Insurance for Family-Run Company Members

The majority of owners of family-run businesses envision future generations running their companies. Only 8 percent expect to sell outside the family.

What an Insurance Policy Can Accomplish

When it comes to leaving business assets to a spouse, estate taxes are typically not part of the equation. However, when the surviving spouse dies, business and personal assets may be subject to federal and state estate taxes, as well as probate.

For that reason, family business owners may want to consider a second-to-die life insurance policy, or survivorship life, as it is sometimes called. This type of insurance is typically less expensive than traditional policies and also offers some benefits during the insureds' lifetimes.

A survivorship policy pays a death benefit after the death of the second insured party. Because the benefit is paid only after the deaths of two people, the risk is lower that the insurer will have to pay within a particular period of time. Typically, premiums are lower because of the reduced risk to insurers.

Estate Taxes

Possibly the most common use of a survivorship death benefit is to help pay estate taxes and final expenses. Because survivorship policies can sometimes be easier to qualify for than traditional life insurance, they often appeal to people who never imagined they would have enough assets to trigger estate taxes and didn’t buy a life policy when they were younger and more insurable.

Wealth Accumulation Opportunities

A survivorship policy also can be used to supplement retirement income. Because the mortality and expenses of this type of insurance policy are usually lower than a single-life policy, the cash value can potentially accumulate more rapidly. The money can be tapped through withdrawals or loans, provided certain requirements are met and the death benefit is not allowed to lapse. Taking a loan from a life insurance policy will reduce the policy's death benefit until the loan is repaid.

Asset Transfer

By making gifts to an irrevocable life insurance trust and directing the trustees to use the money to purchase a survivorship life policy, a married couple can slowly transfer potentially taxable assets out of their estate. After they both die, the death benefit is paid to the trust, which transfers it to the trustees free of income or federal estate taxes, provided the trust is properly structured.

As your business grows, so may your need to protect its assets for your heirs so the company can continue without facing a large tax bill. Survivorship life insurance is one strategy to consider.

Research Life Insurance Before Policy Purchase

Before you take any specific action, be sure to consult with your tax professional. The cost and availability of insurance depend on factors such as age, health, and the type and amount of insurance purchased. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges and income tax implications. Before implementing a strategy involving life insurance, it would be prudent to make sure you are insurable by having the policy approved.