Survivors Run the Business?
If you plan that your surviving spouse, family or others will
continue to operate your business after your death, you must
believe (or desire) that they will be able to do so profitably.
The question then becomes whether they can pick up where you
left off without a period of lessened profits.
Profits may stay level. The best situation is where
there will be no let-up in profits. You must have operated your
business in such a way that your family members know what must
be done, and can do it! If you are at this point, you have
probably involved your family in all aspects of business
operation already (and have them dealing with customers and
suppliers, if that is required by your business). If this is the
case, you have no particular increased need for life insurance
because of your business, unless you wish to use it to meet
needs. However, you may wish to purchase life insurance to
provide a ready fund to pay any estate
taxes that will be due, so that your heirs don't have to
sell off needed business assets to pay Uncle Sam.
Profits may drop off for a time. It certainly would
not be unusual if the family members who continue to run your
business could not do so as profitably as you could — at
least, not right away. No matter how talented or industrious
they are, if they have not been intimately involved in the
day-to-day running of the business, they probably will not be
able to do everything as well as you did. This is particularly
true with businesses that require specialized business knowledge
or training, and businesses that depend on long-standing
personal relationships with clients, customers or suppliers.
If you think that it will take your family members or heirs a
few months, or a few years, to get the business back to where
it's making the same profits that it did for you, life insurance
can be used to bridge the period of diminished profits.
Philip Labrador operates an up-scale dog
grooming salon. He has established a reputation
with wealthy dog-show exhibitors as the best
groomer in the area, and his business earns
profits of $70,000 per year. His son, Chuck, is
an accomplished groomer himself, but does not
have his father's business savvy or reputation
with clients. Philip believes that if he died
tomorrow, Chuck probably could operate the
business at a profit of only $35,000 a year.
With diligent effort, however, Chuck could have
the business back to earning yearly profits of
$70,000 in three years. Assuming that Philip
wants Chuck (or other family members) to have
the benefit of the full $70,000 income for the
three years until Chuck can get the business
back to its previous level of profits, Philip
will need to make up for a $105,000 shortfall.
This could be done by an insurance policy on
Philip's life sufficient to pay a death benefit
of $105,000, spread out over the three-year
Profits may stay lower. You may conclude that your
family will be able to run the business profitably after your
death, but never at the profit level that you did. If this is
so, and you want to provide your survivors with the same level
of income that they enjoyed during your life, you will have to
do something to make up for this shortfall in income.
Mary Green works 80 hours a week operating a
landscaping business. Her yearly income from the
business is $40,000. She believes that her
husband, Gary, could run the business after her
death, but because he has another job, could
only devote to it enough time to make a yearly
profit of $20,000. If Mary wants Gary to enjoy
the benefit of his salary plus the $40,000 per
year that had come from the landscaping business
during her life, she will need money from
insurance (or other sources) sufficient to earn