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Insurance and running a business
Almost everyone understands the idea of insurance. You pay a premium. If one of the specified events occurs, you or your dependents are able to claim. The hope is the money will help people recover from the event. Depending on the type of insurance, this may be repairing the vehicle, rebuilding the home, getting treatment in a hospital or paying off liabilities after your death. Obviously, the money cannot solve everyone's emotional reactions. There can be great sentimental value in homes and their contents. Grief remains even though your family may be financially secure. All this works well when you are employed. You can sit down with pen and paper to calculate roughly how much you owe now, add in foreseeable costs and arrive at a minimum figure required to pay off debts. The actual amount you buy will probably be between seven and ten times your annual pay. This gives everyone complete security. But this does not work so well when you run a business. As someone self-employed working on your own, your income may fluctuate and estimating how well the business may be doing in the years to come is difficult. The problems are worse when you are in a partnership or hold stock in a company. Family pride can be mixed into the situation. Survivors may be reluctant to see the business sold after so much effort has been invested in it. You may also have a sense of responsibility to the employees and want to provide for a smooth transition to new management or ownership. That way, everyone benefits.
The best way of dealing with this problem is to put separate life insurance in place to buy out your interest in the business when you die. This allows you to plan exactly how to resolve all ownership issues. If this is a partnership, it will be able to buy out your interests and pay the value of capital invested plus the accumulated share in profits to your dependents. If you are a stockholder, the company can buy your interest. In both cases, this avoids a forced sale which never realizes the real value of the business. The best strategy is to get detailed advice. There are tax and estate duty implications to deal with depending on how the proceeds from the policy is used. If it passes directly into your estate, this may be taxable. But if the money is held by a trustee who buys an annuity to provide an income for your dependents, this may be treated differently.
However you approach the problem, the life insurance premiums will be tax deductible as a business expense. You can also use term insurance rather than permanent life which is cheaper. All it takes is the will to make time available to discuss this with your advisors and make the best arrangement possible for your family. This could see them continuing to run the business or selling out your interest at a fair market valuation. Either way, their interests will be protected.