Life Insurance for the Life of Your Business

Life insurance is usually purchased to protect a family's finances when the breadwinner dies. But business owners may also wish to purchase life insurance to protect partners, the business and employees.

Business life insurance is much like personal life insurance, but it's owned by a business rather than an individual. It can be a permanent or term policy.

Permanent Policies

A permanent policy is more expensive than term, but it builds cash value over time and is designed to last the lifetime of a partner. There are three main types:

• Whole life — the most conservative option: Whole life insurance can be participating, where policyholders may receive dividends, or non-participating, where policyholders do not receive dividends, but premiums are generally lower.
• Universal life — the most flexible: The policy pays interest into the cash value instead of dividends.
• Variable universal — the most aggressive: The policy's cash value accumulation is invested in a portfolio of mutual fund subaccounts and the principal is not guaranteed, but the investment gains can be more generous than the first two options.

Term Policies

These are the least expensive options and only provide coverage for a specific time. There is no cash value.

Disability Rider

Experts recommend adding an accelerated benefit rider regardless of whether a permanent or term policy is chosen that will pay out some or all of the death benefit to a policy holder while the insured is still living if they become disabled, need nursing care or are diagnosed with a critical disease.

How it Works

Business life insurance is usually a key component of a buy-sell agreement and outlines what happens to each owner's share in a company if one of the owners dies or leaves the business. Scenarios where a buy-sell agreement is appropriate include when partners want to:

• Set a fair price for each share of the business in case there is a dispute among the owners or if one owner wants to be divested of their interest in the business so that the other parties can buy out the exiting share of the business.
• Restrict other owners from selling their shares of the business to a person or entity that might not have the business's best interest in mind.
• Guarantee that the current owners sell their shares back to the business when they die or become incapacitated.
• Guarantee all remaining owners in the business will buy out all deceased partners' shares.

The terms can include an agreement that co-owners will insure each other to protect the continued ownership and operations of the business. This ensures that if one business partner suddenly leaves the business or dies, the remaining partners will be able to fund any costs that arise as opposed to having all the cash on hand.

A buy and sell agreement that includes insurance can include an entity purchase plan or a cross-purchase agreement for the co-owners.

It is often too complicated for the partners to buy life insurance on each other if there are multiple owners. In this case, the partners can use an "entity purchase" agreement where the business buys one policy on each partner. The death benefits can be used to buy the deceased co-owner's shares.

With a cross-purchase agreement, every partner purchases life insurance on the other partners. If a partner dies, the remaining partners can use the death benefits to buy the deceased partner's shares in the company.

A buy and sell agreement will only work for these two additional plans if the partners agree to purchase life insurance to buy the shares of the deceased partner. This is called a "funded" buy-sell agreement.

Your insurance agent or broker can help you choose the coverage that is best for you and help you manage the application process.

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