Business insurance and planning: Key strategies for owners

Questions like these often cause business owners to consider insurance — typically some form of disability, long-term care, or life insurance. Of course these types of insurance are useful tools, but other options exist. Whether you’re starting a new venture, inheriting an old company, selling, or retiring from a well-established business, consider the following insurance approaches.

Buy/sell planning: Life insurance and disability insurance

Businesses often put guidelines around their ownership. As an example, it’s not always desirable to have the ex-spouse of a partner own a piece of a business, so a buy/sell agreement may be drafted to detail who’s allowed to have control, when ownership is appropriate, and what price and terms apply if that ownership is sold.

Let’s say you’re a business owner in your 60s, and your buy/sell agreement dictates that, if you pass away, your surviving partner(s) must buy out your ownership. Let’s also assume your ownership in the business is worth $2 million. What would you do if your partner doesn’t have $2 million in cash comfortably set aside at all times? What if, instead, your ownership could be bought out over several years — without negatively impacting your heirs or the business?

Does your answer change if you and your partner(s) are young and healthy and the coverage is inexpensive?

Life insurance may work well to address a buyout at passing, because the same issue that causes the problem (death) can provide the solution (liquidity) with a properly structured insurance policy.

Another common problem is what to do in case of a long-term disability. If your buy/sell agreement says that your disabled partner’s ownership must be bought out after a specified time period, would you or your partner have the required cash already on hand?

The same issue that causes the problem (death) can provide the solution (liquidity) with a properly structured insurance policy.

Keep in mind that long-term disability can also include unanticipated expenses for the disabled, so the liquidity needed from selling the ownership stake in the business could be more urgent. A disability buyout policy providing a lump-sum benefit, for at least some portion of the ownership value, may make sense here.

Cash planning: Permanent policies such as whole life or universal life insurance

CDs, commercial paper, money market funds, and even traditional checking and savings accounts can all be appropriate ways to earn some interest on savings, considering how quickly the cash is needed and how much principal risk you find acceptable.

In addition, for some portion of cash reserves, business owners can consider policies or annuities with a cash surrender value at least equal to the initial premium deposit. These types of options may provide a minimized death benefit as well as cash surrender value growth at least equal to returns at the bank. Some options also have features that could allow the policy or annuity owner to earn more than traditional savings vehicles, while still allowing access to cash without penalty, if needed.

Key person planning: Life insurance and disability overhead expense insurance

A key person is that owner or employee who has a distinct talent that would be difficult to replace. This person may also bring in the majority of revenue or clients to a business. The loss of this person would severely impact day-to-day operations until a replacement is found. For these key individuals, business owners often consider strategies to retain them, such as through bonuses, health insurance, and other benefits. But what can owners do to protect themselves?

If death and disability pose the greatest risks, then owners should think about life insurance or disability overhead expense policies. Disability overhead expense provides a monthly benefit for a limited period of time to cover expected costs such as rent and utilities for a business.

Consider these insurance options along with tools such as recurring periodic deposits into savings or investment accounts. The goal is to provide liquidity, and an insurance policy could provide the liquidity necessary to search for and integrate a new person or team, alleviating pressure to make hasty decisions.

Executive benefits: Life and supplemental disability insurance

What do you currently do to attract and retain talented people to build your business? Do you offer some sort of deferred compensation, bonus, or stock purchase plan? Depending on the age and health of the people you want to reward, other options, such as life and supplemental disability insurance, can be a fit.

For example, you could pay the premiums of an employee’s life insurance policy through a bonus. The employer can deduct the bonus as reasonable compensation. At the same time, the employee receives death benefit protection at a reduced out-of-pocket cost or even no out-of-pocket cost in the case of a “double bonus” plan.

Wrapping up

When it comes to business insurance, every situation is different and, therefore, so are the solutions that business owners should evaluate. If you have questions about the pros and cons of different options and benefits, or unusual planning situations that are coming up in your business, reach out to us — we’re here to help.