Even in death do us not apart

Don't leave your family -- or your shareholders -- with the debts of your company.

Yesterday Josh D. (an attorney) wrote in to thank me for my advice on taking out a business loan.  In particular, Josh noted that I recommend a life insurance policy be in place before taking out a business loan.  He was surprised by that, and I think its worth a bit more discussion.

In yesterday’s post “7 Secrets Your Banker Wishes You Knew”, I described life insurance as a way that banks minimize their risk.  In other words, if you borrow their money and then get hit by a truck, how will the bank get their money back?

And there are some other excellent business reasons for your business to buy a life insurance policy on you, which I’ll get to in a minute.

The entrepreneurs I work with report that banks are requiring a life policy valued at 2 to 3 times the value of the loan.  The policy names the company as the beneficiary (not the bank), but the terms of the loan make it clear that  the policy will pay back the debt on your death.  That’s only fair.

But man, that could get expensive, right?  Right. Don’t forget to add the cost of the insurance policy to your monthly expenses.  Its possible that your loan payment may be $1,000 a month and your insurance bill (depending on your age and health) could add another $300 to $500 dollars.

In fact, if you have a revolving loan like I do, in many months my life insurance payment is much larger than my loan payment!  Suddenly that loan is starting to look very expensive!

But hang on.  Here’s the thing.  Were you really going to run your business without a life insurance policy on yourself?  Would you sign a 3-year office lease or buy a new company truck without knowing that it could be paid for after your death?

No way you want to leave a stack of bills as your legacy to your spouse, your children or your stockholders.

Which brings me to the third reason to have a big juicy life policy in your business… other stockholders.

When you get into business with a partner or investor, its important to have a clear written agreement between all parties.  This is especially true if one of you kicks the bucket.  If you die, who owns the company?  If your spouse inherits your ownership, will (s)he really want to work with your other partners?  Can your spouse even do the job you are doing now?

This brings us to the concept called “Key Man Insurance”… which is a fancy way of saying a life insurance policy that pays the company on your death.  It could be used to pay back loans or leases, but more likely it is used to purchase your stock from your spouse.

That sounds tricky, right?  Let’s try again.  When you die, your spouse inherits your ownership of the company.  Then the company takes the cash from the life insurance policy and “buys” that stock back from her.

The result?  Your partners can carry on without you, and your spouse has something more valuable than stock in a floundering company. (Because without you, it will flounder for a while!)  If the policy is rich enough, there might even be enough for the company to hire your replacement.  That would be ideal.

DO THE MATH:  Every time you make an obligation for your company, be sure its backed up by a way to pay it off.  Add up all your debts and leases, and get a policy that can cover them in case of your death.

THE BOTTOM LINE:  Don’t leave your family OR your partners (shareholders, employees, etc.) out in the cold.  When you die, leave a policy made out to your company that can cover the debts and help the company carry on.

Dedicated to your profits *(before and after death!)

David Worrell

Advertisements