How To Cover Yourself, Partners, And Employees
If you're a small business owner, you may need more coverage than a standard life insurance policy. While many applicants think of life insurance as security for their family members, business owners should also look into these policies as protection for their business and their employees.
Wondering how whole or term life insurance can help your business? Read our quick guide on life insurance for business owners to learn more. We'll walk you through the benefits of taking out a personal life insurance policy, and why you should consider insuring your co-owner or your employees!
Types Of Life Insurance For Business Owners
There are multiple reasons why small business owners take out life insurance policies, and there are different kinds of policies catered to specific buyer needs. Here we outline the different types of life insurance and explain how they protect your business interests:
Personal Life Insurance For Business Owners
Personal life insurance is designed to take care of the family of a small business owner after they die. Because an employer doesn't get the typical benefits that workers get, such as executive bonus plans and group whole life insurance, personal policies become more important. They're a way to replace income and protect your beneficiaries from your debts.
Here are a few compelling reasons for a small business owner to get a whole or term life insurance policy.
Life Insurance Can Earn Cash Values, Which You Can Use For Capital
Whole life insurance earns cash value, which accumulates over time due to earned interest and paid dividends. If your business expenses ever increase, you can cover them by taking out policy loans up to the amount of the cash value in your policy. Instead of paying off a bank loan with a high-interest rate, borrowing from your policy will keep you insured while you repay your policy's significantly lower interest.
Life Policies Can Act As Collateral
If you get a life insurance policy, a business loan can be covered under your plan. Loans are a typical debt undertaken to grow a business, and they can be a heavy burden on your family if you die before they're repaid. Your life insurance coverage can help reduce any debts that your estate plan will have to shoulder – loans included.
A Whole Life Insurance Policy Can Replace Your Income When Necessary
If your family is dependent on your income, the death benefit will go a long way financially after you've passed away. Apart from answering for your usual contributions to your household, it can also help your family get your estate and succession plan in order. If you're unsure how much your death benefit should be to make up for the loss of your income, consider these future expenses:
- The future college fund of any of your children
- Any minors or senior citizens dependent on your income
- Your spouse's income, and how much more it will need to answer for daily expenses
- Any debts incurred, like loans for business purposes or credit card debt
While the death benefit, as a general rule, is not subject to income tax, this will depend on the payment plan of your policy and if it had any attached cash value or investment plans. Minimizing the tax burden will take a massive burden off your beneficiaries' shoulders, so talk to your insurance agent if you want more information about tax liabilities.
Group Life Insurance
If you are looking for a great way to provide affordable employee benefits, consider offering group life coverage. This is an attractive work bonus that business owners can use to recruit potential hires and reward their workers.
By providing a policy that ends when they leave your employment, you provide more incentives for them to stay with your business. This provides coverage at low life insurance rates with no medical exam, so an employee may opt to take it to provide for their family.
Talk to your insurance company about the premium rates they can offer your company. Depending on the nature of the work that you do, the number of people in your company, and their average risk factors, you may be able to find affordable whole life insurance rates to cover your employees.
Buy-Sell Agreements And Life Insurance For Co-owners
The impact of losing a business owner is so massive that partners often take out life insurance policies on each other. This ensures that if one business partner suddenly leaves the business or dies, the remaining partners would be able to fund the cost of searching for and hiring a replacement.
If you share business ownership, you should also consider entering a buy-sell agreement. A buy-sell agreement will outline the terms for what happens to an owner's share in a company if they die or leave the business. Within those terms, co-owners can agree to insure each other, to protect the continued ownership and operations of the business.
Once businesses come to a buy and sell agreement with insurance, they can also enter into an entity purchase plan or a cross-purchase agreement for co-owners.
- An entity purchase plan allows businesses to buy a business life insurance policy on all of its owners. In the event of a co-owner's passing, companies can use death benefits to buy the deceased co-owner's company shares.
- In cross-purchase agreements, every partner can purchase life insurance on other partners as part of the buy-sell agreement. In the event of a partner's death, the remaining partners can use the death benefits to buy the deceased partner's shares in the company.
A buy and sell agreement will only work for these two additional plans if you get life insurance to buy the shares of the deceased. Without a policy to use for buying the shares, a buy-sell agreement is not financially viable for the remaining owners or the company – putting the business at risk.
Key Person Insurance Policies
The death of a key employee may not end your business, but it can make it very difficult to replace them or lead to a serious interruption in your daily work. Key person insurance is a form of life insurance to help a business owner with the potential financial loss suffered when an important employee dies. These people are known as key employees – hence the name for this type of life policy.
With key person insurance, the business will pay for the employee’s insurance premiums and the business will be the policy beneficiary. If key employees die while still covered by this policy, the life insurance company will pay out the death benefit to the business.
Conclusion
Losing valuable employees or business owners can have a massive impact, not just on the deceased's surviving family, but on the employees who depend on continued operations. If you want to protect your small business and its day-to-day operations, consider getting small business life insurance for yourself, your employees, and your business partners.
Compare whole and term life insurance policies with the help of a financial expert! Wesley Insurance, LLC can look at the different benefits offered by life insurance companies, and help you decide which one is best for your needs. Get in touch today!