Nearly 700 small business owners were interviewed by The Canadian Small Business Research Institute to determine the top ten challenges of small business owners.
The number one financial concern reported was "planning for the future", something that is extremely relevant to the solutions that life insurance can provide.
There is perhaps no better financial product for long-term planning than life insurance. Life and business are both full of the unexpected, and wise business owners will be as well-prepared as they can be for any possibility. There are several ways life insurance can help with such strategies. In the following, it will become clear how life insurance helps small business owners prepare for the future.
A life insurance policy is often the cornerstone of a business’s succession plan. The business uses life insurance to fund a buy-sell agreement, allowing surviving partners to purchasing a deceased partner’s share of the business from their estate. In this way, surviving spouses and heirs receive their share of the business, and the living partner(s) maintain control of the business. Buy-sell agreements can reduce conflict and allow the business to keep running smoothly.
The accumulated policy cash value can also be used or leveraged to help one partner purchase another partner’s interest in the business, upon mutual agreement. A one-way buy-sell agreement can be constructed in cases when a chosen successor wishes to purchase the company upon a founder’s or partner’s retirement from the business.
Key Employee Policies
No business would think of not insuring their buildings and equipment, yet often, they don’t ensure its greatest asset – the people whose skills, knowledge and experience are essential to its operation!
Traditionally known as “key man” policies, life insurance policies taken by the business or business owner on a hard-to-replace employee are now referred to as key person or key employee policies. Examples could be:
A company manager
The head chef of a restaurant
An organization’s top salesperson
Any employee whose absence would cause a severe disruption of a business.
Consider an example: Jill has been with a prosperous small business for years, and the owner, Bob, isn't sure what he'd do without her. In additon, Jill is also literally part of Bob's family, as she married Bob's brother.
As such, Bob took out a life insurance policy on Jill. The policy provides his business with additional liquidity and savings that could be borrowed against in an emergency. The policy was also set up to benefit Jill and her husband as it would provide an additional income for her husband in the case that anything happened to Jill.
Often times, business owners will have several adult children who may have varying degrees of interest and involvement in the family business. Consider the example of a successful mom and pop business owned by Jose and Roberta Steele. If their daughter is a lawyer across the country and their son is a manager in the family business and an obvious choice to take it over someday, how do they solve the estate planning dilemma? Life insurance provides the solution by creating an additional asset that can be used in a multi-generational balancing act.
As with personal life insurance, often a combination of term and whole life is a good solution. Even if someone aims to retire at a certain age or after a certain number of years, we highly suggest planning for flexibility since many people find they enjoy being active in business well into their 70’s and 80’s.
Interestingly, the research institute survey revealed that many small business owners already owned whole life policies, term policies, key employee policies, and insurance-funded buy-sell agreements. Yet in some cases, almost as many survey respondents “planned to acquire” such policies the following year. Of course, it’s always best to acquire the policies before they are needed, which may be sooner rather than later.