Life insurance for business owners
When we talk about life insurance, we typically focus on protecting families and dependents. A business is another insurable interest that can benefit from life insurance protection. Beyond providing financial support if a business owner dies, personal life insurance can be used as collateral for a loan to expand the business. Other life insurance types, like key-person life insurance, can also benefit business owners.
If you are a business owner then you are keenly aware of the importance of keeping your personal and business assets secure. However, life insurance may not immediately stand out to you as part of your business. You might assume that a life insurance policy is for protecting your family or dependents should something happen to you, and that’s it.
But what would your business do if something unfortunate happens to you? Or your dependents if they are responsible for settling or maintaining your business in your absence?
Getting life insurance for business owners is not only an effective way of protecting a business but also comes with other benefits. It can help protect those that depend on you and even act as collateral when taking a loan to grow your business.
Why would a business owner need life insurance?
When it comes to an individually owned life insurance policy, a business owner’s needs are no different than anyone else’s. One still wants coverage to take care of their loved ones or dependents financially if they die. Depending on what stage your business is at, the need for life insurance may vary; but, the need will likely always be there.
Furthermore, you may have taken out loans or lines of credit to get your business started and your estate would need to settle these should anything happen to you. This could eat into your family’s savings or force them to make a tough decision like selling your home to settle any business-related debts.
A life insurance policy can also help you access loans for your existing business. Banks and lending institutions also consider a life insurance policy as part of their credit evaluation; having life insurance may even be a requirement to securing a loan. In some cases, an inspiring business owner can even access the cash value from a policy to secure the initial funding they need.
But life insurance isn’t just a consideration for small business owners and entrepreneurs. Those who own or manage large businesses also need to consider the protection that life insurance can provide should anything happen to them, but also should anything happen to their key employees or business partners. For these reasons, business owners of any stature need to consider two different types of life insurance policies.
Personal life insurance for business owners
An individually owned personal life insurance policy is important for most business owners for the reasons stated above.
For the same reasons anyone gets an insurance policy, to take care of their loved ones and dependents financially should they die including:
- Replacing the contribution you would have made to household income
- Covering the costs of raising children or taking care of older dependents
- Children’s future education costs
- Personal debts like mortgage, car loans, credit card debt or lines of credit
- Covering the added risk of any personal debt or business loans they incurred starting or running their business
- Protecting the financial interest of your family, business partners, and employees should they consider running the business in the event you pass away or have to pay severance
Whether it is through term life insurance or a permanent life insurance policy, a budding or established business owner would be wise to calculate how much coverage they would need to ensure their family, business, and employees were taken care of should they die unexpectedly.
Key-person life insurance for business owners
Key person insurance is a life insurance policy owned and paid for by a business, that is issued to an employee deemed important to the company’s operation. The tax-free death benefit goes to the business instead of the insured’s dependents and helps fund whatever steps are necessary for the betterment of the business in the insured person’s absence.
Thus, the proceeds from key-person life insurance can be used in several ways.
- It can be used to fund the search for and hiring of the insured person’s replacement, and account for any lost business in the meantime
- If the insured person was a business owner or partner providing capital to run the business, the benefit can be used to replace those funds
Thus, a key employee for life insurance is often a CEO, founder, owner, or another employee essential to the running of the company.
Can a business own a life insurance policy?
As outlined above, yes a business can own a life insurance policy and stipulate themselves as the beneficiary if they have an insurable interest in the individual getting coverage. The policy protects the company’s financial interests – just as it would an individual business owner in the examples outlined above. These policies are often referred to as COLI (company-owned life insurance) or in the case when financial institutions or banks own the policy, BOLI (bank-owned life insurance).
What is a buy-sell agreement?
For companies with multiple business owners, life insurance through a buy-sell agreement is a great way to ensure the continued success of the company in case a partner passes away.
In a buy-sell agreement, the insured person(s) is a co-owner of the business. The policy’s death benefit can be used by the surviving owners to buy out or settle their share of the business when liquid assets would not normally be available to do so.
A business partner or multiple partners can retain control of the company while also ensuring the family or dependents of the deceased business partner receive fair market value of the business in the event of their passing.
How do buy-sell agreements work?
Buy-Sell agreements are arranged with these simple steps:
- The business value is evaluated
- Each owner gets a policy equal to the value of their shares. These policies will be owned by the business and the business is the beneficiary.
- In the event one of the business owners passing, the policy is paid out to the business while their family inherits the shares of the business
- The money is then used to buy the shares back from the deceased’s family
Things to keep in mind when setting up a buy-sell agreement
- Have the agreement or contract prepared by a licensed lawyer. This is key to ensure the buy-sell agreement is effective and works as intended in the unfortunate event of a business partner’s death
- Include a Guaranteed Insurability Rider. This will allow you to increase the value of the insurance policy to match the increased value of your business without having to go through the application process again
How do I get life insurance if I’m a business owner?
Getting a personal individually owned life insurance policy is the same whether you are a business owner or work in any other profession. A broker like PolicyAdvisor can help you sort through your options, find you a quote, and advise if your insurance needs are growing beyond that of a personal broker. Reach out to our experienced advisors below and they can get you started down the right path for covering yourself and the business you’ve built.
The information provided herein is for general informational purposes only. It is not intended and should not be construed to constitute legal or financial advice.
- Business owners need life insurance the same as anyone else with dependents
- They also often need extra protection to compensate for loans, debts, or expenses they've incurred to get their business started
- Key-person life insurance can be purchased by a company to protect against the financial blow of losing an important employee
- Buy-sell agreements help business partners protect themselves and their company if a co-owner pass unexpectantly