How Do I Protect My Business And Fund My Exit?Protect The Business Today, Fund Your Exit Tomorrow.
Your business pays you today and funds your retirement later. Maartin plans the insurance that protects it while you run it and the income that replaces it when you step away, alongside your attorney and CPA.
The Short Answer
Business owners face two insurance questions. While you run the company, life insurance can pay the business if a key person dies, or fund a buyout if an owner dies. When you step away, the sale or your savings has to become income. Maartin can talk through both, alongside your attorney on agreements and your CPA on taxes.
Source: California Department of Insurance
What Can Interrupt A Business
Three Risks Every Owner Carries.
Each one can cost the business, or its owner’s retirement, a great deal when nothing is in place.
Losing A Key Person
When the person who brings in clients or runs operations dies, revenue can drop while you replace them. Key person life insurance pays the business.
Losing A Co-Owner
A buy-sell agreement says who buys a departed owner’s share. Life insurance can provide the money, so surviving owners can buy from the family on the agreed terms.
Stepping Away
The paycheck the business paid you has to come from somewhere else: sale proceeds, savings, Social Security and annuity income.
Two Stages
While You Run It, And When You Step Away.
Insurance does a different job at each stage, with different people at the table.
| Question | While You Run ItProtecting The Business | When You Step AwayReplacing Your Paycheck |
|---|---|---|
| The Main Risk | Losing a key person or a co-owner suddenly. | Outliving the money the business produced. |
| Topics To Discuss | Key person coverage and funding for a buy-sell agreement. | Social Security timing, annuity income and the order you draw on savings. |
| Who Owns The Policy | For key person coverage, the business owns the policy and is its beneficiary. | You own any annuity that pays your income. |
| Paperwork To Expect | Written notice to the insured employee, and their written consent, before a business-owned policy is issued. | Annuity contracts disclose surrender charges, and California requires a suitability review before purchase. |
| Who Else Is At The Table | Your attorney drafts the buy-sell agreement; your CPA reviews the tax side. | Your CPA plans the taxes on the sale and on retirement withdrawals. |
Key person and buy-sell funding are topics Maartin can discuss with you and your advisors; the agreements themselves are drafted by your attorney.
Is This You?
Signs Your Business Needs An Insurance Review.
If any of these describe your company, the planning is worth doing before something forces it.
- You Have A Partner And No Funded AgreementIf a co-owner died tomorrow, who would buy the share, and with what money?
- One Person Drives The RevenueA lead salesperson or a manager whose loss would cut sales while you find a replacement.
- Your Buy-Sell Agreement Is Years OldThe value written into it may lag far behind what the business is worth today.
- Your Retirement Depends On A SaleThe price, the timing and the taxes decide your income. Plan the income before you sign.
- You Pay Yourself From The BusinessWhen that paycheck stops, Social Security, savings and annuity income have to replace it.
Before Your Review
What To Bring To An Owner’s Review.
These papers let Maartin see how the business runs and what each owner would need.
- Your buy-sell or operating agreement, if you have one
- The most recent business valuation, or your own estimate
- A list of the key people and the roles they fill
- Any life insurance the business or the owners already own
- Contact details for your CPA and attorney
- The year you would like to step away
Questions
Common Questions
What is key person life insurance?
A policy a business owns on someone whose death would cost it money, such as a lead salesperson or a founder. The business pays the premium and receives the benefit. Federal law requires written notice to the employee and their written consent before such a policy is issued.
How does life insurance fund a buy-sell agreement?
A buy-sell agreement sets who buys an owner’s share, and at what price, if the owner dies. Life insurance on each owner can provide the money, so the surviving owners can buy the share from the family. Your attorney drafts the agreement, and Maartin can discuss the coverage side. See life insurance.
How do I turn the sale of my business into retirement income?
Sale proceeds and savings are matched to your monthly needs alongside Social Security. An annuity is one way to turn part of a lump sum into income for life; it carries surrender charges in its early years, and its guarantees depend on the insurer’s claims-paying ability. See tax-efficient retirement income for the order you draw it.
Does the business report its life insurance to the IRS?
A business with employer-owned life insurance contracts issued after August 17, 2006 reports the number of employees covered and the total coverage in force on IRS Form 8925. Your CPA files it.
Can my business partner join the meeting?
Yes. Maartin meets in Riverside, by Zoom or by phone, so every owner can take part. Read more about how Maartin plans for business owners.
Sources
- Life insurance can compensate a company for a key employee or fund a partner buyout
- Employer-owned contract: owned by the business, which is a beneficiary
- Form 8925 reports employees covered by contracts issued after August 17, 2006
- Annuity suitability review required in California
- Deferred annuities usually carry surrender charges
Own A Business?
Protect It Now.
Plan Your Exit.
Bring your agreement and your questions, and see what coverage and income planning your business needs.
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