Companies, like individuals, can be the beneficiaries of life insurance policies. In fact, citing Aon Hewitt, The New York Times reports that up to 20 percent of new life insurance policies are owned by corporations. Companies often use corporate-owned life insurance (COLI) to insure against the loss of key executives who would be expensive to replace. COLI also has benefits for small businesses, though. If you own a share of a small business, a company-owned whole life insurance policy can help your partners continue to run the company and provide for your family if you pass away unexpectedly.
If you passed away without a COLI policy
If you don't have a COLI policy and you pass away, both your stake in the company and any life insurance benefits would pass on to your heirs, who are presumably your family. The life insurance benefits would provide for them financially, but they may be ill-equipped to fully realize the potential of your interest in the business.
Unless your family is able to assume your role in the company or your partners are able to buy them out, the value of your company, and therefore of your family's share in it, will decrease. If they don't have your skills and expertise, they won't be able to run the company as well as you did. Slowly, its profitability and value will diminish. This decline could be stayed if your partners bought your family out, but your partners would need to be independently wealthy to do this.
In many cases, when a business owner passes aways without a COLI policy, their family is straddled with an interest in a business that they can't properly benefit from. The fellow business owners are also hampered, as the business suffers from the loss.
If you passed away with a COLI policy
If you were to pass away but had a COLI policy, your partners would have a way to buy out your family after your death. Your share of the business would still go to your family, assuming that's what you specified in your will. The proceeds from your COLI policy, however, would go to your business. (Having a COLI policy doesn't preclude you from having an additional life insurance policy that names your family as its beneficiaries.)
The proceeds from your COLI policy could be used to buy out your family, which has a couple of benefits if your family members aren't fit to assume your role in the company. First, your family members would receive a fair price for the value of your share in the company. Second, your business partners would be able to continue to operate the business in the most profitable way possible. They wouldn't be handicapped by your unqualified family members.
If you retire with a whole life COLI policy
When purchasing a COLI policy, it's important to select a whole life, rather than a term, policy. Whole life insurance policies contain an investment component that increases in value over time; term policies do not have this feature. If you don't pass away unexpectedly, which is both the most desirable and likely scenario, but instead retire, the investment component of a whole life policy can be used to buy you out.
Your partners might not have enough savings to purchase your interest in the company, but the cash value, or the investment component's value, of a whole life insurance policy could be enough to purchase your share. You would receive the cash value and be able to retire. Your partners would gain your share in the business and continue to work.
If you're a small business owner and have partners, consider purchasing a COLI policy for yourself. Taking a life insurance policy out that names your business as its beneficiary will provide for your family and let your partners continue to run the company if you pass away before retirement. If you retire, the policy can be used to buy out your share in the business. For more information, check out companies like Matt Roenker Insurance Agency.