The Role of Insurance in Succession Planning

signing life insurance policy, representing the use of insurance for succession planning

As a business owner, protecting yourself and your business has always been a major concern. You’ve purchased various types of insurance policies, such as general liability, property and worker’s compensation, to cover your business in the event of unexpected circumstances. But have you considered the role insurance can play in protecting your business when you are gone?  

Some people may think of life insurance as a way to take care of your family when you pass away. While that’s certainly a possibility, life insurance is often an integral component of a business succession plan. The proceeds from the policy help to ensure stability for the company and continued success of your business. Despite this important need, 38% of small business owners reported they do not have enough insurance to protect their businesses from closing if they die.

Long-term care insurance also has financial benefits for you and your family. Regular health insurance typically doesn’t cover long-term care, which can be quite costly. Purchasing a long-term care policy can preserve other personal or business assets and provide some tax benefits.

Life Insurance for Succession Planning

4 Common Reasons to Buy Life Insurance

It helps when selling your business.

Your succession plan should contain a buy-sell agreement, which outlines who will purchase your share of the company when you retire, become incapacitated, or die. Oftentimes, this agreement will be funded through a life insurance policy to cover you, purchased by another owner or owners, or an employee who has agreed to buy the business. The life insurance proceeds allow the buyer(s) to pay for your shares of the company without having to find another way to come up with a large amount of cash to complete the agreement.

Key Person insurance protects your business.

Key person insurance is a type of insurance that protects the business against the death or severe disability of a key person in the company whose absence would threaten the company’s future. Typically, the company purchases the policy, pays the premiums, and owns the policy. If you are taking out this type of policy on someone other than yourself, you will need their consent in writing. The funds could be used to keep the company running while you look to supplement the lost income from the key employee or pay off company debts, for example.

It can make inheritances more equal.

Sometimes a business owner purchases life insurance to use the proceeds to provide a more equitable inheritance to children. Perhaps one child has agreed to take over the family business and the other child doesn’t want to be involved. The proceeds from the life insurance can make the inheritance for the uninvolved child monetarily equal to that of the involved child.

It provides liquidity.  

Life insurance can provide the cash your heirs need to pay off estate taxes without having to sell off other assets, such as the family business. This preserves important assets and allows them to continue accumulating growth. Life insurance proceeds are generally income tax-free and estate tax-free (if under estate tax limit), which also helps to preserve more family assets for future generations.

Long-Term Care Insurance for Succession Planning

If you are currently in your 60s, there is a high probability you will need long-term care (LTC) services in the future. It’s estimated that someone turning 65 today has a nearly 70% chance of needing some type of LTC or support. Twenty percent are expected to need it for more than five years.

Why should you consider purchasing a LTC insurance policy?

Prepare for future health care costs.

As you know, health care can be expensive, and prices are only expected to continue to increase. In 2020, the monthly median cost ranged from $4,576 for a home health aide to $8,821 for a private room in a nursing home facility. By 2030, those numbers are expected to increase to $6,150 and $11,855, respectively. By 2040, costs are estimated to be nearly double what they are today. A LTC policy can help to cover a majority, if not all, of those costs.

Preserve other assets.

With the funds for long-term care coming directly from the insurance policy, you don’t need to dip into savings or sell other assets to pay for care.

Choose your quality of care.

A LTC insurance policy will provide more money for care than Medicaid, plus Medicaid does not pay for assisted living in many states. By being able to afford more coverage, you have more choices as to where you receive care and the type of care you obtain.

Tax benefits.

Just like life insurance, LTC insurance can have some tax advantages if you’ve purchased a tax-qualified LTC insurance policy. If you are the owner of a small business (sole proprietorship, partnership or LLC, or S corporation), you can fully deduct the LTC premium, up to age-based limits. Because each person’s situation differs, work with your financial advisor to determine what tax advantages may apply based on your policy and age.

Don’t overlook the importance of life insurance and long-term care insurance in your small business’s succession plan. A little work today can mean peace of mind for your family and your business tomorrow. A financial advisor experienced in working with business owners can help you discuss the pros and cons of these insurance policies in your plan and select policies that work best for you.

The team at C.W. O’Conner Wealth Advisors understands your business and financial needs and will help you make the right decisions for you, your family, and your business. We provide business advisory and consulting services in areas including ownership transactions, liquidity events and buy/sell agreements. Call us directly at 770-368-9919 or email Cliff at or Kevin at to learn more.

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    Cliff O'Conner

    Cliff is the founder and president of C.W. O'Conner Wealth Advisors, Inc. Cliff earned a Bachelor of Business Administration degree in Accounting from Georgia State University.

    Kevin O'Conner

    Kevin O'Conner is a financial planner with C.W. O'Conner Wealth Advisors, Inc. He earned a Bachelor of Business Administration degree in Business Management from Georgia College, and is a Certified Investment Management Analyst (CIMA).