Are you a business owner, looking to protect your company in the event that something happens to you? When you run your own business, the number of people who depend on you financially is greater. This is why its a good idea to consider life insurance.
Continue reading to find out why business owners need life insurance, what types are available, and what the benefits are for you, your family, and your business.
Why do business owners need life insurance?
"Life insurance for business owners is typically something that you are either going to be required to get, or you're going to really want to get put into place, if you're serious about your business." - Steven Sinclair, Principal Life Insurance Advisor at Dundas Life
As a business owner, 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. Life insurance will provide security for businesses, and helps them keep running 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.
Life insurance may help your family by:
- Paying for your final expenses
- Replacing your income and easing the financial burden when you are gone
Life insurance can also be beneficial to your business while you're alive:
- It can assist you in obtaining loans. A bank's credit evaluation includes life insurance, which may be required to obtain a loan.
- An aspiring entrepreneur can sometimes use the cash value of a policy to get started.
In the even that you pass away, the policy also provides benefits to the company such as:
- Repaying business loans
- Purchasing back your shares in the company
- Covering the cost of a replacement for you
- Settling any liabilities of the company if it closes
Types of life insurance for business owners
Business owners require personal life insurance for the same reasons other people do — debt protection and income replacement. In fact, their needs in these two departments are usually much greater than those of the average applicant.
Certain companies offer employees benefits like retirement accounts or employer-sponsored and group life insurance, which helps employees with planning retirement and gives them more protection. 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.
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 permanent life insurance policy.
Term life insurance vs. permanent life insurance
There are two main 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 is 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 a permanent life insurance plan, you will accumulate cash value which can be beneficial while a person lives. Insurance premiums tend to be higher for a permanent life insurance policy.
Simply purchasing term life insurance 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, a permanent life insurance plan is a better choice as it provides better coverage.
Other types of life insurance
While term life insurance is the simplest and easiest to understand, when it comes to types of life insurance. there are many specific options within these categories.
Universal life insurance (UL):
This life insurance is a type of permanent 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 permanent 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.
Corporate owned life insurance (COLI)
Can a business take out a life insurance policy on an employee? The answer is yes. In addition to personal life insurance, as a business owner, you may be interested in business life insurance.
Corporations can get life insurance to protect an owner, executive or other important person, which is called key person insurance. The idea is that the company has an insurable interest in this person, and would suffer financially if they were to pass away. With key person insurance, the company is listed as the policy holder and the beneficiary, and in the event that something happens to the insured, the corporation will receive the death benefit.
A corporation may use this policy to:
- Cover a tax liability at death
- Fund a buy-sell agreement
- Secure a loan
Uses of personal life insurance for business owners
Spending money on a personal life insurance policy when you own a business comes with several benefits because the proceeds can be used on anything. According to the National Association of Insurance Commissioners, the average death benefit for a business owner is $500,000.
Your family may need the death benefits to:
- Pay off debt: If you have any college debt, a mortgage, or any other personal debt, you do not want this to be passed on to your family.
- Help a family member with health problems: After you have passed away, the last thing you want is your family to use their savings after you are gone.
- 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.
- Collateral coverage: 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.
Uses of life insurance for business purposes
In addition to helping your family in the event that you pass away, business life insurance can also help your company, including while you're still alive.
- Obtaining a loan: You can use your policy as collateral when securing a business loan. In some cases, the lender may actually require you to have a life insurance policy in order
- Cash value: As mentioned earlier, permanent life insurance policies often include a cash value component. This is essentially your savings, which may come in handy if you need some cash quickly.
- Buy-sell agreement: If you die, your business partner could use the death benefit to take over your stake or assets.
- Key person protection: The death benefit of an important person such as an owner or executive can be used to make up for lost profit, and to find someone to replace the individual.
- Estate equalization: A family owned business may make up a significant part of the value of your estate. If you have multiple children but only one will inherit the business, you can name your other child(ren) as life insurance beneficiaries to ensure that they receive an equal inheritance.
How to buy life insurance as a business owner
The process of buying life insurance for entrepreneurs is the same as for anyone else.
Follow these steps:
- Find out how much insurance you need. To do this, first, determine your long-term and short-term financial obligations, including any business loans that you have taken out. Next, subtract your assets from that figure. The remainder is the gap that you would want your life insurance policy to fill. You should also consider whether you want term life insurance or permanent life insurance. If you need help, try our free online life insurance calculator.
- Compare quotes. All life insurance companies will evaluate your situation differently. Compare quotes from multiple insurance companies in order to find the type of policy that works for you. Or, have a life insurance broker help you.
- Pick the insurer that offers the best value.
- Submit an insurance application. This will involve gathering information such as personal identification and documents. Depending on the policy you choose, this will also likely include taking a medical exam so the insurer can asses your health and risk. Alternatively you may have to answer a series of health questions.
- Make the premiums payments. Once you've been approved, make sure you stay on top of your premiums to ensure you receive the coverage you need.
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.
A life insurance policy may not immediately come to mind as a part of your business protection strategy. However, as an entrepreneur, 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.
Frequently Asked Questions (FAQs)
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.
Personal life insurance coverage helps you financially protect your children, family's happiness, but can also benefit 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.
The average value of a life insurance policy is $500,000 for business owners. However, your personal needs will vary depending on your financial goals or any debts that you have. To find out how much life insurance perfect for you, speak with a licensed life insurance advisor.
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.
The payout amount of life insurance for entrepreneurs in Canada may be used for any of the follwing:covering the cost of hiring a replacement; compensating business losses resulting from the insured’s death; distributing severance pay if the business closes; or buying and redistributing the deceased’s interest in the business.
While all employees are important for a business owner, some are indispensable. For example, a key-person can be an entrepreneur, a CEO, a top executive, or any other employee who will be extremely difficult and expensive to replace.
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.
Steven has a deep background in life insurance. At Dundas Life, he's helped 1000s of clients find the right insurance coverage while also training dozens of insurance advisors during his career. Previously at Finaeo, Steven oversaw compliance and coaching for over 350 independent insurance brokers. Steven is also rated the #1 Insurance Agent in Toronto on Rate-My-Agent.