Being an entrepreneur is special. The business ends up being your baby but depending on where you are in life you may have real babies and a family also. That’s why regardless of your current state life insurance is an important thing for all entrepreneurs to consider. The type of life insurance you look at will depend on your current situation.
The truth is when buying life insurance you aren’t just buying for you and your business but you are buying it for other people’s financial interests. Knowing what policy may be right for you can be difficult which is why this article gives you the breakdown of why you need it and what policies will work for your situation.
Why Do You Need It?
Entrepreneurs and business owners operate a little differently when it comes to life insurance. While the kinds of policy remain the same, they may have different riders, provisions, and reasons for getting life insurance. Depending on whether your business has already bloomed or is blooming, your needs for life insurance will be different.
Often any kind of loans taken out for the business may require that the entrepreneur has life insurance. It also helps any business partners who may have relied on your financial part carry out the business if you were to pass.
When entrepreneurs are just starting out they are going to make a lot of initial investments to get their feet underneath them. Regardless of whether it is property, machinery, or supplies, likely as an entrepreneur you will go get a loan.
If you go to get a small business loan from the U.S. Small Business Administration you can get that they are going require you to get life insurance based on their requirements. In some cases with more commercial loans, you may also find that you are required to get life insurance in order to get loan approval.
Passing The Torch
When passing the business down to family generations to come, it works sort of like estate planning. It needs to be carefully drawn out and the funds are usually meant to cover the costs of the company while the transition in ownership takes place.
The other component of that is your family or beneficiaries may not want to inherit the business. If all co-owners of the business buy life insurance policies the other financial investors can use their life insurance policies to buy out the business. The money would go to the beneficiaries of the owner who has passed.
Your Options With Life Insurance
Generally speaking the best type of life insurance for an entrepreneur is going to be term life. This is because it can cover the entrepreneur and his family for the needed type to pay off those debts. Having said that, there are some advantages to the other types should term life be a turn off to them.
Term life makes the most sense when it comes to entrepreneurship because of the requirement when taking out a loan. Term life is a type of policy that only covers you for a predetermined amount of time. This means that if you outlive your policy term the death benefit is not paid out. This is the most affordable and low-cost monthly premium you can find on the market which is why it is so attractive. The downside is that you don’t get your money back unless you go with one that offers a return of premium. In that case, your monthly premium will be higher but you will also get a portion back.
This is perfect for an entrepreneur because in the beginning they probably can’t afford an expensive policy and by the time they can their debts will be paid off and they may find themselves self-insured and not needing a policy anymore.
Whole life is entirely different from term life. It has expensive monthly premiums but your death benefit will be paid out no matter what. The amount that is paid out can’t be said because your money is put into the market. While generally have cash accrual, there is no way to guarantee how much money you will get out of it. This can be helpful for entrepreneurs that have had a lot of success and want to use it as an investment as well as protect their estate should it come close to or over roughly $10 million.
Guaranteed Universal Life Insurance is your middle option between the two previously mentioned. This will guarantee your death benefit for a designated amount of money regardless of whether you outlive your term or not. It doesn’t offer much of a cash accrual opponent or any of the other frills which keeps costs relatively affordable.
The Different Types Of Term-Life Insurance
Because term life insurance is your best option for coverage with life insurance, it is worth knowing that there are several types to choose from within this category. Generally, all will be accepted by your business loan but it’s worth double-checking before applying.
Level term insurance is a good choice because the payout is guaranteed regardless of whether you are in year three or 10. That means if you have an unexpected death or terminal illness, your beneficiary will receive the full amount. The monthly premium will not change if an accelerated death benefit rider or of the sort is accessed.
Return Of Premium
Briefly mentioned above, a return of premium option is when you pay a slightly higher monthly premium but also get back a portion of those if you outlive your policy. This is somewhat similar to a GUL but instead of having a death benefit payout, you just get some of the money back. This is good for those who hate the idea of putting money in and not getting it back. It’s a compromise.
Annual Renewable Term
This option doesn’t always make sense for entrepreneurs because typically they know what the loan term length is and will want to match that to the life insurance policy term. Annual renewable terms just allow the client to continually renew each year. That means your term is only a year’s length and your rates are necessarily locked in.
This is a great option for those who are taking out life insurance because of debt. This allows your monthly premiums to decrease as the term agreement goes on because your death benefit will decrease at the same time. This is a good thing because your need for the death benefit decreases as your debts are paid off.
How Much Coverage is Needed For Entrepreneurs?
Each entrepreneur is going to need a different amount of coverage. There are a lot of factors that are taken into consideration such as all the debts you owe, any mortgages, whether your spouse is working or not, etc. The more coverage you need will be completely dependent on your debts and future expenses.
Consider Several Years Income
The amount of time you will want to cover your business should be several years in the event that your company needs to find your replacement. It may take several people to cover your place until the appropriate person is brought in. When that person finally is chosen it can even take some time to train them. Consider what your contribution in money value was to that company and make sure that your coverage is a couple of times that to help with the replacement costs.
All your debts need to be added up when taking out a life insurance policy. These are your debts for your business as well as your debts for your personal life. A house mortgage would be something that is included in these debts. The loan itself for the business is another debt. If these are not accounted for the creditors can either come after your family for the money or may go after the business depending on how it’s set up. If you set up your life insurance policy properly, you can have certain aspects be tax-exempt and protect your loved ones from debt collectors.
You want to consider all your future costs as well. This can sometimes be quite a long list. If you are trying to replace your income for your spouse because they didn’t work, you want to put aside 10 to 15 times your yearly salary. If you want to cover any disabilities for your son or daughter this is also something to consider. Long-term care is often something that is included as a rider if you don’t already have that in place so that your loved ones don’t have to bear the costs of long-term care like a nursing home etc. In the event that you have a terminal illness, or become disabled there are riders that can help cover these costs as well by accessing the funds early.
What Is The Process?
The first thing that an entrepreneur should do is search for a good independent agent. It is common to go directly to finance companies that you think may be a good fit but since their job is to sell you their insurance policies it is better to find an independent agent. Their sole focus will be getting to know your needs and finding the best life insurance policy for you.
Your insurance agent will walk through the steps you will take going through the application process. For instance, you will likely need to participate in a medical exam provided by the insurance company to find out your class rating that determines your monthly premiums.
You will still need to review your application done by your agent with your new insurance company once it is chosen. It’s just to verify the information is correct and normally takes no longer than 15-30 minutes. It can be done over the phone and doesn’t require you to come in for the most part. They may ask for some additional medical information from your own doctor because they may find a “red flag” in your medical exams or research.
From there on out, they may verify a few more things and make a decision if your original quote matches up after their process. You will either receive the same quote or be given a final new monthly premium number.
It’s important as an entrepreneur to take your time with this. While you may be in a rush to get that loan approved, each entrepreneur’s life will determine which path you go down in regards to the type of life insurance policy. It is likely because of all the great benefits of term life insurance that you will end up going with that. Most entrepreneurs do because it is a low-cost option in time where they are taking on many debts. There are a few different types to choose from that offer a little more flexibility based on your needs.
In the event that you are in your later stages of entrepreneurship and have seen a lot of success, you may find one of the other options is a better fit. Either way, you will want to hire an experienced agent to walk through all your choices. There are many riders and provisions that are added into insurance policies that can benefit certain situations and appeal to specific people. A good agent will know how to protect you and your loved ones for the future.
Even though most entrepreneurs are required to get life insurance to take out a loan, they are usually glad they do!