Business Life Insurance Guide for Getting Coverage

Business life insurance

Businesses, just like humans, need protection from uncertainties that might come into being along the way. For that reason, life insurance is not all about protecting humans. Instead, these types of policies go a long way in ensuring the smooth running of businesses amidst uncertainties.

Business life insurance is a protective layer designed to protect businesses against unexpected events that might affect operations. Death or incapacitation of an owner or partner is some of the adverse events that these types of policies protect businesses against.

To shield against such risks, insurance companies do offer business life insurance that ensures smooth business running on the financial front should the unfortunate happen. Just as is the case with normal life insurance policies, business life insurance policies can be tailored to cover key personnel or protect the payment of business loans. Such policies also do cover shareholders.

How to Buy a Business Life Insurance Policy

Buying a business life insurance is as easy as buying a normal life insurance policy. In the case of a big business involving partners, the first step involves determining coverage needs. In this case, the business owners must decide on what the insurance policy will have to cover.

If a business has many business owners, then applying for multiple life insurance policies may have to come into play. One of the policies may go towards protecting the families involved and the other one the business. Premiums will, in this case, have to be paid on each policy.

It is advisable to seek the services of an independent insurance agent when in pursuit of a business life insurance. Such experts come in handy in providing much-needed advice on how to navigate the entire process. In addition, they will be able to provide the best options in the market based on business needs and cover needed.

Types of Business Life Insurance

There are three basic types of Business life insurance policies

  • Key Person Insurance
  • Business Partner Insurance
  • Business Expense Insurance

Key person Insurance

A key-person business life insurance is a type of product geared towards providing cover against people within a business, perceived as valuable assets. The knowledge and contribution that these people bring to the day to day running of a business calls for protection against unforeseen events such as incapacitation or death.

In this case, a business might insure them for death, trauma, or permanent disability. By insuring them, a business would essentially be protecting itself against the potential loss of revenue or capital debt in case the key personnel is not able to work.

Premiums in key person insurance are calculated based on how profitable the person being insured is. Any payouts made by an insurance company as part of the policy agreement most of the time goes to finding a replacement if the insured is no longer able to contribute to the running of the business.

Business Partner Life Insurance

Also known as, Buy/Sell Insurance, these types of business life insurance provide the much-needed financing to buy out the share of another business partner. Death, trauma, or permanent disability to an existing partner may call for the buying out of his or her share, as a way of avoiding a complicated situation.

In the setting up of a business partner insurance, business partners must agree on which time the insurance cover will come into enforcement. Strict guidelines must be laid up to ensure the buy/sell agreement does not result in a messy divorce.

Business Expense Life Insurance

A business owner must plan on how to address some business expenses in case of an insured event. Should an incident happen to an income earner behind the success of a business, then a business should be able to address normal expenditures such as rent, leases as well as staff wages without too much struggle.

These types of business life insurance are essential for small businesses whereby one person is responsible for bringing in the dollars. If that person is not there, then a business should be able to operate until a permanent fix is found.

Insurance companies do offer business expense life insurance to businesses that have fewer than five income-producing employees.

How Life Insurance Protects Businesses

There are a few key ways that life insurance can protect a business. Let’s dive into the details.

Cover Key Personnel

Most business life insurance cover key personnel or senior managers who are crucial to the day-to-day running of a business. Such policies are especially beneficial for smaller businesses that rely on one key member of management for operations.

Should an unfortunate incident occur to that member, then the business life insurance would kick in to protect against any potential profit loss. The policy could also protect against the buildup of debts. The lump sum paid to cover the unfortunate incident could go a long way in hiring worthy replacement that would ensure the smooth running of the business.

Cover Shareholders

Business life insurance is also tailored to protect shareholders against unforeseen incidences that might affect their investments. For instance, in the event of the death of a senior manager, the business life insurance could be used to buy back all the shares from the deceased manager or partner.

Some businesses take to cover that allows them to cover all costs that might arise because of an unforeseen event in a bid to protect shareholder value. For those reasons, such policies smoothen the transition between shareholders.

Cover Business Loans and Debts

Businesses loans and other debts are a serious issue for many businesses. To protect against such headaches, some enterprises take business life insurance. Payouts made by insurance companies, because of the covers, come in handy in protecting a business in case of death or incapacitation of a senior staff member responsible debts or loans.

Business life Insurance policies thus go a long way in protecting businesses against financial obligations such as rent, mortgages, or other outstanding loans.

Cover For Employees

Businesses also do take a tax-efficient life insurance policy for their policies. Such policies do come in handy in helping pay for an employee’s estate in case they die in the line of duty. Instead of a company having to look for funds from its balance sheet, then an insurance cover kicks in to cover any payments that might arise. Such covers also provide protection in case an employee is not able to turn up for work because of a terminal illness.

Why Business Life Insurance?

Business owners need to give business life insurance a good thought as the health of their business will always affect a big pool of people. Businesses that employ a good chunk of people must always be ready to address any uncertainties that might come into being. The fact that business partners, as well as employees, depend on the wellbeing of a business calls for a lot of sobriety as any action can affect a vast population.

Key-Person insurance is a specific type of business life insurance that ensures a continuous running of business even on the owner or an integral member departing abruptly. In this case, the business pays a premium for coverage and is made as to the beneficiary of the life insurance policy. Any payout made because of an insured risk goes directly to the running of the business.

Business life insurance also plays an important role in times of buy and sale agreements. In case of joint businesses where there is more than one owner, then a life insurance policy would help in the buying of shares owned by one owner who has departed or is planning to offload his stakes. Without a business life insurance, it might be financially draining or impossible to buy a departed of deceased co-owner shares.

What To Consider When Purchasing A Business Life Insurance

Business life insurance should be permanent rather than term based. Permanent business life insurance is ideal, as a business is likely to exist for many years. With term life insurance, a business stands to lose a great deal on the expiry of the term policy in the course of operations.

 When selecting a business life insurance, it is important to have an option for increasing the policy amount of coverage. A growing business is always exposed to a vast amount of risks that a cover taken should be able to address. For instance, a policy cover with a fixed face amount might not be valuable five years after signing an agreement. 

The ability to increase the amount of coverage based on the rate at which a business is growing ensures that a business is well protected against adverse risks or events. However, it is important to note that premiums might increase as an insurance company increases the face amount.

Medical Exam is Important

When taking business life insurance for key personnel or partners, it is important to take a medical exam. While a lack of medical exam always hastens the process of acquiring coverage, it is not always the best move.

A lack of medical exam in insurance can, at times limit the amount of insurance protection that a business gets. Some insurance companies cap overage at $50 00 on the lack of medical exam. In addition, premiums tend to rise as a provider seeks to protect itself from adverse events emanating from the insured.

SBA Loan Life Insurance

Any small business can apply for a Small Business Administration Loan. Simply put an SBA loan is a special type of loan for small businesses that the government partially guarantees. The involvement of the government eliminates some risk to institutions offering such loans. If a business is not able to pay some of the amounts borrowed, the government agency comes in to cover a portion of the loan.

The partial guarantee offered by the government at times covers as much as 85% of the loan amount. The high coverage seeks to motivate financial institutions to lend to a small business that is many at times considered risky.

Once a business applies for an SBA loan, life insurance may be required in instances where the lender suspects a disability of death could affect the wellbeing of a business and the ability to pay the loan. 

“Life insurance and/or disability insurance is not required for all loans, but the Lender should require life or disability insurance where there is a concern over whether the business could survive in the absence of an individual or small group of individuals that provide the management for the small business concern.”

The requirement is many at times applied on sole proprietor businesses whereby only one person is the driving force behind the business. A financial institution would require a proof of life insurance as a way of guaranteeing any loan granted would be paid off, regardless of any event afflicting the sole business proprietor. 

For a business life insurance, to be approved as part of small business administration loan application, it must satisfy the following requirements

  • The business life insurance must be in force on the primary creator behind a business. The insured, in this case, must be the owner or the business creator.
  • The death benefit stipulated on the life insurance agreement must cater for the existing amount of the loan’s principal amount
  • The business life insurance policy duration must exceed the loan payment period especially in cases of term life insurance policies
  • A business must offer a proper collateral assignment prior to an SBA loan approval
  • A business must be above two years old with no outstanding tax liens or other government-related loans.

It is also important to note that some businesses are excluded from an SBA loan based on the industry of operations. For instance, gambling, mining, real estate development, and bail bond focused enterprises are not eligible for SBA loans even on meeting all the requirements.

How to Secure a Life Insurance for an SBA loans

The easiest way to secure a life insurance policy for an SBA loan is to collaborate with independent insurance agents. Such agents might prove to be helpful in instances where an application is turned down because of an underlying medical condition or lifestyle-related issues.

Independent agents would, in this case, come in handy in helping one navigate the insurance world in a bid to get the best life insurance policy that is also affordable. While visiting an insurance agent, it is important to have in mind insurance needs that a policy will have to over. One must also be ready for the insurance application process, which may require a significant amount of information.

When seeking a business life insurance, it is important to secure a policy amount that is slightly higher than the loan amount that one would be seeking from an SBA loan. One must also go for life insurance with more term limits.

Mistakes to avoid with SBA Loan life insurance

It’s better to work with a pro, but to find one, you have to be aware of what they should know to guide you in the right direction. Here are a few mistakes to avoid when getting coverage for SBA loan.

Legal Requirements neglected

Most SBA loan lenders require a borrower to prove the availability of life insurance before approving an SBA loan application. This is especially the case when there is a direct link between the recipients and the viability of a business.

Collateral Assignment neglected

Never assume that a collateral assignment is not necessary. For an application to sail through, then the applicants must show how the benefits from a life insurance policy would be shared out or distributed in case of death.

For approval, financial institutions call for their inclusion as one of the recipients of the amount paid out by an insurance policy in case of death. Collateral assignment, in this case, would make it possible for the financial institution to recoup a substantial amount of the loan amount remaining, from a death benefit.

No Exam Option

While most SBA loan applicants may be swayed to pursue a business life insurance without a medical exam, the same might come to bite. Life insurance issued without a medical exam can significantly affect a business’s ability to secure an n SBA loan.

Policy Face is not appropriate

Contrary to perception, financial institutions pay a great deal to a business life insurance face amount prior to issuing an SBA loan. In this case, the policy amount, which is the amount payable in case of an insured risk occurring, must correspond to the SBA loan.

If one is seeking an SBA loan amount of about $20,000, then the policy face amount must exceed the $20,000 amount. In addition, the term limit of a life insurance policy must be longer than the SBA loan term. For instance, an SBA loan of two years should be followed by a business life insurance that offers coverage for more than two years. 

Bottom Line

Business life insurance acts as a solid financial foundation for businesses. Life insurance policies enable the smooth running of business during a period of uncertainties that might take a toll on day-to-day operations. Such policies also allow business owners to protect their companies as well as family and employees from unexpected death.

In addition to protecting a business from unforeseen events such as death or unexpected expenses, such policies also allow a business to attract top talent. Businesses can use the policies to build loyalty with key personnel crucial to the survival and success of a business.