Business Owners Have Three Life Insurance Needs Most Advisors Miss
Key man insurance, buy-sell agreement funding, and executive bonus plans are the three life insurance strategies every business owner needs. Here is how each works.
If you own a business, you have personal life insurance needs — and business life insurance needs. Most business owners address the personal side but ignore the business side. That is a mistake that can destroy the business you spent decades building.
Key Man Insurance
Key man insurance protects the business from the financial impact of losing a key employee. The business owns the policy and is the beneficiary. The death benefit provides cash to recruit and train a replacement, cover lost revenue, and reassure customers, suppliers, and lenders.
Buy-Sell Agreement Funding
A buy-sell agreement is a legal contract that governs what happens to a business owner's interest when they die. Life insurance funds the buyout — the surviving partners use the death benefit to buy the deceased partner's interest from their estate at a pre-agreed price.
Executive Bonus Plans
An executive bonus plan (Section 162 bonus) allows a business to pay the premium on a life insurance policy owned by a key employee. The business gets a tax deduction for the bonus. The employee gets a valuable benefit. The policy builds cash value the employee can access in retirement.
How Much Coverage Do You Need
Key man coverage is typically 5-10 times the key employee's annual compensation. Buy-sell coverage should equal the fair market value of each owner's interest. Executive bonus plan coverage depends on the employee's compensation and retirement goals.
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