Life Insurance for Business Owners
For business owners, life insurance is about safeguarding your company's finances in the same way that you safeguard your friends, family, loved ones, kids, etc.
In this article we're going to walk you through some of the uses of life insurance for business owners.
Keeping your business running
It’s a great way to keep your company afloat in good times and bad times. It could just cover expenses needed to find your replacement if you pass away, it could pay off your debts.
Likewise, if your business owner's life insurance policy has a cash value component, you could tap into those funds to fuel tax-free business growth—even while you’re still alive.
Funding partnership agreements
If you have business partners, it means you have a partnership agreement in place. This agreement stipulates that if one of the partners passes away, the other one has the right to buy their share of the business.
Equalizing an estate
If you own a family business, you can use life insurance to make sure everyone gets an equal inheritance.
Suppose you have two kids. One works for the family business and the other one does not. “Insurance can assist in estate planning to allow the child in the business to inherit the corporation’s shares while the other child receives an insurance payout,” says Daniel Kachani, a financial strategist and partner at Aria Wealth Solutions. This indicates that everything is equal, therefore.
Protecting your family
Have you ever thought, about what would happen to your family’s finances if you passed away unexpectedly? They can be left with debts, can have a lack of income and have no way to move forward. Life insurance can replace your income so your family can maintain the same standard of living.
How Does Life Insurance for Business Owners Work?
The main purpose of life insurance for business owners is to provide financial protection for a company in the event of the owner’s death. The beneficiary can use the death benefit to pay off debts, support the family, or keep the business running—whatever the policyholder wishes.
For example, if you have business partners, business life insurance can buy your or their share of the business when one of you dies. After that, the business can continue running and your loved ones can receive the financial support they need without the added stress of managing or selling the business during a difficult time.
Types of Life Insurance for Business Owners
There are three types of life insurance for business owners: personal life insurance, Key man life insurance, and Buy-sell agreements.
Personal life insurance protects your family and personal finances. It is for your family and any personal debts you may have. It can be used to replace your income, pay your debts, leave an inheritance to your kids, and keep your family financially secure.
Key man life insurance covers the financial hit your company would take if it lost a key owner, executive or employee. It is also known as “key person life insurance”, and protects your business if you lose an owner or employee who’s critical to the company’s success.
“An owner or key person fills various roles that are vital to a business’s survival—from maintaining assets to fulfilling debt obligations and operations roles—and the sudden loss of such an individual can throw a business into a tailspin very quickly,” says Matt Miller, the founder, and CEO of Embroker.
“Key-person life insurance focuses on maintaining the business’s needs until it can get back on its feet by covering outstanding debts and share buybacks, covering the cost of hiring and training a new employee, and even paying out severance obligations in case the business needs to close or lay off workers,” says Miller.
Buy-sell agreements allow business partners to buy your share of the business if you pass away. The final type of business owner insurance you should consider is a buy-sell agreement. This one is especially important if you have business partners. A buy-sell agreement is a binding contract between business owners that dictates what will happen to the business if one of the owners passes away or wants to sell their interest in the business.
There are two main types of buy-sell agreements: cross-purchase buy-sell agreements and entity purchase buy-sell agreements.
In a cross-purchase buy-sell agreement, each of the business owners buys a life insurance policy. The death benefit is paid to the surviving owners, who then use the money to buy out the deceased owner’s interest.
In an entity purchase buy-sell agreement, the business itself buys a life insurance policy on each of the owners. The death benefit is paid to the business, which then uses the money to buy out the deceased owner’s interest.
About The Cost of Business Life Insurance
The average monthly cost of a business owner's policy for small business insurance is $57; however, the exact amount you pay will depend on the specific business insurance you choose to purchase.
A business owner's life insurance premium is usually influenced by several variables, such as:
The age: You have an increased risk of unexpected death or an accident that makes you a candidate for living benefits as you get older. Thus, as you get older, consider your insurance costs to increase.
The type of coverage: Your insurance rate is primarily determined by the type of insurance you choose. Almost always, whole life insurance policies with payout guarantees cost more than term life insurance.
The type of business you run: Certain business forms are more vulnerable to catastrophic injuries and emergencies due to their nature. You should budget extra for coverage if you operate in a high-risk industry (such as construction or forestry).
How to Reduce The Cost of Business Insurance
- Research and compare prices from other insurance providers.
- Make yearly premium payments rather than monthly ones.
- Avoid situations that might result in a claim.
- Raise your deductible.