Life and disability insurance could strengthen business continuity and transitions

Businesses face various risks that can interrupt all work, potentially leading to significant financial strain, operational disruptions, and if not adequately planned for, even collapse. At the same time, ownership brings a variety of daily responsibilities and challenges. With the vast number of tasks, many business owners haven’t had the time to properly prepare for the unexpected.

Among the most crucial is ensuring the continuity and stability of the business, especially in the event of an unexpected illness, injury or even death, that leaves the owner unable to work. In those cases, incorporating life and disability insurance into their financial planning can be a game-changer.

Life and disability insurance play a pivotal role in smoothing business transitions, helping to provide financial security and stability during challenging times. Consider these key components as part of a risk mitigation strategy, and how life and disability insurance can complement your financial and business transition planning process.

Protecting against financial uncertainty

When a business owner passes away unexpectedly, the financial impact can be significant. Life insurance provides a lump sum payment upon the owner’s death, while disability insurance offers ongoing payments if the owner is unable to work.

Also, one may consider business overhead expense insurance to cover essential expenses during the disability of an owner to help keep the business afloat, preventing operational disruption and financial losses. These funds can be used to cover immediate expenses such as debts, operational costs, and salaries.

If the business is heavily leveraged, insurance can be used to pay off business debt to reduce the financial burden on the business, preventing liquidation or even bankruptcy. This financial cushion ensures that the business can remain operational without the pressure of immediate financial strain during challenging times.

Facilitating buy-sell agreements

A buy-sell agreement is a legally binding contract that outlines what happens to a business owner's share of the business if they die, become disabled, or otherwise leave the business. Life and disability insurance can fund these agreements, ensuring that the remaining owners have the necessary funds to buy out the deceased or disabled owner’s share.

Typically, the individuals that will assume control of the company after the owner’s death or disability, may not have the financial resources to fund the owner’s estate while continuing the company operations. This helps maintain stability and continuity, prevent disputes, and helps ensure that the business remains in capable hands. When we think about family-held or closely held businesses, a funded buy-sell agreement prevents the business from being sold to outside parties while helping to ensure the family of the deceased or disabled is compensated fairly.

Providing for family members

Life and disability insurance are intended to financially support the deceased owner’s family. The policy payout can provide for the family’s needs, including living expenses, education costs, and other financial obligations. This financial security allows the family to make informed decisions about their future without the added stress of immediate financial concerns.

Attracting and retaining key employees

Key person insurance is a type of life insurance policy taken out by a business on its most valuable employees. In the event of their death or disability, the policy provides funds to help the business navigate the transition period. This can include recruiting and training replacements, offsetting lost revenue, and maintaining operations.

It’s also a valuable tool in maintaining creditor confidence. Offering such benefits can also help attract and retain top talent, knowing that the business is prepared. And in this competitive labor market, this benefit can be a difference-maker when trying to attract top talent.

Enhancing creditworthiness

Having life and disability insurance in place can make a business more attractive to lenders and investors. It demonstrates that the business is prepared for unexpected events and has a solid plan in place to ensure continuity. This can help improve the business’s creditworthiness, making it easier to secure loans and attract investment.

Simplifying estate planning

For business owners, estate planning is a complex process that involves balancing personal and business interests. Life insurance simplifies this process by providing liquidity to cover estate taxes and other obligations. In the case of family-held businesses, life insurance can be used to equalize inheritances among heirs, to help ensure fair distribution, and keep the business in the hands of the active heir. This helps maintain business continuity and family harmony so the business can be passed on to heirs without the need to liquidate assets or sell the business. Often, the sale or liquidation must occur within a matter of months which doesn’t permit the Company to be sold for its maximum value.

Integrating life and disability insurance into your business continuity strategy

Conduct a risk assessment: Identify key individuals whose loss would significantly impact the business and evaluate the financial implications of their sudden absence.

Consult with insurance professionals: Work with your wealth advisors and insurance advisors to determine appropriate coverage levels and customize policies to fit your business’s specific needs and risks.

Establish and fund buy-sell agreements:

• Ensure legal agreements are in place and adequately funded.
• Regularly review and update these agreements to reflect changes in business value and ownership structure, as well as tax law changes that may impact the structure of your existing buy-sell.

Note that the Supreme Court recently held (Estate of Connelly v. United States ) that a corporation’s value for estate tax purposes includes the value of life insurance death benefit that was paid to the corporation when the insured shareholder died^†.

Educate and train successors: Prepare potential successors through training and development programs, and ensure they’re aware of the insurance policies and the role they play in business continuity.

Regularly review and update policies: Reassess your insurance needs periodically with your insurance advisor as your business grows and evolves, and adjust coverage to reflect changes in key personnel, business valuation, and operational risks.

Life and disability insurance are more than just a safety net; they’re strategic tools that can help ensure the smooth transition of a business in the face of unexpected events. For business owners, investing in life insurance is an essential step toward securing the future of their business and ensuring its continuity for generations to come. By proactively incorporating these insurance products into your financial planning, you can mitigate risks, and provide financial stability.

Getting the advice you may need

We are here to help you navigate the complexities of insurance planning and ensure a secure future for your business and family. For further assistance and tailored advice on life insurance options that best suit your business needs, contact your wealth advisor today. Also, we offer a fully independent insurance brokerage through Huntington Insurance. To learn more, please contact your Huntington Private Bank team to see how we can help, or find a Huntington Private Bank Office near you.