While many people know that protecting loved ones with life insurance is essential, this type of coverage is also crucial for those who own or run a business. This is especially the case for companies that would not survive upon the sudden or unexpected loss of certain individuals.
When conducting planning for a small business, it is important for the company owners or partners to include life insurance as a part of their overall financial strategy. This is because life insurance can play an essential role in the financial strength and stability of the business. For example, having life insurance protection can help keep a business running upon the unexpected loss of a partner, owner, or even a key executive.
There are numerous ways that an insurance strategy can be structured when it comes to life insurance for small business owners. Some of the more common methods include:
Buy Sell Agreements
When there are several individuals that own a business together, the sudden death of one of them can cause a significant hardship to the company. This is why a buy sell agreement should be considered so that immediate liquidity can be provided.
A buy sell agreement is a type of contract that is set up between two or more owners of a business. Using this strategy, each of the business owners will purchase a life insurance policy on each of the other owners.
Should one of the company owners pass away, the proceeds from the life insurance policy will be paid out to the surviving owners. This money can then provide the needed funds that can be used to buy out the deceased owner’s portion of the company. The money can also be used for allowing the company to continue its operation during the transition.
Money from the proceeds of a buy sell agreement can also be used to assist the family of the deceased business owner, partner, or key executive. This is because oftentimes, surviving family members – especially the spouse and dependent children – will be left without income upon the death of the individual. Therefore, a certain amount of funds from the buy sell agreement can also be allocated for income replacement, debt payoff, or other needs of the family.
Cross Purchase Agreements
Cross purchase agreements are another type of arrangement that can be used by small business owners and funded with life insurance. These are essentially a type of buy sell agreement whereby each of the business owners are named the beneficiary of each others’ life insurance policies. Therefore, the company is not an actual participant in the cross purchase agreement.
In this case, the individuals – not the company – will pay the life insurance premiums, and will also have their individual beneficiary designations, in direct proportion to their share of their purchase price of the company.
When setting up buy sell agreements, it is important for small business owners to ensure that they use a permanent type of life insurance policy. This way, the coverage will not expire over time. (Term life insurance policies expire after a set amount of time and then the insured needs to re-qualify based on their then-current age and health status. This can make keeping a buy sell agreement in place difficult, as well as costly, over time).
In addition, it is also important that the life insurance that is put into place should have an option for the death benefit to increase over time as the value of the business increases in the future.
Key Person Life Insurance Coverage
Life insurance for small business owners can also be used for covering key employees and other individuals who are important to the organization. Oftentimes, if a key employee suddenly passes away, a company can lose customers quickly.
By purchasing life insurance on key individuals, the company can use the liquidity from the policy’s proceeds to remain afloat until a replacement for the individual is sought, hired, and trained.
Typically, the company will pay the premium on a key person life insurance policy. The company will also be the beneficiary on the policy. There are some types of key employee life insurance that will allow the insured individual on the policy to be changed – without the need to cancel the insurance – if a key person leaves the company and a new person takes his or her place.
As a Benefit to Attract and Retain Good Employees
Another great use for life insurance for small business owners is to use it as an incentive for attracting and retaining good, quality employees. By putting life insurance coverage into an employee benefits package, a business owner will be showing employees – or potential employees – that they care about their employees, as well as about the well-being of those employees’ families.
The coverage can be set up in a number of different ways – and likewise, the payment of the life insurance premium can also be split in a number of ways between the employer and the employee.
Simply knowing that they have the additional protection of employer-sponsored life insurance will help employees to feel more secure, and will also provide them with a sense of loyalty to the business that they are working for.
Likewise, life insurance can also be used by small businesses as an additional “fringe” benefit package for key executives. For example, it could be used as a part of an executive bonus or a deferred compensation plan for highly compensated employees of a company.
Small Business Owners’ Estate Planning
Oftentimes, small business owners will be subject to estate taxes upon their death. In some cases, these taxes can be in excess of half the value of their overall estate. When these taxes are due, it can cause a real blow to the decedent’s survivors – especially if survivors are forced to dip into savings or sell precious family heirlooms in order to come up with the cash to pay the tax when due.
Having life insurance can help to provide the cash that is needed for paying estate taxes – while still keeping the business up and running – upon the death of a small business owner. In this situation, however, it is important to set up the life insurance policy so that it will not be included in the individual’s actual estate. Otherwise, the amount of the death benefit will also be added when calculating the value of the decedent’s total estate value.
How to Purchase Life Insurance for Small Business Owners
When considering the purchase of life insurance for small business owners, the many potential options can be confusing. At Life Insurance United we are here to help. We can assist you with comparing your options, as well as with comparing premium quotes in order to ensure that the policy you choose also fits in with your company’s budget.
Each life insurance company is different, and all of them are going to have different ratings and underwriting that you’ll have to go through to get insurance protection for your small business. That means that you could get drastically different rates depending on which company that you get the quote from. If you want to ensure that you’re getting the most affordable life insurance plan, you’ll have to get quotes from dozens of companies before choosing the one that worst best for you.
There are thousands of different insurance companies on the market, which means you could spend weeks and weeks calling different agents to receive quotes, or you can let us do all of the work for you. There are two ways that we can bring all of the best rates directly to you. You can contact one of our agents today and we will walk you through the process and provide all of the best rates. Our independent agents represent several dozens of highly rated companies across the nation. We can bring all of the lowest premiums directly to you for a no medical exam plan.
In order to get the process started, simply submit the form on this page to obtain policy premium quotes. Should you have any questions at all regarding business life insurance, obtaining premium quotes, or even about life insurance in general, please feel free to contact us directly by calling, toll-free, 334-380-4188 and we will be happy to help. We want to be sure that you have the right type of life insurance coverage for your small business and its liquidity needs.
You never know what’s going to happen to you tomorrow, which means that you shouldn’t wait any longer to get the life insurance protection that your family deserves. Not having life insurance is one of the worst mistakes that you could for your loved ones. It would leave them with a massive amount of debts and final expenses that they would have no money to pay off. This could make an already difficult situation a thousand times worse. Nobody wants to think about his or her own death, but when you’re a small business owner, it’s vital that you plan for every possible scenario. Otherwise, your business and your family could both suffer. Don’t wait any longer to get the life insurance protection that they deserve.
So no matter if you’re shopping for yourself or life insurance for your parents, we can answer your questions and help you get the coverage you deserve.