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Building Business Continuity with Life Insurance

By Mike Martinez, CLU, ChFC, AEP, Director, Doeren Mayhew Insurance Group

Successful companies are made up of key employees and strong leaders, so it’s important to keep business continuity on top of mind to ensure your legacy continues to live after your exit. Furthermore, business continuity planning is vital to the owner’s company and family.

Without a well-thought out and crafted business survival plan, the consequences for owner’s employees, customers, and most importantly, family and estate can be devastating. Life insurance can help mitigate these risks by serving as a funding tool for your plan. Consider these steps to ensure your business continuity:

Develop an Incentivized Plan

Create a written plan that includes financially meaningful incentives and/or compensation to motivate key employees to continue with the business in the event of a change of ownership or unexpected death.

Typically, this type of incentive package involves a special type of bonus (called a stay/retention bonus or golden handcuffs) for staying with the company after the owner’s departure. Some plans include vesting schedules to motivate the key employee even further to stay throughout the transition.

Explore Funding Options

One way a company can fund the incentive compensation bonus is with life insurance on the owner. This funded bonus plan provides the designated key employees with a cash bonus (usually about 50 percent or more of their annual compensation) and possibly a salary guarantee if the key employees stay (typically 12–18 months) during the transition period.

To ensure the incentive package is carried out as you desire, the plan should include, among other things:

  • Names the person(s) who will run the business going forward
  • Stipulate if the company will be continued, liquidated or sold
  • Amount of bonus
  • Duration of payments
  • Penalty for early departure

Communicate the Plan

Once implemented, be sure to communicate the plan’s existence and purpose to key personnel. This will help reassure them the plan is designed to reward key employees who remain with the company after the owner’s departure and during the transition period.

In addition to communicating the plan’s existence internally, let your advisors (CPA, banker, attorney, etc.) know as well. This will help:

  • Inform them of the business continuity plan in place that addresses your strategy for retaining key employees in the event of your death.
  • Disclose that there is life insurance on yourself to fund the plan.

For some business owners, it might make sense to discuss the plan in general terms with your top-tier customers as well. This will help assure your top customers business will go on as usual following your exit.

Consider These Factors

Creating a contingency plan for your company is paramount to the overall health, well being and continuity of your business should you depart unexpectedly. The alternative is chaos, ensured financial loss and uncertainty for the business owner’s heirs.

If you do use life insurance to fund the plan, work closely with a knowledgeable insurance professional, like those at Doeren Mayhew Insurance Group, to ensure the appropriate amount and type of life insurance is purchased by the proper entity (the business owner, the business owner’s trust or the business itself).
 To learn more, contact Doeren Mayhew Insurance Group today.

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