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Business Uses of Life Insurance

As a business owner and decision maker, you need to utilize financial solutions and strategies that protect your business, attract and retain key people, and effectively position your business for long-term growth. Life insurance can be an excellent tool to help accomplish these objectives. Here are four concepts for your business to consider:

 

Buy-Sell Agreements

 

Life insurance can fund an agreement between two or more co-owners in a business which stipulates that when one of the co-owners dies, the death benefit goes to purchasing the deceased owner’s interest in the business.

Two ways to help with this is to enter into either a cross purchase or an entity purchase buy-sell agreement.

Cross Purchase

If death of one of the business owners occurs, the agreement obligates the remaining owner or co-owners to purchase the deceased owner’s interest in the business at an established price and obligates the deceased owner’s estate/heirs to sell the interest at that price.

How it Works:

  • Each owner purchases life insurance policies covering every other owner’s life
  • Each purchaser owns the policies he or she buys and is the beneficiary of all of those policies
  • The total amount of insurance defines the purchase price for the insured’s share of the business

Entity Purchase

If death of one of the business owners occurs, the agreement obligates the business entity to purchase the deceased owner’s interest at an established price and obligates the deceased owner’s estate/heirs to sell the interest at that price.

How it Works:

  • The business entity purchases life insurance policies covering each owner’s life
  • The business owns the policies and is the beneficiary of each policy
  • The amount of life insurance purchased on each owner represents the purchase price for the insured’s share of the business

 

Key Person Life Insurance

 

As a business owner, you recognize the contributions your employees make to your organization. A key person brings significant value to your business, and it is that value that you need to insure in order to help protect your business.

Key person life insurance helps reimburse a business for the economic loss that occurs when a key person dies. With key person insurance, business owners can offset the business risk of the death of employees who are essential to the success of the business.

Benefits of Key Person Life Insurance

  • Employer is owner and premium payor
  • At death of key person, employer receives policy benefits income tax-free if certain requirements are met*
  • Provides funds to recruit, hire and train a replacement

Business can suffer from a key person’s death in significant ways

  • Loss of management experience and skills
  • Disruption in sales and production
  • Increased expenses due to hiring and training a replacement

 

Credit Line Coverage

 

Life insurance can help secure a line of credit for a business by being a known business asset that can be utilized as collateral for a loan.

business owner on cell phone and tablet

 

Debt Coverage

 

The beneficiaries of a life insurance policy can use the proceeds to help cover business debts when a sole proprietor dies.

women using a calculator and looking at a paper bill

Ready to get started?

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