Definition of "Sole proprietor life and health insurance"
Coverage for the owner of a business. When a proprietor dies, debts of the business become the debts of the estate since in this circumstance the law recognizes business and personal assets as one. The executor is required to dispose of the business as quickly as possible. Life insurance can fund the disposition in several ways:
- If the business is transferred through a will, the life insurance's death benefit can be applied to the deceased proprietor's personal and business debts and estate taxes.
- If the executor conducts a forced sale or liquidation, a death benefit can be used to reduce or eliminate any debts. The death benefit can also be used as a source of working capital for interim financing to operate the business in the short run.
- If the business is to be transferred to a child or employee, the death benefit can provide funds to effect the transfer.
- If the business is to be sold to a key employee (s) through a buy-and-sell agreement, the key employee (s) usually has previously bought a life insurance policy on the sole proprietor and made all premium payments. The buy-and-sell agreement stipulates the formula to be used in valuing the business as well as other conditions of the sale. Upon the death of the proprietor and the sale of the business to the key employee (s), the proprietor's estate receives the cash amount according to the buy-and-sell agreement, and the key employee (s) receives the deceased proprietor's business.
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