Can You Use Life Insurance for Business Succession Planning?

Feb 17, 2021 2 min read

Owning a business comes with many responsibilities, and as a business owner or co-owner you regularly make critical decisions for the future of your company. This includes creating a strong business succession strategy. Whether transitioning your business is a few years away or decades down the road, it takes careful planning to successfully pass the reigns of your business on. A business succession plan is more than just transferring ownership, it ensures your business can continue how you envision it to - for years to come. Without a plan in place, the business you’ve worked hard to create could struggle to survive. Working with a Farm Bureau agent or advisor can help you identify key resources to achieve a smooth transition. Let’s take a closer look at one important vehicle to make a future business succession and transition a seamless process.

Business Succession Planning With Life Insurance  

Often, life insurance is believed to serve one purpose — provide a death benefit to select beneficiaries. While protecting your loved ones’ financial futures is one important component of a life insurance policy, it’s not the only use for it. When a business is owned by multiple people or you have multiple heirs, it can complicate the transition of ownership. A family or partnership buy-sell agreement can help ensure a smooth transition of ownership. By funding a buy-sell agreement with life insurance, it creates an amount of money that is paid to your family/heirs for your share/control of the business.

How Does It Work?

Partnership Buy-Sell Agreements: For this type of buy-sell agreement, the business or the co-owners of the company purchase a life insurance policy on other co-owners (not on themselves). When one co-owner passes, the policy’s death benefits are paid to the business/co-owners. The proceeds are then paid to the insured’s family members/heirs and the ownership/operation of the business remains with the living co-owners.

Family Buy-Sell Agreements: When a business owner has multiple heirs where one or more are involved in the business and others aren’t it can make things complicated. Through a family buy-sell agreement, the heir set to take over the business has the option to buy the family business from the other heirs not working in the business. The death benefit of the life insurance policy can be used to pay the heirs for their shares in the company.

What Are the Advantages of Using Life Insurance for Business Succession?

  • Death benefits from a life insurance policy are generally tax-free and paid quickly which means the buy-sell transaction can happen fast.
  • There’s a lump sum of money available when an owner passes away.
  • If the policy is permanent life insurance, the cash value can be used to purchase business shares when a co-owner wishes to retire or is no longer able to operate the company.

What Are the Disadvantages of Using Life Insurance for Business Succession?

  • Life insurance policy premiums add to a company’s operating expenses.
  • Co-owners may be uninsurable.
  • Premiums could be expensive depending on the insured’s age, health, etc.
  • Depending on how much a business is worth and the percentage of ownership the co-owner holds, it may require a large amount of coverage.

Is Funding a Buy-Sell Agreement With Life Insurance Right for Your Business?

Your business’s succession needs, and plan are unique to you and your business. When it comes your business succession strategy, there are many options. The good news is you don’t have to navigate creating your plan and selecting resources on your own. A Farm Bureau agent or advisor will get to know you and your business to help develop a plan that fits your current and future needs and goals. Connect with an agent or advisor today to help ensure your business can smoothly transition.

Want to learn more?

Contact a local FBFS agent or advisor for answers personalized to you.

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