You are the leader of your organization, the one who sets the direction and ensures that everyone stays on course. Even if you have created a talented team for support, your organization still needs a captain at the helm. So what happens if you are no longer able to lead? For the health of the business you have worked so hard to build, you need a plan in place.
Life insurance is commonly included in business succession plans as a tool to perpetuate the business, guide ownership changes, and/or protect lender interests. Each area has its own set of considerations, outlined below:
Perpetuate the Business: In the case of the untimely death of an organizational leader, life insurance can help fund a plan to keep the business running and therefore, maintain its value. While it is not possible to insure receivables, organizations can insure the ability to bring someone in to support its operations. Businesses buy Key Man life insurance policies to cover the costs of attracting or retaining key individuals to fill leadership roles, and to keep them in place for a period of time. The policies are paid for and owned by the business, which is also the beneficiary. The death benefits of these policies tend to be set at 2-3 times the expected initial costs to help ensure funding lasts through the transition period. Additionally, these funds can be used to retain valued employees who could become a competitive threat if they left the organization.
Direct the Transfer of Ownership: In some cases, when a key person in a business passes away, his or her share of the organization is transferred to their surviving spouse. This situation can get tricky for other partners, as the spouse may not know much about the organization, or may be mostly concerned about income. A life insurance policy owned and paid for by the company can be used to redeem a spouse’s shares in the business. The spouse receives the value of the shares and the company retains 100% ownership. The company leadership is then in complete control of the succession plan, allowing them to reinvest the capital into the organization. Policies set for businesses comprised of many partners can get quite complicated, as they are trying to protect multiple interests.
Guarantee a Bank Loan: To borrow money from a bank to buy or start a business, or to fund a capital expenditure, an individual or organization may be required to carry life insurance to guarantee the loan would be repaid in the case of a death.
Underlying all of these situations is the question of how best to insure the value of a person or business. Obviously in the case of the bank loan, the policy is based on the loan balance. However in terms of the Key Man and Transfer of Ownership policies, the methodology becomes more complex. CPAs tend to work out the valuation on which the policy is based along with negotiations between affected parties. The WIFS Team has a depth of experience in working with accountants, lawyers, consultants and business owners to create a policy acceptable by all involved. If you are interested in learning more about how we can help you with your business succession plans, send us an email or give us a call at 317.663.4138.
