How insurance can help with business succession planning strategy

As a business owner, you care deeply about what you built and want to plan for every contingency. So, it’s important to plan for when you retire, a buyout, or even the death of a business owner. While it may not be the easiest thing to think about, life insurance is something that can help ease the way for succession planning.

With business succession planning strategies, like with other estate planning situations, life insurance can provide an immediate lump sum of money called the death bene­fit.¹ That sum can be used by beneficiaries to buy out the deceased owner’s share of the business.

There are a number of business succession planning strategies, but a common strategy is a “buy-sell agreement.” This is when one party (or sometimes multiple parties) agrees to buy the deceased owner’s share of the business at a predetermined price from the deceased owner’s estate or heirs. Two forms of buy-sell agreements are a cross-purchase agreement, where the remaining owners or partner purchase a share of the business, and entity-purchase agreements, where the business itself buys the share of the deceased owner.²

A life insurance policy can help provide the funds necessary for the agreement. Together, the buy-sell agreement and life insurance policy can help smooth the way for ownership to transition, meaning there’s less potential disruption in the day-to-day running of the business.

Without these components, any other owners of the business could have to liquidate if the deceased owner’s heirs aren’t interested in keeping the business. The remaining owner(s) might try to raise the capital needed to buy out the heirs — but if they can’t, that could be the end of the business. Planning can make a world of difference in keeping the business on track.

When you’re writing a buy-sell agreement, be sure to include: a list of the events that would trigger a buyout, such as death or permanent disability, how the company will be valued (e.g., is it a fixed price or is there a formula for determining the value), and how the agreement will be funded (e.g., with life insurance).^3,4

One of the main types of life insurance you can use to fund a buy-sell agreement is whole life insurance. It can be kept in force for the life of the person who’s insured if the required premiums are paid. Whole life insurance offers guarantees regarding the premiums, the cash value, and the death benefit. Many whole life policies also guarantee a level premium at the outset. Assuming the premiums are paid in full and on time, the cash value of a whole life policy is designed to grow at a guaranteed pace as stated in the contract.⁵ The death benefit is also guaranteed, so long as premiums are paid as scheduled.

Some whole life policies also pay dividends (when issued by a mutual insurance company) and are considered participating policies.⁶ When the insurance company pays dividends to its whole life policies, the cash value and the death benefit both have the potential to increase.

As a business owner, you already have a lot on your plate. But planning for your business’s future isn’t something to overlook. Working with a financial professional can help you set up a succession planning strategy that’s right for you and helps protect the business you’ve worked so hard on.