How much life insurance for small business? Should you buy term life insurance or permanent life insurance?
Let us suppose you and your partner own a business that has a book value of say $1,000,000 and a going concern value of $1,400,000.
You own 60% of the business and your partner owns 40%. Let us further suppose your partner had an automobile accident and died.
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How Much Life Insurance For Small Business?
Would you want to have his wife as your partner, or, better yet…would she want to be your partner? Do you not think you should own the whole business? Should your partner’s wife not be fully compensated for the full value, that is, going concern value, of your partners share of the company.
How much life insurance for small business will depend on the needs of the particular company.
Where is the money going to come from to buy the heirs share? Suppose the wife does not want to sell. These are questions that should be answered before such an eventuality occurs.
First of all your partner and yourself need to have a buy-sell-agreement that would stipulate that in the event of the death of one of the partners the survivor would buy the shares of the deceased partner for a predetermined amount of money.
This agreement would be drawn up by an attorney and signed by both parties. This agreement is binding and should be reviewed annually.
The best way to fund such an agreement is through life insurance. For most businesses term insurance is OK on a temporary basis…a temporary solution.
Your partners wife would receive $560,000. That is 40% of the going concern value of the business. You would own the whole business and everybody would be happy.
I mentioned that you could use term insurance to fund the agreement. Remember…term insurance is for a specific number of years and will expire after this period. This term policy should be converted to permanent life insurance when you are able.
Use these ideas to help you determine how much life insurance for small business.
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