With all your attention focused on running your small business, you likely have not considered how your family members, surviving owners, and company might be affected by your health. Though it is not pretty to think about, death comes for us all. You owe it to your loved ones’ financial future to invest in life insurance.
For small businesses, life insurance companies offer several types of life insurance. In this article, we will explore why you need business life insurance and how it works, as well as all the possible plans available, so you can choose what best suits the size and scope of your company.
Why Get Your Business Insured?
There are five key reasons why life insurance is essential, not just personally but as a small business owner.
Financial Protection
Life insurance creates a safety net for the living should you or a key staff member die unexpectedly. Insurance payouts can assist with hiring and training new staff, paying off pre-existing debts, and covering expenses throughout the transition.
Business Continuity
If your business is entirely dependent on you, when you die, it dies with you. When you insure your business, you leave behind the necessary funds to keep your business running in your stead.
Employee Benefits
Taking out a group life insurance policy gives your employees peace of mind and attracts the most skilled talent. Your employees will be even more motivated to do their best work, knowing their families will be cared for should they die unexpectedly.
Estate Planning
If you plan to will your business down to the next generation, life insurance can fund estate taxes and costs acquired with lost revenue, allowing your spouse or children to inherit your business without having to part with any personal property.
Partner Protection
If you have any, your business partners can use insurance to fund a buy-sell agreement, allowing them to acquire your share of the business and ensure financial security for your spouse and family, all while keeping your business running.
How Does Life Insurance For Small Businesses Work?
Small business life insurance provides a death benefit to the beneficiary (you, your spouse, or your business partner) should you or key company employees pass.
This benefit can be used in any of the ways listed above to support your family, staff or the continuation of your business in your absence. The value of your death benefit is determined by you when you plan your policy.
Types of Small Business Life Insurance
Personal Life Insurance
Personal Life Insurance protects your spouse, children, and personal finances should you die unexpectedly. There are two types of personal life insurance: term life insurance and permanent life insurance.
Term Life Insurance
Term Life Insurance policies provide coverage for a set amount of time, typically from one to 30 years. Because these terms last a shorter period, they usually have lower premiums than permanent life insurance policies.
Permanent Life Insurance
Although the premiums are higher than term life insurance policies, permanent life insurance policies insure the policyholder for life as long as premiums are paid monthly.
Term Life Insurance v. Permanent Life Insurance
We discussed the two types of personal life insurance in the previous section, but many business owners need clarification when considering which option is the best fit for them. Here are some of the pros and cons of each type of policy:
Term Life Insurance
PRO: Provides level premiums for a set period of time
PRO: Less expensive than permanent life insurance
CON: Does not generate cash value
CON: Considered a liability on your balance sheetPermanent Life Insurance
PRO: Generates cash value that you can access
PRO: An asset on your balance sheet
PRO: Can cover you for life, as long as you make payments
CON: Costs more than term life insurance
While the advantages and disadvantages of both policies are clear, it is important when taking out any insurance policy to carefully consider your coverage needs as well as salary, unpaid debts, and large future financial endeavors, such as buying a home or college tuition.
Key Person Life Insurance
If you are the oil that keeps your business running, you are likely what would be considered your company’s “key person,” or at least one of your company’s key people.
A company pays key person life insurance to cover an owner, partner or employee who is so valuable to the company that should they die; the company would experience a loss in revenue, increased expenses, business interruption, and so forth.
The premium for this type of insurance policy is based on several factors, such as the size of your company, the financial loss expected in this employee’s absence, and the key person’s role in the company.
Group Life Insurance
This type of life insurance covers employees of a company or members of an organization. Investing in group life insurance incentivizes working for your company, allowing you access to the most skilled talent and giving your employees’ families financial security. It may take a bit of shopping around to find the plan that best suits your company and employees.
Buy-Sell Agreements
Should you have a business partner or several, a buy-sell agreement is a way to ensure the legacy of your company carries on in the event one or more of your partners dies unexpectedly. This policy is a legally binding contract that describes, in detail, how your business ownership will shift in the event of a death.
Cross-Purchase Buy-Sell Agreement
In this agreement, each partner takes responsibility for covering the premium of the other. In the event of one partner’s demise, the surviving partner would be granted a death benefit, which can be utilized to purchase the deceased’s ownership of the company.
Entity Purchase Buy-Sell Agreement
In this scenario, the business itself covers the premium of each individual partner. In the event of death, the business receives the death benefit, which is then used to buy out the deceased’s ownership of the company.
How Much Life Insurance Is Enough?
When deciding how much coverage your business needs, you must consider more than the value of your products and services.
The main aspects to consider are business size, the company’s financial stability, personal finances, the number of employees, overhead expenses, whether a buy-sell agreement is in place, and existing company debts.
While it’s important to make sure your business and family can carry on without you, it should never be at the expense of your financial security now and in the future.
A healthy 30-year-old can get personal term life insurance with a death credit of $250,000 for as low as $13 a month. With so many plans available, there is a premium for every budget and unique set of business needs.
What Is The Procedure For Getting Insured?
To be approved for a life insurance policy, you must pass a procedure called underwriting. This is how your provider determines whether or not to offer you life insurance and at what cost. This is based on carefully assessing your profile to determine your level of risk.
There are two types of underwriting:
- Traditional underwriting, which involves a medical exam and the traditional extensive paper application
- Simplified underwriting, which is designed to streamline the underwriting procedure by skipping the paper trail and in-person medical exam in favor of a fast online survey
Traditional underwriting usually takes longer but can afford you access to higher-valued policies. Simplified underwriting is quick and easy, providing you with quotes in days instead of weeks.
What If I Am Denied Life Insurance?
Insurance providers reserve the right to refuse service to individuals who possess high-risk health conditions, participate in risky hobbies, have a history of speeding or DUIs, have a dangerous job, have a criminal record, smoke, or do illegal drugs.
In the unlikely event that your application is denied, you should first follow up with the provider that denied your application to see if there has been an error.
Should you prove to be too high-risk for their company to insure, stay calm and remember that you may attempt to appeal their decision. If this is not your preferred route, there are several providers willing to help high-risk clients get insured. Never forget that you are not alone – many other business owners and private citizens struggle to get life insurance. The right plan is out there.
Finding The Right Policy For You
Now that you have a wealth of knowledge about how life insurance can benefit your business, the only thing to consider is which policy is right for you. Will you invest hefty time and finances into a permanent plan or fund a humble term plan? The choice is yours to make.
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