Small Business Life Insurance Needs

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					by: Donald Lusan

ave You Given Any Thought To Small Business Life Insurance?

What Type Of Business Do You Own?

Is your business a Sole Proprietorship?

Are you part of a business Partnership?

Is your business an S Corporation?

What about a C Corporation? Is this how you incorporated?

Have you taken advantage of the new Limited Liability Company laws?

How about Key Employees? Do you have any employees that you can categorize them as Key

Small business life insurance as it applies to each type of business is different in many ways but
there are also many similar features as well. What we are discussing here is not group life
insurance but more specifically life insurance as it applies to the owners of each business and life
insurance for the key employees. Let us take a look at each type of business and how life
insurance could go a long way in protecting the business itself as well as the heirs of a deceased
business owner.

The Sole Proprietorship.

Because the owner of a sole proprietorship and the business itself is considered one and the same
one may think that the need for small business life insurance is limited. Nothing could be further
from the truth. We put in a lot of time and effort building a business that has to be dissolved at
our death. We do want to have this business transferred to a member of the family when we die.
How can this be done?

The estate of the sole proprietor can sell the assets of the business upon his or her death. A small
business life insurance policy can be bought during the lifetime of the owner the proceeds of
which would be used to buy the business. A buy sell agreement, which would be binding, would
determine the terms and the amount to be paid for the business.

Let us assume the proprietor is married and has a son or daughter who is interested in taking over
the business upon his death. This young person has spent a lot of time learning the intricacies of
operating the business from his or her father. So dad decides he wants to transfer this business to
this child upon his death. He has a buy sell agreement drawn up by an attorney that would fulfill
his desires. This agreement is funded buy a small business life insurance policy specially bought
for that purpose.
The proprietors wife is not particularly interested in the business but if the business owner dies
before her she will still need income. The proprietor dies. The proceeds of the small business life
insurance policy is used to purchase the business from the estate and the wife has full value in
cash. She can use this money to purchase an annuity that would pay her an income for a certain
number of years or for a lifetime. Of course this decision will depend on the amount of money
we are talking about here.

The Partnership.

The use of small business life insurance in a partnership is very simple and straightforward. The
ownership of this partnership is in the hands of three partners. For the sake of easy explanation
let us assume that that these partners own equal shares. A buy sell agreement would be set up
that would state that the partnership would buy the shares of a deceased partner from his heirs.
The buy sell agreement would be binding. The heirs cannot decide they don't want to sell. The
partnership would buy a small business life insurance policy on the lives of each of the partners
in the amount of the value of their shares. The proceeds would be used to fund the purchase. In
some cases the policies can be owned by the partners themselves. The results are the same.

The Corporations.

Small business life insurance for c corporations, s corporations are limited liability companies is
very similar to that of the partnership. The corporation usually owns the policies on the lives of
the principals. Upon the death of a stockholder the corporation buys the stock from the heirs of
the deceased. A small business life insurance policy is the least expensive way to fund the buy
sell agreement. It is recommended that the insurance is updated on a regular basis and that the
buy sell agreement is reviewed and updated from time to it is binding.

Key Employee Life Insurance.

What state would your business be in if a key employee died? Have you given this any thought?
In my 40 years in the life insurance business I have seen many interesting situations. Some
businesses had no key employee life insurance on their valuable employees...much to their
detriment. Others were prepared and things continued on smoothly after the death of the key
employee. It is recommended that if a business has a very valuable key employee that they buy a
small business life insurance policy on the life of that employee equal to about 5 years of that
employees income. Upon his or her beath the proceeds of the policy is paid to the business and
used to help keep the business going while the company finds a capable replacement.

For more detail on how to start a business and the need for business life insurance go to:

This article was posted on September 11, 2006