I often write a lot about the exit planning process or business value enhancement process for private business. There is another part of wealth management that’s very important, but is often overlooked. That part is disaster planning for the business owner…..specifically what happens if the owner dies or becomes disabled.
Life insurance is often owned by the business to be used in the event of the death of the business owner. Many people believe and I’m one of them, the death of the owner often means the death of the business. With this in mind, I think we need to examine what entity owns life insurance on the business owners life and why.
I believe that owning life insurance inside a business is most often a mistake. Sometimes you need to have insurance inside the business, but often it’s better to hold your life insurance outside the business. Here are 5 reasons why this is an important thing to consider:
- For many privately held businesses survival after the owner dies or disabled is very difficult. Having insurance inside the company makes it easier for creditors to attach life insurance proceeds.
- You may have wanted your life insurance proceeds to be used for living needs of a spouse. If your insurance death benefit goes to the company, it could be difficult for he or she to get life insurance proceeds out of the business.
- If your spouse has not signed on any corporate debt (and they should never sign) having your life insurance death benefit outside the company would make it unavailable to secured creditors.
- With life insurance death proceeds outside the company the surviving spouse has a choice of how the funds can be used.
- There is more flexibility when life insurance proceeds are outside the business versus inside the business.
When we review life insurance programs for many of our Clients, we find their insurance programs are not designed as well as they might be. I like to ask questions about where and who should be the owners of life insurance. My belief is that in many cases, having life insurance inside the company just doesn’t make much sense.
As always, I’m interested in hearing your ideas about life insurance ownership and whether it belongs inside or outside the company. You can reach me at Jpatrick@stage2planning.com with any comments you might have.
I also invited you to take get our free Stage 3 exit reading report. If you click on the button below you will be taken to our sign up page with direction for how to get your complementary report.