If you own a family business, life insurance can be a significant part of a financial plan. It helps protect the family in the event of an unexpected death of a co-owner.
Life insurance can not only replace lost income but also lower inheritance taxes and provide a sense of fairness to those family members who are not involved in the business. The common motivation for any potential policyholder—ensuring that the family will have enough money if the primary breadwinner(s) goes away—is one of the benefits that life insurance may offer small-business owners.
Many families find themselves in situations in which estate planning wasn’t completed. More often than not, they find themselves depending on the value of the business, which may not be the best option. After all, a company doesn’t always yield a high value just because someone owns it. The value is frequently hidden and can only be accessed by selling the business. The company's cash flow would then be the only source of income for the surviving family members. Relying solely on the value of the business can put the family members in jeopardy of not having enough cash flow or enough income to run the business. Life insurance may help avoid this type of situation.
Additionally, when a business owner has one or more children who work for the firm and other children who don't, life insurance can be a beneficial instrument to promote fairness in inheritance. The family is better off financially and relationally if the business is left to the actively involved children, and the other children are the life insurance beneficiaries.
Co-Ownership in Life Insurance: Contributing Factors
Life insurance policies may be essential when two people jointly own a business. Typically, buy-sell agreements fall into one of two groups. One involves business owners entering into a cross-purchase agreement to purchase life insurance policies for one another. These agreements are frequently written so that, in the event of the death of one of the owners, the surviving owners may use the death benefits to purchase the deceased partner's ownership interest in the company from their estate.
In an entity purchase agreement, another type of buy-sell agreement, it is specified that the company will have life insurance coverage for each co-owner. In the event of the death of a co-owner, the company would receive the death benefit, which can then be used to purchase the deceased interest from their estate.
Entity purchase agreements are beneficial when there are many partners in a corporation because they do away with the need for each partner to have a life insurance policy on every other partner.
Early family communication is essential.
When clients ask for our counsel, we frequently take on the role of storyteller. We have seen numerous circumstances in family settings during the years we have worked in our sector. We can provide sage counsel and inform individuals about the many options and frameworks based on these experiences. We also have deep relationships with third-party organizations that specialize in working with family-owned businesses.
Although every situation is unique, one general piece of advice we can offer is to discuss your estate plan with your loved ones before passing away, mainly if it contains any provisions that your children might construe as favoring one child over another.
Life insurance for family-owned businesses offers many benefits to the company, family, and individuals involved. Contact our team today if you have questions about utilizing life insurance as part of your financial plan.