Individual life insurance can help protect you against unforeseen circumstances that could otherwise jeopardize the sale. It can also be a powerful estate planning tool as part of your financial plan.
Let’s take a look at how life insurance can help you when buying or selling a business.
How life insurance helps when selling your business
Before the sale
Take inventory of all individual insurance policies (life, disability and critical illness) that you hold personally and through the company. Calculate the total amount of benefits and then answer these questions:
- If you become ill or injured, or die during the process, would that endanger the sale? Might it prompt the buyer to back out or renegotiate the terms of the sale?
- Should you maintain these insurance policies to protect yourself and your family, at least until the transaction is completed?
Buying new life insurance during the selling process can also protect your family. Here are some other points to consider:
- The person or entity that owns the insurance may change, which can result in tax consequences. You should consult an expert on what these may be.
- It’s essential that the policies you wish to keep after the sale are owned by you or by a corporation or holding company that you’ll own after the sale, otherwise you may no longer be covered.
You should also consider whether you want to insure the person buying the business: would the sale be affected if that person became ill or injured, or died prematurely?
Term insurance (both life and critical illness) can be used to ensure that funds are available to meet the terms of the sale agreement and that you receive the full asking price for your business.
Talk to a financial advisor with insurance expertise: they’ll be able to review the sale agreement to assess the risks you need to protect against, as well as the tax implications.
After the sale
While you may no longer own the business, permanent life insurance can play three key roles in estate planning:
- Preserving the full value of your assets: life insurance can help to cover any taxes that might arise from transferring assets from one generation to another.
- Leaving a fairer will: Some large assets are difficult to divide or may be intended for just one person. Life insurance can help distribute the overall value of your estate fairly and reduce the likelihood of anyone challenging your will.
- Maximizing your estate: some life insurance policies have an investment savings element to them, which provides tax-sheltered growth. It would mean you’d have a larger estate to leave to your loved ones or preferred charities. You can also withdraw some of the money that your policy has earned, and the eventual insurance payout to your beneficiaries is tax free.
How life insurance helps when buying a business
After buying a business, you’ll need to think about the potential risks that you and the business will be exposed to. There are a number of insurance types that you’ll want to consider:
1. Insurance on the loan
If you’ve taken out a loan to buy your new business, loan insurance will cover your repayments in case you become ill, get injured or die. Also, your life insurance premiums could be used to reduce your taxes owing (you should discuss this with your accountant). Insuring your loan could be essential in ensuring your family’s finances are secure if the worst happens.
2. Key person insurance
You may have people in your company whose role is so important to its success that losing them could cause significant financial consequences. Insuring them would help keep your business running smoothly.
- Key personnel could be from different business areas, such as sales, finance and product development.
- The company can buy key person insurance to provide liquidity for job replacements and to free up cash flow if a key member of staff dies or becomes seriously ill.
3. Permanent life insurance
Tax-sheltered permanent life insurance can be an effective alternative investment option if your business consistently produces excess cash flow.
- Permanent insurance can be a low-volatility investment option (unlike other assets, such as stocks, bonds and real estate) because it will not decline in value and can provide good long-term returns.
- It can provide investors with an alternative to equities, bonds or real estate.
- You can also use funds from the insurance policy to put back into the business (for example, to pay for growth), to provide another source of retirement income or use it as an estate planning tool, as outlined above.
Discuss your life insurance options before you buy or sell a business
Whether you’re buying or selling a business, life insurance can be an essential part of the process, and one you should consider before you put your business up for sale or make an offer. Not only will you get peace of mind that the transaction will go through as planned, but there are also a range of other benefits that can help improve your finances.
Your IG Advisor can go over your business buying or selling plans in detail and recommend the most effective insurance for your circumstances. They’ll also integrate your insurance into your estate plan. Talk to your IG Advisor today if you’re considering buying or selling a business. If you don’t have an IG Advisor, you can find one here.
Written and published by IG Wealth Management as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an IG Wealth Management Consultant.
Insurance products and services distributed through I.G. Insurance Services Inc. (in Québec, a Financial Services Firm). Insurance license sponsored by The Canada Life Assurance Company (outside of Québec).