INSURANCE NEEDS FOR BUSINESS A VITAL DECISION

Many businesses involve more than one owner. In this situation, step one is to have a buy-sell agreement. This outlines how the business would be valuated and how the company would pay out a partner or shareholder's estate if that person died.

Step two is making sure that such an agreement can be carried out, by making sure that the required funding will be in place if one partner dies. Funding such an agreement with life insurance makes it much more practical, as there is usually not enough cash kicking around in the company to buy back a significant amount of shares if someone died. Since the chance of someone dying is small and the dollars are generally needed in the business, it would be very inefficient to bank the kind of money needed in a reserve fund and not be able to put it to use.

As well, relatively new companies have not had the time to put such reserves away. Finally, there are distinct tax disadvantages to funding a buy-sell agreement with retained earnings.

A life insurance company accepts this relatively small risk for a relatively small amount of money, which is a great arrangement.

Funded buy-sell agreements also give much more security to the families of the partners and shareholders, who know that they will realize their share value in cash quite quickly, rather than wait a number of years for the company or the surviving partners to come up with the money.

As well, life insurance paid out in this manner pays the value out tax free, if arranged properly.

To calculate the need, start out by asking yourself how much money it would take someone to buy your share of the business. If that's the value you would want your family to receive for their shares if you died, think about having the company purchase that amount of life insurance on your life. Do the same for your partners, and think carefully about what your shares will be worth in five or 10 years. That may be the amount of insurance you want to put in place now.

The second broad type of need that all businesses should look at it is "key-person" insurance, which is coverage on an important executive, manager, inventor, salesperson or other employee. Ask yourself the question, "Where would the business be if that person died?"

If the answer is "up the creek" to any extent, then put the right amount of life insurance on that person's life. The dollars could be used to find a replacement, to provide lost income during the interim or to reassure the bank that everything will be fine and the line of credit shouldn't be pulled.

There are more elaborate strategies using life insurance to help remove years of built-up retained earnings from a company without paying tax, to provide tax-advantaged retirement savings for executives or owners and, of course, as protection for employees and their families.

If you are a business owner, large or small, you should explore these opportunities with a knowledgeable inter-advisory team comprised of the financial planner, insurance specialist, accountant and lawyer.

Remember, insurance is not a religion. I always laugh when I hear people say, "I don't believe in insurance." I don't believe in dying either, but I'm reasonably certain it will happen. The life insurance decision may be based on love as a motivator or a straightforward business need, but the type of insurance and the amounts can be based on fairly cold, objective crunching of the numbers.