Life Insurance for Business Owners

When you run your own business, the number of people who depend on you financially is greater. Not only do you have to think about your children and family's happiness but your business partner(s), employees, and the business's success as well. This will provide security for your business and help run it after an owner passes away.

Life insurance can help you secure your family’s and your business’s future success in the event of your death. It will help your family live comfortably after you are gone, and ensure your business continues to thrive in your leave/vacation.

A corporation may purchase a life insurance policy to cover a tax liability at death, fund a buy-sell agreement, or secure a loan.

A life insurance policy can assist you in obtaining loans. A bank's credit evaluation includes life insurance, which may be required to obtain a loan. An aspiring business owner can sometimes use the cash value of a policy to get started.

Even as a small business owner, obtaining life insurance is not only an effective way of protecting a business, but it also provides several other benefits such as repaying business loans, purchasing back your shares in the company, covering the cost of a replacement for you, and settling any liabilities of the company if it closes.

Is personal life insurance for business owners a good idea?

There are two types of personal life insurance — term life insurance and permanent life insurance. While term life insurance is cheaper, both term and permanent life insurance help the ones you love live comfortably after you are no longer there to provide for them and assure them security.

With term life insurance, your beneficiary are entitled to a tax-free payout if you pass away within the policy's term. This means policyholder doesn't have to pay taxes on the death benefit. With the permanent life insurance policy, you will accumulate cash value which can be beneficial while a person lives. Insurance premiums tend to be higher for a whole life policy.

Certain companies offer employees benefits like retirement accounts or employer-sponsored and group life insurance. Since employers hold the policy for the employees for group life insurance, business owners do not have access to the benefits it comes with and, as such, may require a personal life insurance policy even more than others. This will help employees with planning retirement and give more protection to employees.

There are various types of life insurance, and some can function as a long-term investment with a cash value that grows over time. This can help the company in the future in a variety of ways, such as borrowing against their policy. Just like refinancing from a mortgage, you can also borrow money using a personal life insurance policy.

Business owners require personal life insurance for the same reasons other people do — debt protection and income replacement. In fact, a business owner's needs in these two departments are usually much greater than those of the average applicant.

The premiums for life insurance for business owners, including small business owners, are typically higher than for individual policies, due to the increased risk associated with insuring multiple people. As a business owner, life insurance will work in your favour and can be used for anything you want after you're gone.

Simply purchasing a term life insurance policy with a sufficient death benefit and investing the rest of your retirement savings in retirement accounts is the easiest approach to include life insurance into retirement planning. For younger business owners, permanent life insurance is a better choice as it provides better coverage.

Spending money on a life insurance policy as a business owner comes with several benefits because the proceeds can be used on anything. In general, the funds are used to pay off college debts, travel, health expenses, mortgage debt, and the list goes on. If a family member gets health problems after you have passed away, these funds can come in very handy. Last thing you want is your family to use their savings after you are gone. So whether it is term life insurance or permanent life insurance, business owners will definitely benefit from either insurance policy.

Some of the main reasons why a entrepreneurs should buy a personal insurance policy are:

Income replacement

Your income is your biggest financial asset. The ones you love may not be able to live comfortably if your income were to suddenly stop. Spending more money on life insurance provides income replacement, which you don't have to pay taxes on, and helps your family and friends stay afloat after you are gone. Guaranteed death benefit from life insurance means your family will still get income as if you still went to work. Your family and friends can use the policy funds to pay household bills, cover any expenses such as college costs, pay off debts, travel, health expenses, mortgage debt, and so on. This can help your family's lifestyle, how they are spending their money, and provide more opportunities for leisure and health.

To figure out the amount of life insurance you need, first, determine your long-term and short-term financial obligations. Next, subtract your assets from that figure. The remainder is the gap that you would want your life insurance policy to fill.

Collateral coverage

Your loans do not simply disappear after your death. If you borrowed a business loan for which you used a personal asset as collateral, your family may have to dip into their savings to pay off the lender. If you used your house as collateral, they may even risk losing it after you are gone.

When figuring out how much life insurance you need, also factor in all business loans that can affect the ones you love after you are gone. If you want your life insurance plan to provide comprehensive coverage to your family and friends, make sure it includes:

• Debt protection

• Income replacement

• Business loans that can impact your dependents

According to the National Association of Insurance Commissioners, the average death benefit for a business owner is $500,000. This data alone makes it extremely important for business owners to have a life insurance policy.

How to buy life insurance as a business owner?

The process of buying life insurance for entrepreneurs is the same as for non-business owners. Follow these steps:

• Find out how much insurance you need

• Get a quote from multiple insurance companies and compare several quotes

• Pick the insurer that offers the best value

• Submit an insurance application and take a medical exam

• Make the premiums payment once approved

Business owners may benefit from buying multiple policies. Generally, a business owner will take out at least two policies. One life policy to provide financial assistance to your family, the other to your business.

Life insurance for business owners FAQ

Why do small business owners need life insurance?

Business owners understand that their death may affect more than their families. It can also impact their company's success, business partners, and employees. Life insurance can act like a long-term or short-term investment for your small businesses if anything happens in the future.

A life insurance coverage helps you financially protect your children, family's happiness and your business. It can also be used to help pay off expenses and provide liquidity to the business in the event of the owner’s death. All in all, you don't have have to pay taxes on the proceeds.

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What is the purpose of key person insurance?

Key person insurance covers the loss of a business partner or a key executive. The business purchases the insurance coverage and becomes the owner and the beneficiary. The business can use the payout to cover financial losses occurring due to the partner or key executive’s death, or the cost of recruiting a replacement.

What is business life insurance used for?

The payout amount of life insurance for entrepreneurs in Canada may be used for:

• Covering the cost of hiring a replacement

• Compensating business losses resulting from the insured’s death

• Distributing severance pay if the business closes

• Buying and redistributing the deceased’s interest in the business

Who is a key employee for life insurance?

While all employees are important for a business owner, some are indispensable. For example, a key-person can be an entrepreneur, a CEO, or a top executive. But it can also be any other employee who will be extremely difficult and expensive to replace.

Some types of Life Insurance

Universal life insurance (UL): This life insurance is a type of whole life insurance that gives you lifelong coverage, allows you select how to pay, and enables you invest some of the money. UL insurance lets you preserve coverage and build wealth for your beneficiaries. It allows you customize insurance and investment costs.

Variable Universal life insurance (VUL): This life insurance is also a type of whole life insurance that lets the cash component be invested for higher returns. This way VUL insurance contracts are comparable to regular UL insurance, except you can invest the cash value through sub-accounts.

Survivorship life insurance: Survivorship life insurance policies cover two people and pays out the death benefit only after both have died. It is frequently purchased by a couple in order to leave money to their children, estate planning, succession planning, leaving a substantial legacy, or funding a support system for a dependent who may require lifetime care.

Single premium life insurance (SPL): Single premium life insurance can be paid for all at once. You'll receive a guaranteed death benefit. Single premium life insurance grows cash value over time and can be borrowed against to generate cash flow.

Indexed universal life (IUL) insurance: This life insurance allows the policyholder to choose how much cash value to allocate to a fixed or equity-indexed account.

Variable life insurance: Variable life insurance has an investing component. The cash-value account is invested in sub-accounts.

What is underwriting for businesses?

Underwriting is how insurers analyze your small business's risk. It involves the insurance company deciding if your firm offers an acceptable risk and, if so, pricing your coverage.

Conclusion

A life insurance policy may not immediately come to mind as a part of your business protection strategy. As entrepreneurs, you not only have to think about your family's happiness, but also your business. Life insurance planning can work in your favour and ensure that both will stay afloat in your absence. At Dundas Life, an agent will assess your needs and recommend plans suitable to your unique situation. We can help you find the right life insurance policy at the right price.