If you own a business you must consider not only the details of your personal finances, but also the financial and income tax considerations that arise from your business.
Meeting Business Obligations upon Death
For most deciding how much life insurance coverage you need can be determined by a simple formula:
Amount of Personal Insurance Needed = Amount of cash needed to pay off personal liabilities PLUS Amount of additional capital needed to generate a predetermined income for your survivors
As a business owner, it’s not that easy.
In addition to direct personal liabilities and business creditors, you need to determine the value of the business at the time of death and how to realize that value for your surviving loved ones.
As a sole proprietor, or even as a partner in a partnership, you’re personally liable for all liabilities in the business.
If you were to die unexpectedly, creditors of the business could claim payments from your estate if the business does not have sufficient liquid assets to meet those obligations.
To guard against this possibility, steps should be taken now to ensure funds will be available on death to meet business obligations without any hardship to your beneficiaries.
A significant problem faced by most business owners is the equity in the business is not liquid.
Many small businesses rely on the sole proprietor for continued success. Should the owner die prematurely or otherwise become unable to work in the business, his family must continue the business until a suitable buyer or successor can be found.
In the meantime, the value of the business may decline as clients, suppliers and employees react to the uncertainty left by the death of the key individual.
As a result, the amount realized on the eventual sale may be considerably less than what could have been realized if the business had been sold in an orderly fashion during the owner’s lifetime.
If there are other active owners, then these individuals are the most likely candidates to purchase the business interests of the deceased. However, if no steps have been taken to provide for funding of this purchase on death, cash will often not be available for an immediate payout to the estate.
Life Insurance to Fund Buyout
Instead, the estate may receive this payout over an extended period of time. Life insurance can be a very easy and inexpensive method of providing cash to fund this type of buyout.
As a self-employed individual, also consider disability insurance to provide funds should you become injured and unable to work. You should meet with a financial planner to discuss all your insurance needs for yourself and your business.
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