For many entrepreneurs, crises serve as litmus tests for their risk appetite and commitment to innovation. Businesses can lose their footing, especially when there are no safeguards in place. However, one should also remember that crises are also the most opportune time to adapt – if only to ensure the survival of their hard-earned legacy.
As revenue streams shift and consumers modify their behaviors, the more businesses should strive to balance risk and innovation. To achieve this, a strong financial foundation is critical. This is where life insurance proves to be a valuable financial tool for founders. These policies are flexible and cost-effective, able to secure not only the business itself but also employees and investors.
From business succession to retirement planning, here are five financial plans that every business owner must secure:
- Key Person Insurance
Key people are those whose death or disability will result to significant financial losses to the company, which include the owners, salespeople with key accounts, and employees with specialized skills. Since the beneficiary is the company, it can use the life insurance proceeds to pay for operating expenses and other liabilities. Some may utilize the money to cover the cost of hiring and training new employees. In essence, Key Person Insurance protects the value of its policyholder to the business and its operation.
- Insurance for Debt Cover
Proceeds from the life insurance policy can be used to pay off debt.
- Insurance for Buy-Sell Agreements
Here, the proceeds will be paid to the family or estate and a buy-sell agreement ensures that the shares are valued fairly. By purchasing the shares of the deceased partner, the ownership of the business is secured and ensures that the company will continue to operate smoothly.
- Personal Retirement Plan
One of the reasons that founders find it difficult to delegate management control is because their retirement depends on the company’s performance. By having a separate retirement fund, the owners can now focus on their hard-earned golden years while letting the next generation take the helm.
- Insurance for Estate Planning
Family-owned businesses will greatly benefit with proper estate planning. Since their money is tied to the business, they may not have the needed liquidity to pay for estate taxes upon the owner’s death. Without enough cash, the family or estate may be forced to sell or liquidate some assets or properties. With estate taxes taken care of, the bereaved family will be relieved of the burden of funding. The business remains intact and continues to operate.
Business owners form the backbone of a strong economy. They are also working hard for the future of their families, employees, and stakeholders. As businesses grapple with the effects of the COVID-19 pandemic, these life insurance plans can help entrepreneurs get their bearings back. Moving forward, this will help them strike the perfect mix between risk and innovation.
With contribution from Renee Co