The Role Life Insurance Plays in Business Planning

Being in a leadership or ownership role in a business is not an easy task, a lot of time and work goes into the roles necessary to lead the company.  You have to have the dedication and passion for what you are trying to accomplish with the business.  As a leader, you have also sacrificed a lot, whether it be your time or your finances.  Additionally, you have the added pressure of knowing how many people are counting on you to lead the company in a successful direction.

Imagine that business is hitting revenue goals, morale in the company is energized, the future is looking exceptional, but then the unexpected happens a key employee dies.  Has the business thought about what happens if that key employee is gone?   If it was the owner, who will take over the business?  How will the finances be handled? Is the owner’s family involved? How will the company move on after such a tragedy?

Life insurance is not the answer to every tragedy but it does play a significant part in business planning and can answer many questions.  Here are some ways that insurance can be integrated in business planning:

Key Person

Businesses have employees that are important to its continued success.  If something happened to these individuals, it would be hard for the business to keep functioning as it was.  The business has to go through the loss of an employee, finding a replacement, business development, and training that replacement.  Key person insurance helps protect the business financially while it searches for a replacement and works to keep the business moving forward.

Funding a Buy-Sell Agreement

If the business is owned by more than one individual, it is important to have a buy-sell agreement.  If one partner passes away, a buy-sell agreement allows for the other partner/s to buy those shares of the business from the deceased partners estate.  The life insurance in a buy-sell agreement provides a tax-free lump sum to the partner/s immediately when the funds are needed the most.

Compensation and Incentive Plans

Today’s workforce is competitive and attracting and retaining key employees is critical.  By using life insurance to informally fund nonqualified deferred compensation plans, the company has an asset on its books to fund the liability.  Knowing this, key employees become more vested in their work and are more likely to remain there.

Estate Equalization

Business owners may have children involved in the business and other children not involved in the business.  In the unexpected death of an owner, life insurance can ensure assets are being allocated fairly and allows for family members not involved in the business to receive a tax-free lump sum while family members involved in the business receive the business equity.


Life insurance can be a very efficient tool that can be used in business planning.  It can provide the business with tax-free income dollars and provides the owner and employees with peace of mind that if something were to happen to themselves that all is covered and the business can continue to move forward.