5 Ways Life Insurance Can Help Your Business

When you think of life insurance, you may envision a critical tool for ensuring your family's financial wellness after your death. However, you might not realize that life insurance can prove equally invaluable for your business. Life insurance policies can help you grow your business, prevent internal disputes, and much more.

Once you understand how life insurance policies can help you get your business going, keep it running smoothly, and plan for long-term changes in its leadership or operations, you'll probably want to purchase this form of coverage for your own enterprise. Take a look at the five ways life insurance can help your business.

1. Leverage for Financing

Business owners commonly need an influx of extra financing to fund overall expansion, purchase new tools and equipment, hire new personnel, or launch a new enterprise successfully. If you find yourself in this position and need a loan, you can secure that loan through an agreement called a collateral assignment of life insurance.

In a collateral assignment of life insurance, you take out a life insurance policy that names the lender as the assignee, or beneficiary. If you fail to pay off the loan within the specified period, either due to your death or for any other reason, the lender receives some or all of the death benefit provided by the policy.

2. Accumulation of Cash

A plentiful source of everyday cash can prove just as crucial to your business's health as the ability to secure financing. The extra cash can help you and your team take sick leave or vacation time as needed, recover from (or prepare for) a natural disaster, pay facility rental fees, and offset cash flow problems.

Whole life insurance, also known as permanent life insurance, can help your business accumulate cash. This kind of policy experiences steady growth in its tax-deferred cash value as you continue to pay the premiums. You can then make withdrawals on the policy's cash value whenever the business needs the additional cash.

3. Funding and Planning for Key Person

Your business, like so many others, may rely heavily on the skills, experience, and specialized expertise of a certain critical individual. If this person dies, the business may suffer serious, possibly irreversible losses. For this reason, many businesses take out a kind of life insurance called key person insurance.

When you purchase key person insurance, you name your business as the beneficiary of that major player's death benefit. If that individual dies, the surviving owners or directors can then use that money to compensate for lost income and/or fund the search for a new team member who offers the same essential qualities.

The death of a business's owner can prove even more devastating to that business than the death of a key team member. If you worry about what would happen to your business in the event of your death, consider taking out an individual life insurance policy with the business as the beneficiary,

4. Buy-Sell Agreement for Succession Planning

Co-ownership of a business can pose certain long-term questions and concerns, especially when one of the co-owners either dies or decides to exit the scene. Without proper succession planning, you might find yourself co-owning the business with someone unqualified or unwilling to take an ownership role.

A buy-sell agreement straightens out these issues in advance, not unlike a prenuptial agreement that lays out the financial terms of a divorce. It gives you and your co-owner a clear road forward for who can purchase the departing co-owner's share of the business. Life insurance can help you fund such an agreement.

You can fund several types of buy-sell agreements. In an entity-purchase buy-sell agreement, for instance, the business holds a life insurance that pays a death benefit for buying the departed member's share. In a cross-purchase buy-sell agreement, each co-owner holds a life insurance policy on the other for the same purpose.

If you don't know whether to go with an entity-purchase agreement or a cross-purchase agreement, you can opt for a hybrid agreement called a wait-and-see buy-sell agreement. In this agreement, the business has first refusal on the share purchase, followed by the co-owner. If the co-owner declines, the business must buy the share.

5. Equalization of Estate

While a buy-sell agreement funded by life insurance can help you carry out your business succession plan, you should also think about your loved ones who don't participate in the business. A strategy called estate equalization can help you provide for all your survivors whether they work in the business or not.

In estate equalization, you purchase a life insurance policy naming the loved ones uninvolved in the businesses as beneficiaries. These individuals will inherit your personal assets. At the same time, you arrange for the loved ones to receive equal shares of your business assets.

If you believe your business could benefit from some strategic life insurance purchases, turn to the experienced team at Illinois Insurance Center. We can discuss your goals and help you select the right coverage while also serving your other business insurance needs. Contact us today or request a free quote through our website.