Life insurance is a way of looking after what is important to you when you are gone.
Usually, personal life insurance policies are in place to give funds to loved ones, perhaps to pay off the mortgage so they can continue to live in the family home, and cover expenses that become difficult due to the loss of your income.
But life insurance does not just have to be about people; it can also be about business. If you are a business owner, chances are that you and your business are intimately connected, and that it will struggle to continue without you at the helm.
Life insurance can help protect your business in the event of your death, and help family members and partners retain the business or sell it for a profit.
Not convinced? Read on for a deeper look at life insurance, how it works, and the essential benefits it can provide to your business. This will reveal the best life insurance strategies for business owners when it comes to protecting both your business and your loved ones.
What Is Life Insurance?
Life insurance is an agreement between you and an insurance company that, in return for you paying your regular premiums, they will pay an agreed amount of money to your named beneficiaries in the event of your death.
It is a way for you to look after your loved ones once you are gone. The death benefit can cover funeral and other end-of-life expenses so they do not place a burden on your loved ones. The payout can pay off a mortgage so your family can stay in your home. It can replace your income to cover day-to-day expenses. It can also ensure that your children have enough money to do something you thought was important, such as go to college.
There are two different types of life insurance: whole and term life insurance. Whole life insurance is the one that most people are familiar with. It is the type of policy you pay into for your whole life, and pays out when you die.
A term life insurance policy is a policy you pay into for a fixed term, for example, 10, 20, or 30 years. If you die during the period of your policy, your beneficiaries receive a payout. If you outlive your policy, it has no value.
While that might make a term life insurance policy seem like a bad deal, this type is significantly cheaper than whole life insurance policies. For example, for a woman of 30 years of age to take out a whole life insurance policy that will pay out $500,000 upon her death will cost around $3,000 per year. If she gets a 30-year term policy for the same amount, it will cost her only $300 per year.
So term insurance policies are often used to cover a defined period of risk, such as the period of a mortgage, a loan, or the period when children are at home as dependents.
To learn more about Whole Life Insurance vs Term Life Insurance click here.
Why Business Owners Need Life Insurance
Anyone who has people who are dependent on them, or rely on them financially, has a good reason to take out life insurance of some sort. That is why 60% of Americans have some form of life insurance.
But owners of small businesses have additional reasons why they would be considering life insurance coverage, beyond the standard reasons of taking care of their family or paying off a mortgage or other significant debt.
The fact is, a lot of the time, you are your business, or at least are an essential part of it. So your life is integral to the business, and the business will need additional resources to survive if you are no longer there.
But let’s dig into the details. What exactly is business life insurance used for, and what are the benefits of life insurance for business owners?
Pay Off Business Debts
If you take out a loan to grow your business, your lender might require that you take out some kind of life insurance to cover the loan in the case of your death. Even if they don’t, it is a good idea. If the business goes through a difficult period after your death, loan payments can be crippling. If the business crumbles, how will family members pay back the loan?
A term life insurance policy for the duration of the loan is the cheapest way to cover this type of debt.
If the insurance is required by your lender, do not name them as your beneficiary. Instead, request a collateral assignment. This mandates the bank to use the funds to pay off the specified debt and then give the remaining amount to your beneficiaries.
Fund Buy-Sell Agreements
If you have a business partner, you will need an agreement in place for what will happen if one of the partners dies, becomes disabled, or simply decides to leave the business. This agreement usually allows one partner to buy the other out for a certain amount of money.
To cover this eventuality in the case of death, both partners take out a life insurance policy, probably a term policy, and name the other as beneficiary. The living partner then uses this benefit to buy out the spouse and children of the other partner and retain full ownership of the business.
Deal With Inheritance Issues
Owning your own business can actually come with some surprising inheritance issues.
First, while you may be poor in terms of cash, the value of your business may make your heirs liable to pay inheritance tax. See your state’s inheritance tax limits here.
The death benefit from a life insurance policy can mean they are able to pay that tax without having to sell the business. Or, if they intend to sell the business anyway, it gives them time to make a good sale rather than rush in order to cover the debt.
If you have multiple children, you may not wish to split the business between them, especially if one is personally invested in the business and the other isn’t.
When this is the case, you may wish to leave the business to one child, but you don’t want to exclude the other child from your inheritance. The cash payout from a life insurance policy can help balance inheritance between children in these circumstances.
In this case, a whole life insurance policy is probably a better choice, as inheritance is not a short-term issue that will disappear after a certain period.
Cover The Death Of Key Employees
Small businesses often rely on a few key employees. Perhaps you have a creative company that relies on an illustrator, or a marketing company that relies on the personal connections of a key individual. While that person might not be irreplaceable, if they were to leave it could set your business back significantly.
To protect yourself in the event of the death of one of these key members of your staff, you can take out life insurance policies for them. This will give you a buffer to rebuild the company in the event of their death.
Yes, you can take out life insurance in someone else’s name as long as they agree. It also does not preclude them from taking out personal life insurance policies to care for their loved ones.
While a term policy is most appropriate when covering your risk of losing an employee, you can also use company life insurance policies that also benefit family members as a perk to attract and retain talent.
Types Of Life Insurance For Business Owners
The life insurance available to business owners is the same as is generally available. You choose the amount you need to be paid out, and you choose whether you need a term or whole life policy.
In reality, most business owners will probably need multiple life insurance policies. You will probably have one whole life insurance policy that is more of a traditional policy aimed at covering your loved ones, but will contain additional funds to deal with inheritance issues.
You will probably then have one or multiple cheaper term policies to cover any loans or business debts, a buy-sell policy if you have a partner, and another to give the business a cash injection buffer to protect it while it is trying to reorganize without you.
You may also have a few life insurance policies on key members of staff to give you a similar buffer in the event of their deaths.
When it comes to business, it is not about getting “a life insurance policy.” It is about using life insurance as a strategic tool to protect your business in case of the unexpected.
Going into business comes with a lot of risks. One of the most worrying risks is what happens to your business, your partners, and your loved ones if something happens to you. Will the business be able to continue? Will your family be burdened with business-related debts? Could your business benefit from a financial injection to rebuild itself after losing a key employee?
Life insurance can provide a buffer against that risk, providing financial support to deal with these issues. This is why every business owner should invest in life insurance.
If you are looking for life insurance, check out our list of the best life insurance companies.