When we think about life insurance, we typically think about the money that goes to the family of someone who dies. This money is used for the funeral, to pay bills that the person’s income would have paid, and maybe shore up savings for college funds or a surviving spouse’s retirement. One of the important tasks this money accomplishes is to provide breathing room. The loved ones can use that money while they figure out how to move forward from their loss.
Small business owners have a very similar need for that breathing room. When an owner or key employee dies, the surviving members of the business will require funds while they recover. Partnerships also need a plan for how the business ownership will succeed after one partner’s death. Finally, conscientious business owners should take their employees’ life insurance needs into account so that those employees have peace of mind for their families.
Life Insurance for Key Employees with the Business as Beneficiary
This is an interesting topic, and not everyone is comfortable placing a monetary value on their employees’ lives. Despite the distastefulness, however, protecting all the other lives in the business may necessitate that valuation. Owners and key employees in a small business are often vital to operations. It’s not that they are fully irreplaceable, but it will take time to discover all that they did and identify someone who can fill those shoes.
By obtaining life insurance policies on owners and key employees with the business named as beneficiary, the business can close for a few days to mourn the loss, take time to find a replacement, and get the replacement trained and up to speed. This will prevent the business from losing so much time, productivity, and revenue that the other employees face layoffs or business closure.
What Happens When a Business Partner Dies or Becomes Unable to Work?
Hopefully you have a personal will, but does your business have a will? For businesses, that will is called a Buy-sell agreement. These agreements should be written into every partnership agreement to specify how the business will be structured in the event of a partner’s death, disability, or other inability to work. Partners need to establish this agreement at the outset of their business, but they should periodically review it for potential changes.
When one partner dies, the other partners typically need to buy the deceased partner’s interest in the business from the surviving family. This arrangement is not a substitute for life insurance. Every partner should have an individual life insurance policy to provide for their families. As mentioned above, the business may also be the beneficiary of a separate life insurance policy on each partner.
In some cases, the surviving family may want to keep their interest in the business. For example, if a partner’s child has entered the business as an employee, they may want to take over their parent’s ownership. The buy-sell agreement should have language to deal with this possibility, or be updated for it anytime family members join the business.
If a partner becomes unable to work due to disability, injury, or illness, the buy-sell agreement should be followed to address this matter. While it’s tempting to agree that partners would continue to be paid, this is only practical if it is a temporary situation. It may be better to consider disability insurance, supplemental insurance, or buyout measures to avoid the costs and tax implications of paying someone unable to work for months or years.
Should I Offer Life Insurance as an Employee Benefit?
Employer-paid life insurance policies are an excellent benefit. These policies show your employees that you know they exist beyond the workplace and are concerned for their welfare. If your employees do not have a private policy, this coverage gives their family some financial benefit after an unexpected death.
It is wise, though, to encourage your employees to get their own private life insurance policy as well. The policy you provide only lasts as long as their employment, and continuous coverage is very important. The employer-paid policy is a great starting point to highlight the importance of private policies. If you host a wellness fair for your employees, invite a life insurance provider to talk about the benefits of this vital protection.
If you are growing your small business and need to start thinking about how you can provide for the unexpected, contact us. Smyrl Insurance has been helping small businesses for over 65 years. We can help you evaluate the best approach to protecting your business. We educate, nurture, and empower our clients to feel confident in how their assets are covered personally and in business. We serve clients for business, personal, life, and other types of insurance in Hatfield, Lansdale, Souderton, Harleysville and throughout Montgomery County, Pennsylvania.
