Small Business Life Insurance

Eric Van Haaften Business Life Insurance

Entrepreneurs often overlook the importance of business life insurance as they juggle the daily operations of their companies.

One of the primary motivations for starting a small business is to create a better life for their families and employees.

However, running a successful small company has challenges, including long working hours and financial risks.

Business life insurance helps mitigate some risks by protecting owners and employees in the event of an unexpected death.

We will cover common questions that arise when entrepreneurs are seeking life insurance coverage for themselves and their team members.

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Why is life insurance for business necessary?
Why do small business owners need life insurance?
What’s the best type of life insurance for business owners?
FAQ: Life insurance for Small Business Owners.

Why Buy Business Life Insurance?

Many self-employed people are risk-takers and opportunistic by nature and may not think they will ever die prematurely.

According to Forbes Advisor, only 18% of family businesses have a succession plan, which may be why only 34% of companies make it past the first generation.

But, business risk needs to be addressed whenever possible. Owners can establish a succession plan and buy business life insurance to protect people who depend on them when they die.

It is a very unselfish purchase, and your family and business’s future depends on your unselfishness!

Without adequate coverage, your family will be left to find ways to replace your income and cover expenses after you pass away.

When creating a life insurance strategy for small business owners, the first step is assessing personal and professional needs.

To determine how much coverage is necessary, consider your business debts, mortgage payments, required income for your family’s well-being, and potential college loans for your children.

By conducting this evaluation, you can calculate the amount of life insurance needed to safeguard personal and business interests.

Life Insurance for Business

As a small business owner, you know that the success of your venture relies heavily on planning and preparation for the future.

Life insurance for business owners is crucial because it guarantees the company’s long-term security in the event of the death of an owner or a key employee.

What are examples of a business’s use of life insurance? Several business life insurance strategies can fulfill different planning objectives for your company.

Some examples include obtaining coverage for key individuals within the company, using it as collateral to secure financing, implementing buy-sell agreements between partners, and offering executive bonuses through life insurance policies.

It is vital to comprehend the distinctions in how these plans are organized and select the appropriate arrangement for your business.

Personal Life Insurance for Business Owners

When starting a business, it’s crucial to prioritize selecting a personal life insurance policy that safeguards your family in case of your demise.

The appropriate amount of life insurance depends on several factors, such as age, income, debts, and number of dependents.

Life insurance serves as a replacement for lost income if you were to pass away unexpectedly. As a general guideline, aim for coverage that equals 7-10 times your annual earnings.

If you have outstanding personal debts such as mortgages or car loans, you should consider purchasing enough life insurance to settle those obligations.

For business owners with children, it is wise to consider acquiring sufficient life insurance coverage to support their educational expenses.

Group Life Insurance for Small Business

With the highly competitive job market, offering group life insurance helps attract and retain top talent.

Small business group life insurance refers to the coverage employers provide to their employees through an agreement with an insurance company.

Group life insurance is a good deal because it is typically included in an employee’s benefits package, based on their income level, without additional cost.

Additionally, qualifying for group life insurance is usually straightforward and does not require answering medical questions.

Furthermore, many small group insurance plans allow business owners and employees to purchase extra voluntary coverage at discounted group rates.

Executive Bonus Life Insurance

With an executive bonus plan, business owners can reward faithful employees by paying for the employee’s life insurance premiums. Plus, executive life insurance is a great free benefit for the employee!

The employee will own the policy, and the employee’s family will receive the death benefit income tax-free.

It can also benefit the company because the plan is simple to administer, and the executive bonus life insurance cost is tax-deductible.

Key Person Life Insurance

Losing a key team member can have a significant impact on your business. Imagine the person who knows every detail of your operations suddenly being absent.

Key person insurance acts as a safety net, ready to support your business if someone crucial is no longer there.

Keyman life insurance is designed to provide funds that allow surviving business partners to continue operating smoothly. It covers expenses like employee salaries, supplier payments, and loan installments.

Typically, small businesses choose coverage that is three to five times the annual salary of their vital personnel.

In this arrangement, it’s usually the company’s responsibility to pay for premiums while acting as both owner and beneficiary of the life insurance policy.

Life Insurance for Business Partners

A buy-sell agreement is a crucial document that outlines how business shares will be distributed when a partner passes away.

Two common buy-sell agreement types are cross-purchase and stock redemption plans, which are funded with life insurance policies.

In a cross-purchase agreement, each partner purchases a life insurance policy on the lives of the other partners. The death benefit of these policies usually matches the value of the deceased partner’s share in the business.

Each owner takes responsibility for paying premiums and becomes both the beneficiary and owner of the policies they purchase.

On the other hand, in a stock redemption plan, the company buys life insurance policies for each owner or partner.

If one shareholder dies, the company uses the proceeds from their policy to repurchase that individual’s shares at fair market value from their heirs.

The company pays these business life insurance premiums and acts as policy owner and beneficiary.

Both options provide financial security by ensuring that funds are available to facilitate an organized transfer of ownership within a partnership in case of death.

Business Loan Life Insurance Protection

Many self-employed people rely on SBA (small business administration) and bank loans to help grow their businesses.

According to the Small Business Association (SBA), some business owners must have SBA loan life insurance to get approved for funding.

The amount and type of collateral available to repay the loan will determine the required life insurance for small business owners.

Banks and loan companies take life insurance as collateral to cover any shortfall in assets and ensure the loan is repaid if a small business owner dies.

When self-employed people are trying to raise capital, investors may also want life insurance to ensure they get their investment returned when an owner dies.

Many business owners choose decreasing term or level term life insurance for covering SBA loans because it costs way less than permanent coverage.

Estate Equalization with Life Insurance

Business life insurance offers strategic advantages, such as minimizing taxes and providing fair solutions for heirs not actively involved in the family business.

By incorporating life insurance strategies into your plan, you ensure fairness among all beneficiaries and address their individual needs and interests.

This approach guarantees that assets and responsibilities are distributed equitably according to your wishes, regardless of whether some children are involved in running the family enterprise.

Including life insurance in your estate planning strategy brings peace of mind by protecting your business operations and ensuring equal inheritance opportunities for all beneficiaries.

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Buying Tip

When looking into any strategy involving a new formal company agreement, we recommend having your document drafted by your attorney.

Also, take the time to discuss the policy with your family and business partners to ensure they understand the details of your plans.

After all, they are the people who will be dealing with the lawyers after you pass away.

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Buying Business Life Insurance

When you’re in the business life insurance market, you must arm yourself with as much information as possible.

This vital knowledge will help you decide what type of business life insurance is best for your company’s needs.

This may seem like another task on your already full plate, but securing coverage can be a relatively quick process if you are in good health.

Many life insurance underwriters expedite the process by conducting a telephone evaluation instead of requiring a medical exam.

However, an exam may be necessary for approval if you are older or require death benefits exceeding one million dollars.

We will provide an overview of the life insurance products available so that you can make the right choice for your company.

Term Life Insurance for Business Owners

Term life insurance is popular among business owners who want to safeguard their loved ones, key employees, and business partners.

These popular policies can be customized to meet your company’s needs, with term lengths ranging from 10 to 40 years.

One of the perks for small business owners is that term life insurance offers simplicity and convenience, often without requiring a medical exam.

Additionally, as small business owners and key employees approach retirement age, their need for life insurance may decrease.

Therefore, selecting an appropriate term length becomes crucial to ensure sufficient coverage throughout the company’s operations.

For cost-conscious entrepreneurs, a ten-year term will be the cheapest plan, while a thirty-year policy will be more expensive for your company.

Let’s look at average premiums based on different term durations to give you an idea of the cost of obtaining business life insurance.

Rates on Life Insurance for Business Owners

	$500k	$750k	$1mm
Age	10	10	10
30	$15	$20	$22
40	$19	$25	$29
50	$42	$64	$75
	20	20	20
30	$21	$27	$33
40	$28	$41	$52
50	$73	$108	$142
	30	30	30
30	$32	$47	$58
40	$53	$76	$99
50	$125	$185	$252

* The sample includes term life insurance rates for non-smoking males.

Many intelligent small business owners use a life insurance laddering strategy to save money while covering personal and business life insurance needs.

The important thing is to align the expiration dates of your term insurance policies with your changing needs at different stages of life.

This way, you can have maximum coverage when it’s most crucial and pay lower premiums when your insurance needs are reduced.

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Saving Money on Business Life Insurance

Thomas is a 50-year-old businessman needing $2,000,000 in total life insurance coverage.

He could buy a $1,000,000 10-year term policy costing only $75 per month that could be used as part of a company buy-sell agreement.

Then, Thomas could purchase another 30-year plan for a million dollars at $252 monthly to cover his mortgage loan.

Universal Life Insurance for Businesses

Universal life insurance is a type of permanent life insurance that offers flexible premiums, death benefits, and cash values.

These lifetime policies can be an excellent option for wealthy business owners who want to transfer wealth to their heirs or help pay estate taxes.

Successful companies often use various forms of permanent coverage to fund executive bonuses and life insurance retirement plans for key employees.

That’s because permanent coverage such as indexed universal life and whole life insurance have a cash value that grows over time.

The investment component allows policyholders to take out policy loans against their cash value to supplement retirement income or to use for major purchases.

However, cash-strapped entrepreneurs should be cautious about buying whole-life insurance because it is substantially more expensive than term insurance.

It would be more beneficial for them to invest in their retirement plan or set up an IRA rather than purchasing permanent life insurance until they have improved cash flow in their businesses.

Our recommendation for most executives is to secure a business life insurance policy that fits within your budget and focus on managing your company.

Affordable Life USA is an independent agency with extensive experience in providing exceptional service in the insurance industry. We understand that there is no one-size-fits-all approach to business life insurance.

That’s why we offer options tailored specifically for businesses like yours that may be more affordable than you think.

If you have any questions about what kind of coverage may work best for your situation, contact us today!

FAQ: Life insurance for Small Business

Do I need life insurance if I own a business? Entrepreneurs should consider having personal and business life insurance to safeguard their company and provide financial security for their families. It is also advisable for business partnerships to establish buy-sell agreements that contain life insurance coverage.

What type of life insurance do you need if you are self-employed?
The most suitable type of coverage for business owners is typically a term life insurance policy. Ideally, you should pick a term that exceeds your most extended financial commitment and protects your income.

Can a small business buy life insurance? Yes, entrepreneurs often purchase life insurance coverage to provide immediate funds to keep the business running smoothly, covering expenses such as bills and potentially hiring a new employee to take over the business operations.

Can my LLC buy my life insurance? Yes, an LLC can purchase life insurance for its owner. If the LLC pays the premiums and is named as the policy beneficiary, any death benefits received would be exempt from taxes.