Business Uses of Life Insurance

Buy sell agreements. Protecting your business investment.

You and your business partners have worked hard to make your company successful. If one of you were to suffer an untimely death, and the deceased owner’s interest in the business were to pass to an outside party, the dynamics of your operation could change significantly. Life insurance can fund an agreement, between two or more partners in a business, which stipulates that when one of the partners dies, the death benefit goes to purchasing the deceased partners interest in the business.

Sometimes referred to as a business will, an agreement of this type is often recommended by business succession specialists and financial planners to assist in the smooth transition of the ownership of the business. In the development of the agreement decisions will be made regarding who can buy, own, or share the business. This may include outsiders or be limited to other partners and/or shareholders. Also, the events that will trigger a buyout are decided. The most common triggers are death, disability, retirement, or an owner leaving the company. Finally, the price that will be paid for the owner’s interest in the partnership is decided.

Two of the most common buy-sell agreement types are Cross Purchase and Entity Purchase.

With a Cross Purchase agreement, if death of one of the business owners occurs, the agreement obligates the remaining partner or partners to purchase the deceased owner’s interest in the business at an established price and obligates the deceased owner’s estate or heirs to sell the interest at that price. To fund the cross-purchase buyout, each owner purchases a life insurance policy covering the life of every other owner. Each person owns the policy he or she buys and is a beneficiary of all of the policies. The total amount of insurance defines the purchase price for the insureds share of the business. When the agreement is funded with life insurance, it can provide the financing mechanism to help ensure control of the business will remain with the current owners and the heirs will receive a fair price.

Similar to a Cross Purchase agreement, with an Entity Purchase agreement, if death of one of the business owners occurs the agreement obligates the business entity to purchase the deceased owner’s interest in the business at an established price and obligates the deceased owner’s estate or heirs to sell the interest at that price. To fund an Entity Buyout, the business entity purchases a life insurance policy covering the life of each owner. The business is the owner and beneficiary and the amount of life insurance on each owner represents the purchase price for the insureds share of the business. If an owner dies, the business receives the insurance proceeds which it then uses to buyout the deceased owner’s estate.

Thank you very much for taking the time to learn about buy-sell agreements. Talk to your Illinois Mutual agent about your coverage needs today.

Key Person Life Insurance: protecting the difference makers.

As a business owner, you recognize the contributions your employees make to your organization. Without them your business would suffer and, in some cases, could possibly be ruined. A key person brings significant value to your business, and it is that value you need to ensure in order to help protect your business.

A key person is someone who is responsible for management decisions, has a significant impact on the success of the business, and is highly paid.

Businesses can suffer from a key person's death in significant ways. There can be a loss of management experience and skills, a disruption of sales and production, and increased expenses due to hiring and training a replacement.

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 and profitability of the business.

One of the benefits of Key Person Life Insurance is that the employer is the owner and premium payer, and, at the death of the key person, the employer may receive policy benefits, income tax free, if certain requirements are met.

Premiums paid for Key Person Insurance, however; are not eligible for a tax deduction. We suggest you consult a tax advisor to ensure IRS requirements for establishing and paying Key Person Life Insurance are met.

Key Person Life Insurance can be used to recruit and develop a replacement for the previous key employee, helping to assure continuity of the business for employees, customers, and creditors.

Thank you very much for taking the time to learn about the benefits of Key Person Life Insurance. Talk to your Illinois Mutual agent about solutions to meet your coverage needs today.