"Identify your problems, but give your power and energy to solutions." —Tony Robbins
When you start a business, your first concern is probably to stay in business. After all, only 36% of family businesses survive to the second generation (that's according to the Pricewaterhouse Coopers Family Business Survey, 2010-11).
But once you realize you're not going to sink, your next priority is growing your business. You want it to provide financial security for you and your employees. You also want it to continue to provide you well into retirement. More than half of all business owners (55%) say it will be at least five years before they can retire. How can you use that time to ensure your business earns enough to pay for your healthcare, long-term care, and other retirement expenses?
You might not suspect it at first, but life insurance can play a huge role in your business continuation strategy. Life insurance can fund buy-sell agreements to keep your company on the right path for the future. Key employee life insurance protects your company from a devastating loss of a vital employee. The right exit strategy can provide you with financial peace of mind during your retirement.
If you work with Trusted Quote to insure and protect your business, you can get:
- An informal business valuation
- A review of major provisions of the buy-sell agreement
- A review of current insurance policies
- A review of the retirement gap
- A review of funding needs
We'll work with you (as well as your tax and legal advisors) to either create a new business continuation plan, or ensure your current plan meets your needs. To request a business continuation review, call us at 800-823-4852.
Strategy #1: Key Man Insurance
As you can see in the chart below, most business owners' top priority is growing their business. Their third most common goal is achieving stability so that business can prosper. But how do you do this? Where do you start? The first step is in recognizing what keeps your company strong: people and ideas. There's a way to protect both of these with insurance.
Most companies have a small handful of employees they couldn't do without. For Microsoft, this was Bill Gates. For Apple, it was Steve Jobs. For your company, it might be you and your business partner, or your whip-smart programmer who fixes every bug on your website so you can sell more product. If you can't imagine a day without that employee, protect that person with key employee insurance.
Key employee insurance protects your business if one or more vital employees were to pass away. (You might also see this referred to as "key man insurance," but we're pretty enlightened here at Trusted Quote, so we like "key employee" better.) As unlikely as that scenario may seem, think about all the unforeseen disasters that happen every day, from car accidents to natural disasters to heart attacks. Things happen, and just because they haven't happened to you yet, it doesn't mean they won't. Two-thirds of all businesses (66%) have NO plan in place to help protect their business in case of death, disability, or termination of it key employees.
Key employee insurance is a life insurance policy taken out by your company on anyone who's integral to the functioning of your business. We're talking about top-level executives, engineers, marketers, and the kind of "big idea" folks you just can't replace with an ad on Craigslist. If that person should pass away while they work for you, your company gets the death benefit. You can use that money to keep your doors open while you search for a replacement, or to offer a hiring bonus to make sure you're getting the best talent out there to consider you.
62% of businesses haven't made provisions for dealing with a shareholder or key employee who becomes seriously ill or dies (PricewaterhouseCoopers Family Business Survey, 2010-11). You don't want to be one of them. It all starts with insuring your vital employees. You can get a cost estimate by running a free quote—just click the orange button below. To package key employee life insurance as part of a larger business continuity plan, give us a call at 800-823-4852.
Strategy #2: Buy-Sell Insurance
Your key employees aren't the only ones you have to worry about. If you're in business with one or more people, you also need to worry about what happens if they pass away. Picture this: your business partner dies unexpectedly. His second wife is less than careful with money. She inherits his share of the business, and now you're stuck sharing your company with someone who's more interested in Prada than accounts payable. Do you want your hard-earned profits supporting someone who has no knowledge or desire to become involved with your business?
We didn't think so.
So here's what you do—you protect each partner by creating a buy-sell agreement. This package includes a legal agreement that says what will happen in the event of a partner's death. It includes a valuation of your company, which is what backs up the purchase price. Each partner takes out a life insurance policy on all other partners in the agreement. Should a partner die, the remaining partner will get a sum of money from the deceased's life insurance that lets them buy that share of the company back. This keeps Mrs. I-Only-Want-to-Shop or Mr. I-Think-I-Know-Everything out of your business.
A buy-sell agreement can also handle the same kind of problems that arise when one owner wants out of the business. A properly structured buy-sell plan can:
- Create a market for the business stock when an owner leaves, whether though death, disability, divorce, retirement, termination, or bankruptcy
- Ensure retirement income is in place
- Minimize disagreements between owners
- Prevent unwanted or unqualified individuals from becoming part of the business
- Set the value of your business for estate tax purposes
To request a business continuation review, call us at 800-823-4852.
Strategy #3: Exit Plans & Retirement
Of course, you're probably not planning on working until the day you die. You want to retire and enjoy the good life, right? Many business owners plan on exiting their business at retirement age, leaving the company to one or more of their children. In this economic environment, it's a buyer's market. You have to design an exit plan so that you maximize the value of your business, minimize taxes, and fulfill your goals.
Part of designing a good exit plan is funding it. Money doesn't grow on trees, and only Clint Eastwood has a fistful of dollars. Unless you pre-fund your exit plan, you're subject to the vagaries of the economic market conditions at the time of exit. For example, if you want your kids or a key employee to buy interest in your business at your death, it's better to pre-fund that buyout with life insurance. If you wait until you pass away and hope that interest rates are favorable, you could be putting your heirs at a big disadvantage.
Another big concern for many small business owners is how to distribute their company shares and other wealth among the kids. What if out of 3 kids, only 2 work for the family business? A solid business continuation plan will distribute the family wealth equitably. This might involve one kid inheriting stock, while another gets life insurance proceeds. Also, an Irrevocable Life Insurance Trust (ILIT) might need to be set up to distribute those proceeds to the kids not involved in the business. We can help you set all of this up so your retirement is spent relaxing, not worrying about who gets what.
To get an idea of what the life insurance policy on you and your business partner might cost, run both of your stats through our instant quoter, or give us a call at 800-823-4852 for a complete business continuation plan consultation.