Will 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 after your death. To achieve this, 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. For example, they will be experienced in 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 certain lifetime 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 "bridge" period.

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 $20,000.