Definition: An agreement that guarantees the payment of a stated amount of
monetary benefits upon the death of the insured
Life insurance is one of the lowest-cost benefits you can offer
your employees. For a small additional fee, health insurance
providers allow you to purchase a life insurance plan, either from
them or from another company. Specialized life insurance options
include the following:
- The survivor-income plan provides the deceased employee's
family with monthly income.
- Key-employee insurance indemnifies you against losses resulting
from the death or disability of a key employee in your firm,
including yourself or your partners. By taking out an insurance
policy on his or her (or your) life, you (or your beneficiaries)
will have ample funds to recruit a successor. To avoid negative tax
consequences, ask your CPA to help you decide whom you should name
as the beneficiary of your policy.
You might also want to consider taking out a partnership
insurance plan on any partners you have. That's because a
partnership usually dissolves when one partner dies, unless the
partners have provided otherwise with a well-thought-out and
adequately financed buy-and-sell agreement. This agreement provides
for the purchase of the deceased partner's share of the business at
a prearranged price. A partnership insurance plan for two partners
is straightforward, as it involves purchasing a life insurance
policy on the other partner. Each partner in return pays the
premiums.
Where there are three or more partners, it's common to have the
company buy a policy on the life of each partner. The trick lies in
trying to set up a formula to determine the future value that will
be paid by the partners and partners' heirs. The simplest plan sets
an arbitrarily agreed upon value for each partner's interest in
advance. More complex systems are necessary for small-business
partnerships that are growing.
Many banks require a life insurance policy on the business owner
before lending any money. Such policies typically take the form of
term life insurance, purchased yearly, which covers the cost of the
loan in the event of the borrower's death; the bank is the
beneficiary.
Term insurance is less costly than permanent insurance at first,
although the payments increase each year. Permanent insurance
builds equity and should be considered once the business has more
cash to spend. The life insurance policy should provide for the
families of the owners and key management. If the owner dies,
creditors are likely to take everything, and the owner's family
will be left without the income or assets of the business to rely
on.