How to protect your business, employees and family with proper life insurance Featured

8:00pm EDT May 26, 2010

If others depend on you for financial support, part of your financial plan should include how you will provide for them after your death. Life insurance may be one of the most important financial products to own, and buying life insurance is one of the best ways to protect the future of your business, employees and family.

Purchasing life insurance is a safety net that ensures financial obligations are met. Life insurance has long been a valuable tool to reduce risk of business closure and to provide the basic financial foundation for continued success. Most business owners recognize the importance of life insurance as an integrated part of maintaining and growing a successful company.

As a former small business owner, Barbara Baldwin, an account executive for JRG Advisors, the management company for ChamberChoice, understands firsthand the value of having life insurance as part of an insurance and financial plan.

“As a business owner, you have the responsibility to see that your business operates efficiently, and at the same time, you must ensure that your employees and family are protected in the event of your death,” Baldwin says. “I wanted to make sure that, upon my death, there would be funds to either terminate the business or have a new business formed.”

Smart Business spoke to Baldwin about the importance of careful planning and adequate life insurance, so that a significant financial and legal burden will be avoided.

So why is life insurance so important?

Many small business owners have their life savings invested in their business. If an owner dies, it is possible the business will close and the family will see all of its assets disappear. The owner of a business holds the most important position in a company and their status should be protected with business owner life insurance. If that person unexpectedly dies, the life insurance can keep a company from bankruptcy. By owning a business life insurance policy, the owner can protect employees, keep the business running and ensure that their family is provided for. Business life insurance can protect both the business and family and help provide for the financial survival of each. Consideration must be given to the interests of the family and heirs as well as the legal aspects of the business insurance.

What are some common uses of business owner life insurance?

Life insurance for a business may be purchased for several purposes. One purpose is to provide for the successful liquidation of the financial interest in the business for the benefit of the heirs. If there is a business partner, each should have a life insurance policy enabling an automatic buyout of the interest of the deceased. It protects the estate of the deceased and ensures the continuation of the business.

If employees are to take over ownership after the death of the owner, an insurance policy can be designed to give them funds for the purchase of the business. If the business is to be sold outright after the death, money will be available during the transition period. Funds may be needed to help the business meet financial obligations. The availability of a source of cash will be a plus in the sale of the business.

Who would be covered under business owner life insurance?

With many small businesses, the key employee in the business is the owner, and this insurance is referred to as key-man life insurance. Also, some owners recognize that company executives and other valuable employees are an important part of the successful day-to-day operation of their business. Some employees have become so essential to the business that they are difficult to replace. In the event of the death of an essential employee, key-man life insurance helps offset the disruption of reduced sales or profits if the business suffers such a loss.

If you have key employees that have specialized skills critical to the success of the business or a significant client base that might leave the business if the employee were to die, you need to cover those people. Key-man insurance would cover the expense of finding, attracting and training a new employee; continue the long-range development programs jeopardized by the death of the key employee; and assure creditors and customers the business will continue.

To determine how much life insurance is needed, estimate the cost of finding, hiring and training a replacement, including employment agency fees, moving expenses and the time spent interviewing and training the replacement. Also, determine the amount of profit brought to the business each year by the employee and how many years it would take for a replacement employee to perform at the same level of competence.

How can a good understanding of business life insurance save a business owner from devastating problems?

With foresight and proper planning, a person who runs a successful business can effectively assure that their wishes will be met either for a continuation or a sale of the business. Funds can be used to hire a capable replacement, continue payroll, pay off debts or simply buy time until the business’s assets can be liquidated and the business can be closed. In any event, business life insurance can provide much needed stability for both the business and family.

Barbara Baldwin is an account executive for JRG Advisors, the management company for ChamberChoice. Reach her at (800) 556-4699 or