For a business owner, life insurance does three jobs, and most owners only do the first. Getting all three right is what protects the family, the partners, and the company itself.
Personal coverage comes first
Before any business use, an owner needs personal life insurance like anyone else: enough to replace income, clear the mortgage and debts, and provide for the family. For owners this is often more tangled, because personal guarantees on business debt can follow the family. Start by making sure your household is protected regardless of what happens to the business.
Key person: protect the business
Many businesses depend on one or a few people, the founder, a top producer, a lead technician, whose sudden loss would cost real money in lost revenue and the scramble to replace them. Key person insurance is a policy the business owns on that individual, with the business as beneficiary. The benefit gives the company cash to absorb the shock and stay stable instead of improvising at the worst time.
Buy-sell funding: protect ownership
If you have partners, a buy-sell agreement sets what happens to an owner’s share if they die or leave. But the agreement is only as good as the cash behind it. Buy-sell funding uses life insurance so the surviving owners can buy the departing owner’s share without draining the business, and the family is paid fairly and promptly. Without it, a death can force a fire sale or a fight.
Coordinate, and bring in your advisors
These three uses, personal, key person, and buy-sell, solve different problems and should be sized so they work together. The legal agreements and tax structure belong with your attorney and accountant; the insurance that funds them is our part. We coordinate the pieces and keep them current as the business and its ownership change.
A coverage review maps which of these you have and which you are missing, and lines them up into one plan.
Questions to ask your advisor
- Is my personal coverage solid before we add business uses?
- Does any single person drive enough of the business to warrant key person coverage?
- Do we have a buy-sell agreement, and is it actually funded?
- How should personal, key person, and buy-sell coverage be sized to work together?
- How do you coordinate with my attorney and accountant on the legal and tax pieces?
What Vantage Point looks for when reviewing this
When we review business-owner life insurance, we check whether personal coverage is in place first, whether key person and buy-sell needs are funded, whether the pieces are sized to work together, and whether the insurance stays coordinated with your attorney and accountant as ownership changes.
Want guidance first? Compare your coverage. Already know what you need? Get a quote.