Businesses, just like individuals, need life insurance. Most business owners don’t know how vital life insurance is or how they can use it to the benefit of their businesses, and that is why they don’t set up insurance plans. A business is a huge risk, especially if you have spent your life savings to start it. And after such a sacrifice, the last thing you would want is for it to fail in your hands.
Life insurance is used to protect the heirs of your business as well as the business itself after you are gone, and that is why it is crucial. Anything can happen, and a good life insurance plan can save the life of your business. Just as there are insurance plans for individuals, each kind of business, depending on the needs, size, and type will need a specific insurance plan.
Every business owner needs to protect the future of their business. Life insurance ensures this as it helps protect the shareholders, key persons, cash flow of the business, and the business at large. There are so many ways businesses can use life insurance, as explained below.
Key Man Insurance
Some businesses would fail in the event of death, incapacitation or exit of some key people. It can be difficult for a business to operate as usual after losing someone who possesses a unique skill set. This could be an individual who moves the company and one who the business cannot do without. While every employee is unique, they cannot be equal, and that is why some of them are highly valued when compared to others. This is why businesses need to insure high performers.
The company receives the benefits from the policy if the key person dies. These proceeds can be used to pay off debts or to cover expenses that may be incurred when sourcing for a replacement. Life insurance for a key person can be structured to help cushion a hard financial blow if a business deteriorates after it loses that person. In other cases, the company can also use the proceeds to provide working capital for the replacing individual.
A branding agency owner had this to say: “If you’re in a partnership or have key employees, its detrimental that you have coverage in place. If something happens to a key part of your business, then it can often be the difference between staying in business or not.”
When setting up a key person life insurance policy, the company needs to consider the benefit they need from the insurer. How much revenue does the key person drive? Will their exit have implications or the financial status of the company? And would it be costly to replace them?
While the policy is insured to the key person, the company carries the responsibilities of the insurance, from paying the premiums to receiving the benefits. The company will be the owner of the key person life insurance and has access to the funds and cash value accumulated over the term of the policy.
Buy-Sell Life Insurance Agreements
Every business needs a succession plan in case a partner, shareholder or an owner passes away. As such, buy-sell agreements are vital for any kind of business because they allow continuation even in the event of sudden death. With a buy-sell agreement, the policies bought will be equivalent to the value of the partners’ ownership stake in the business.
Depending on the type of business, buy-sell agreements can be set up differently, such that setting up for corporation, partnership, and sole proprietorship will be different.
Partners can set up a cross-purchase agreement where they buy coverage for each of their partners. It works best for two partners and gets more complicated with a higher number of owners. With the cross-purchase agreement, the benefits of the policy go to the surviving partner to allow them to buy their deceased partner’s company shares.
In the case of more than two partners, an entity buy-sell agreement can be set up. Unlike the cross-purchase method where all partners buy coverage for each of their partners, entity method allows the business to set up policies for each of the partners and uses the benefits to buy back the shares if a partner passes away.
Business Loan Life Insurance
Running a business may not all be easy, and as an owner you may find yourself taking out loans when the business finances take a dip. These debts and other bills may be hard to pay on time, or even at all. Oftentimes, when a business hits financial roadblocks, one of the ways of alleviating the problem is through loans.
Depending on different factors like the credit worthiness of the business, a business owner can easily get loans via banks and other creditors. However, most of these banks and creditors usually require business owners to have life insurance as collateral for the loan.
Locking a life insurance plan for your business will go a long way to helping you to secure loans for the business in the future.
Most business owners only realize the need for liquid cash to boost the business when the need arises. You need to be prepared for anything for you to have an easy time tending to unexpected financial needs and responsibilities.
As a business owner, you need to accumulate cash inorder to prepare yourself for any uncertainties in the future. A life insurance plan is a great way to accumulate cash for the business to use in the future when the need arises. This cash can be used to clear debts and bills, supplement the business’s cash flow, or even pay overhead expenses for the business.
Also, a Life insurance plan for a business is equivalent to a tax-free investment. This is because the proceeds from life insurance are not taxable if payable to an employee or beneficiary of the business.
In addition, in the case of other financial emergencies, you will not be forced to use profits from the business or from your own pocket.
Stock-redemption Life Insurance
A stock-redemption agreement is similar to a buy-sell agreement, but with several variations as compared to the cross-purchase method. It is most suitable when a business has multiple shareholders or with an employee stock option plan in place.
While it may be complicated for more than two partners to enter a cross-purchase agreement, stock-redemption makes it simple. The business buys policies for each of the individuals in the company and uses the proceeds to buy shares in case a shareholder passes away.
Group Life Insurance
Just as a key person life insurance policy can be set up for a major shareholder or the owner of the business, group life insurance can be set up for other employees in the business. It may not have the advantages that key person life insurance has but it is handy for an individual that is struggling to get approved for the normal life insurance plans. This could be an individual with a bad medical record or family history.
Most group life insurance plans usually get renewed after 5 years, and the employee is allowed to pay for an extra policy if they are not content with the benefits from the group life insurance. Businesses offer group life insurance to entice new employees and retain the current ones. For instance, it is a relief for employees with low incomes and more financial responsibilities to have the employer pay group life insurance for them.
In addition to benefiting the business, life insurance can also benefit the policyholder in different ways. The business owner can also use the life insurance benefits for the following purposes;
Supporting your family’s lifestyle
If your business is the only source of income that supports your family, then you should start thinking about your next steps to ensuring that the lifestyle of your loved ones will remain the same even after you die. Being the breadwinner, it can be very difficult for your family to get by on their own after you pass away.
You may leave a couple of financial needs like paying school fees, taking care of an old person, your funeral and burial expenses, estate taxes, medical bills for a family member and general upkeep for your loved ones. With an unemployed or disabled spouse and young kids who cannot raise money on their own to support themselves, your family might be left in a difficult position.
But with a life insurance plan in place, the death benefits can be used to support their lifestyle and allow them to manage their expenses without struggling.
Paying outstanding bills and debts
Debts and outstanding bills can be a pain to your loved ones after you are deceased. If your family is oblivious of any unpaid debts, then they are left with the burden of clearing those debts and bills. Business owners can use life insurance to pay off debts if they die before clearing them. This lifts the financial burden your loved ones would have been left with and leaves them with a peace of mind.
Protecting your property
Also, proceeds from a life insurance plan can help protect your personal property. The policy proceeds can be used as collateral for a loan for your business. If your business is unable to pay a loan, your creditor has the right to claim your assets to settle the debt. But a life insurance plan will help protect you against such a case so, if you die before fully paying the loan, your creditor cannot claim your business or personal assets. Instead, your insurer will pay off the remaining loan balance using the death benefits from the policy, while the rest of the proceeds go to your beneficiary.
How Much is Enough Coverage?
Deciding on the amount of coverage you will need for your business may be the hardest task, even individuals struggle in figuring how much they will need when choosing life insurance plans. Having a life insurance policy for your business is not enough, you need to know how much coverage you will need. This is because the benefits are meant to be used for a specific purpose, and how much coverage you will need boils down to two things;
The type of insurance you choose
Some life insurance products are costlier than others, and this can impact the amount of coverage you get for a chosen plan. Also, different insurance packages will have different terms and depending on the amount of premiums needed to be paid, the benefits will also differ.
Why you need the life insurance plan
How you intend to use the proceeds from the policy will be a major determinant of how much coverage you will need for your business. Do you need the insurance proceeds to supplement your retirement plan or is it for expenses? Perhaps you need to set up a succession plan in place for your business. If you are able to point out why you need the policy, then it will be easier to estimate how much coverage you will need.
The amount of coverage is not a one-size-fits-all, as different businesses will have different financial needs. Also, before making any decision on the amount of coverage, consult an expert first so as to understand how a simple life insurance plan works.
Business owners cannot afford to overlook life insurance. No one knows how the future of their business looks like, and that is why owners use life insurance for their businesses. It is as important as it is for any individual. Life insurance will help to keep the business afloat and sustain it through future uncertainties. It can be viewed as both a financial aid for your business and even an investment plan.
It is not a waste of finances as usually thought, and even small premiums over a specific term can go a long way to boosting your business financial needs.
While life insurance is not something that a lot of people like hearing, it may be that one thing that saves your business’s finances, retains the very productive and valuable employees your company has or even prevents the business from a hard fall after a key person dies.
We are experts in business life insurance and can help you navigate the waters in the right direction. We shop with all of the life insurance companies out there to get you the best rate, without charging you a penny.
Give us a call today or use the quoter on this page to compare rates.
Welcome to CFA!