I’ve helped orchestrate business life insurance for everything from the simple loan collateral policy to complicated stock repurchase plans, but what all business life insurance has in common is business succession, making sure the business survives in the event of an untimely death. Whether your business has one employee or thousands, the wrong untimely death can send a business into a fatal tailspin that impacts your customers, your suppliers, your lenders, your family and your employees. The life insurance isn’t going to bring back that key person or CEO. It won’t bring back that partner that was so critical to your success and so very important to his or her family. It won’t bring back that investor whose faith changed the future and course of your business.
Business life insurance can, though, provide the immediate capital to make things easier during the transition and to make those whose losses are greatest whole again. It can keep the train on the tracks until companies can regroup and get a plan in place to move on. Let’s get right to the meat and the need for business life insurance. It can provide the capital to keep your business from having to be liquidated for a fraction of its’ worth because someone is due money and they can force that issue. The old adage, “A lack of planning on your part doesn’t constitute an emergency on my part”, holds the logical high ground on this subject. So, practical applications?
1. Let’s start at the far extreme with a large company and a stockholder who owns, say, 30% of the stock. Whether that is the CEO of the company or just an individual who has done well by supporting your company through stock acquisition, consider the untimely death. If 30% of the stock in a company were to suddenly be put up for sale the usual direction of that stock price, especially accompanied by a press release about the CEO or major stockholder death, is going to drive the price down. The obvious plug in the dike for that situation is for the company to repurchase the stock at the current market value or at least at some predetermined with life insurance proceeds to keep the stock from suddenly being dumped into the public market.
2. The death of a partner in a partnership, in the absence of life insurance, can bring an end to a business that could have well survived with just the surviving partner. The sticking point is that by law the deceased partner’s spouse and/or family has the right to receive the full value of their deceased family member’s portion of that partnership. Suffice it to say that the majority of partnerships don’t have a wad of cash laying around for just that purpose, or usually for any purpose. A buy/sell agreement funded by life insurance can make this tragic transition a seamless one with the funds being used to buy, at a predetermined price, the deceased partner’s portion of the business. To flip that adage, planning on the part of a business prevents an emergency in the lives and businesses of others.
3. There is no understating the value of the relationship between banks and both small and large businesses. While banks may lend a business money for various reasons often it’s not just the strength of the business, but the strength of a key individual in the business and the bank’s relationship with them that keeps money available and keeps the bank comfortable that the debt will be repaid. Often a person in the business is so fundamentally tied to the future and success that a bank will require that the person has life insurance assigned to them to ensure they aren’t left in the cold if that person dies and the dream collapses. A good example of this is a client I have who is pastor of a church. Since becoming the pastor several years ago the congregation has grown from 40 to over 600 and when they approached a bank about building a new church, the bank insisted on life insurance on the pastor since he seemed to be the driving force in the growth and would likely remain the driving force in keeping the pews filled to pay for the new facility.
4. Key man life insurance can be structured to meet the needs of the company during the life of the key person. Every business has a key person or key people and it isn’t always the CEO or President of a company. Often overlooked for key person life insurance but certainly not unnoticed by customers are people that make the machine well oiled. They make it all work so the customer experience is the way it should be, awesome. It could be the head of the warehouse and shipping who has made it their mission in life to make sure every customer gets what they need when they need it and communicates each step of the process by text or email or phone to the customer so they’re never in the dark. It could be the best person in the sales department that customers love because they’re always available and never pushy. They’re doing business with your company because this person in sales understands and practices good customer service. In large companies most customers don’t interact with the CEO and it isn’t the CEO that keeps them coming back.
5. Key man life insurance can be structured as a bonus to the key person upon retirement. Transferring ownership of a paid up life insurance policy to your long time loyal employee upon retirement can be a huge gift to the family. It can either be done with a cash value permanent life insurance that gives the person of keeping the life insurance or taking out the tax free cash, or it could be a paid up universal life policy that will pay out to their family upon their death. The key is paid up. It wouldn’t exactly be a bonus if they had to continue to pay for the policy.
Bottom line. Budget is always a consideration and your accountant’s reminder that you can’t deduct life insurance premiums might temper how much you can do, but the possibilities with business life insurance to do the right thing are endless. If you have questions or have a business life insurance situation complicated by health issues or their love of private aviation, call or email directly. My name is Ed Hinerman. Let’s talk.