The Importance of Life Insurance and Business Succession Planning

By: Updated: November 8, 2016

 

Too often entrepreneurs spend years building a business and come to an agreement with a partner or family member over succession, but fail to make plans to finance the succession.

This is where life insurance plays an important role.

Did you know your corporation can own a life insurance policy on your life? Your business can pay the premiums, be the beneficiary and life insurance proceeds are paid tax-free to the corporation. In addition, the surviving shareholders, your estate or beneficiaries can move the life insurance proceeds out of the corporation through the capital dividend account tax-free. You can use life insurance in this way to provide the money your beneficiaries will need to deal with the business if you were to pass away.

Life insurance creates instant liquidity to keep a business running smoothly, replace lost income and ensure your family has cash-in-hand to maintain the business without financial distress.

Moreover, life insurance ensures that a transition is smoothed out, enabling your family to either continue the business uninhibited or maximize the value from the sale of the business as a vibrant going concern vs. the potential of having to sell a distressed asset or at the wrong time. Distressed or poorly timed sales send a signal to potential buyers as an opportunity to bid down the selling price.

Melvin O'Neal, a renowned Canadian insurance analyst, explains it this way: “When the family is forced to sell the business quickly, they may have to sell at a discount or during market conditions that make the business less attractive. In other cases, the business may be worth very little without the proprietor or partner.”

Simply put, if you're a small business owner, then now is the time to consider the importance of life insurance and business succession.

And remember: if your business has multiple owners, you can combine life insurance policies on each partner with a buy-sell agreement. The agreement stipulates that on the death of a partner, the remaining partners can buy out the surviving family’s share at a previously agreed price. The life insurance pays for the buyout.

Related Reading: How Much Life Insurance Does a Small Business Owner Need?

Interested in learning more about Life Insurance and how it can protect your family and your business? Download our free ebook: The Beginner's Guide to Life Insurance.

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