Using Life Insurance to Ensure Business Continuity

life insurance for business owners
The loss of critical personnel can be life threatening to small businesses; however, it's a risk that life insurance can often mitigate. In fact, life insurance policies are frequently incorporated in plans aimed at making it possible for a business to survive a change of ownership or the loss of a partner, the chief executive, or an employee whose creative talent, technical knowledge, or salesmanship drive the business.

Most commonly, life insurance is employed as the funding mechanism in "buy-sell" plans — legal agreements providing for an orderly transfer of ownership interests — and to compensate for the loss of a key person.

Points to Remember

  1. Life insurance is a common means for funding buy-sell agreements — legal documents designed to provide an orderly transfer of ownership interests in a business.
  2. Many businesses maintain key person life insurance policies to compensate the firm in the event of the insured's death or withdrawal from the firm.
  3. In addition to providing immediate funding upon the loss of the insured, life insurance allows cash to build up on a tax-deferred basis over time.
  4. The value of the business entity in a buy-sell agreement or the key person being insured must be carefully determined before life insurance can be purchased.
  5. Legal, tax, and insurance professionals can help address issues affecting both the firm and individual owners that typically arise during business continuation planning.


© 2008, Standard & Poor's, a division of The McGraw-Hill Companies, Inc. All rights reserved.
Re-published with permission.