Business Insurance
Too often entrepreneurs spend years building a business and come to an agreement with a partner or family member over succession, but fail to make plans to finance the succession. That is where life insurance plays a role. By insuring the head of a small business corporation or each senior partner, a small business can weather the death of a partner and ensure succession follows the course intended by the entrepreneur.

Small business owners usually need Permanent or Universal Life Insurance, rather than term insurance. Permanent insurance is necessary because it lasts for your lifetime - a term policy that ends at 75 is no good if a 75-year-old still has all his capital tied up in the business. Succession is a big issue for small companies and you need advice from someone who understands the role of life insurance. Your best choice of advisor is a Chartered Life Underwriter (CLU) or Certified Financial Planner (CFP).

Capital gains exemption on small business shares

The planning process must include preparation for paying of estate taxes on the business. When a small business owner dies, an assessment is made on the value of the business. If it qualifies as a closely held corporation, there is no capital gains tax on the first $750,000 of value in the business. The tax-free amount may be offset by any capital business losses the owner declared in his or her lifetime.

Insurance can be used to cover capital gains tax on the value of the business over and above $750,000. Depending on the structure of your succession agreement, you might use life insurance to allow a partner to buy out your share, an heir to take over or to provide an inheritance to a child who is not involved in the business.

Working with a partner

A similar arrangement can be made between partners. Many partners sign an agreement that they will buy one another out, but if one partner dies unexpectedly, there is no guarantee the other partner will be able to get a bank loan to cover the cost of half the business they have built together. The deceased's family finds their wealth is tied up in the business and they face both estate taxes and a partner who cannot live up to the agreement.

If the partners buy cross-owned insurance - making each other or the company the beneficiary when they die, the money will be available to buy out the other partner. The widow or widower must sell to the partner and the money is there to cover the cost.

Partnership or Shareholder Agreements can also be funded with Disability or Critical Illness Insurance in the event of a permanent disability that results in one partner or shareholder having to buy out the other entity.

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