How Life Insurance Simplifies And Strengthens Succession Planning

Everything comes and goes. It’s easy to forget that when you spend every day building a company and positioning it for the future. One day, you’ll have to pass the torch. If that day comes before you have taken the necessary precautions, your business just might fade away. That is why life insurance should be a critical part of any succession plan, particularly for small businesses. While large organizations can typically survive the loss of one employee, many small businesses rely on the leadership of just one person.

With a strong life insurance plan in place, you can prepare your business to survive far beyond your own active management and control, continuing your legacy into the future.

Implementing A Succession Plan Can Be Expensive

Businesses of any size have thousands of material and immaterial assets, from intellectual property and trademarks to office buildings and warehouses. After the business valuation — one of the first parts of any succession plan — is complete, those assets can add up to a significant amount of money. Acquiring the funds to finance the succession, and competently transfer ownership of those assets, requires quite a bit of financial savvy.https://ws-na.

Of course, the parties involved in such a transaction are likely to have that savvy. But they aren’t likely to be immortal. According to financial analyst Mark P. Cussen, it is standard practice for all parties involved in the succession to take out life insurance policies. Those policies provide substantial sums of money that you can use to secure the deal, either directly or through a loan.

Since succession plans can cost millions to implement for mid-sized or even small businesses, life insurance policies are a crucial component of the plan. In the event that one of the parties involved in the succession plan passes away prior to its completion, life insurance would be the only thing standing between them and the dissolution of the deal.

Payouts Can Fund Succession Procedures

The reason life insurance policies are so important to succession plans is simple: money. Buy-sell agreements are involved in the overwhelming majority of succession plans, whether you’re selling your shares to a young protege or to an outside party. Without something to secure that money, your business’s future may be in question. To avoid falling into a financial pitfall, you should ensure the finances used in any buy-sell agreement with a life insurance policy.

If one of the key parties passes prior to the completion of the succession plan, insurance payouts can continue the execution of the plan. With a life insurance policy, finances are secured and set aside to protect the future of the business you put so much work into building.

Proper Allocation Of Funds Is Critical

Any buy-sell agreement needs its funding to be properly allocated. That means ensuring that every party involved fully understands the amount of capital involved, where it is coming from and how it will be used within the succession plan. If either the buyers or sellers lack life insurance, the deal is set on much less secure footing and the business runs the risk of fading away.

Every party involved needs to know that all the participants have life insurance policies. The kind of life insurance, whether they are whole life insurance, term life insurance or another kind is not as much of a concern. What matters is that the funds are there and will be available when they are needed.

Life Insurance Plans Are Variable

However, the type of life insurance policy is important to consider at one point of the succession planning process. Countless life insurance plans are available, and each provides its own list of benefits. Each also comes with its own list of costs. In order to give your business the best possible life, you will need to have the best possible life insurance plan. What “best” means depends entirely on you and your particular circumstances.

Whole life insurance can provide you with dividends and returns on your insurance. Certain kinds of business owners are more attracted to this type of plan due to its similarity to a 401(k). However, others find that it doesn’t provide the level of stability and certainty that unstable times might demand, such as in the circumstances presented by 2020 so far. While whole life insurance does provide unquestionable security into the future, some small business owners may not be willing or capable of paying the more expensive premiums.

Term life insurance and permanent life insurance are two other insurance plan types. Many business owners prefer term life insurance when their succession plan is geared towards retirement in the near future, as it is only good for a specific length of time. Additionally, term life insurance is cheaper, which may be an advantage for a small business owner without significant capital. However, permanent life insurance offers the benefit of earning cash value that can be borrowed from the policy as a loan. This advantage gives liquidity to a permanent policy, but business owners should note that loans reduce both the cash value and death benefit by the amount that is borrowed.

Business Funding For The Future

Any business owner who hasn’t taken the time to think about life insurance should do so before it is too late. Especially with small businesses, many people are depending on its endurance for their own survival. It is likely that unless there is already a plan in place, the owner’s loved ones and employees will be unable to seamlessly take over. Life insurance can mitigate much of the financial stress of securing funding for buy-sell agreements, as well as other kinds of succession planning, such as passing the business down to an heir.

Whatever your plan for your business may be, communication will be key. Going over the possibilities and plans with all relevant parties can help you better draft a strategy for the future. What will be funded, where that funding will come from, and who will be at the helm—it all depends on the succession plan, and the succession plan depends on life insurance.

Originally posted on Small Biz Resources: https://smallbiz-resources.com/small-business-life-insurance/