Life / Business Continuity

Personal Uses of Life Insurance

Life insurance is the only financial services prod­uct which guarantees a specific sum of money will be available at exactly the time that it is needed. Bank sav­ings accounts. mutual funds, stocks, bonds and other investments cannot make such a guarantee. The death of the insured creates an instant estate for the benefit of the individual's family. From a personal perspective, life insurance may be used to provide:
  • Peace of mind and financial security for a family
  • Cash for funeral costs and related expenses
  • Cash to pay off a home mortgage
  • A college education for surviving children
  • Income for a family and surviving spouse
  • Cash for emergencies or to supplement retirement
  • A means of maintaining a family's lifestyle
  • Funds to preserve an estate and avoid a forced liq­uidation of capital to pay estate taxes and debts
  • Bequests to non-family members or to charitable or civic organizations
  • Advance payment of proceeds prior to death through accelerated benefits or viatical settlements

Business Uses of Life Insurance

There are generally three types of business organi­zations: the sole proprietorship, the partnership and the corporation. Regardless of business type, a business has the same need as an individual - protection against premature death and the delivery of cash exactly when it is needed.

This cash need relates to the disposition of a busi­ness interest upon the death of the sole proprietor, a partner or a corporate stockholder. Disposition of the deceased's business asset usually means the sale of the business, retention of the business within the family or liquidating the business. The difference between a sale and liquidation is that a sale will usually result in the family receiving a fair market value for the business interest. Liquidation is a forced sale which may only bring one-tenth of the true business value.

In some situations, liquidation of the business is necessary or mandated by law. However, liquidation is the least desirable method of disposing of the deceased's business interest. The sale or retention of the business requires:

  • Proper planning and implementation of business agreements
  • A willing and competent successor — buyer
  • Cash with which to implement the plan

The principal advantages of the funded buy-sell agreement include:

  • A fair market value is established, funded with life insurance, for the benefit of the surviving family
  • Buyers of the partnership interest are predetermined and legally bound by the agreement
  • The partnership and employee's jobs are secure
  • The necessary funding to implement the plan is readily available
Information on this page is courtesy of BISYS Education Services (2001)
© Lanmar Risk Advisors LLC