Although life insurance is important for most people, it can be critical for business owners. Often when you run your own business, you not only have your family depending on you, but partners and employees as well. Your death may put your family’s income at risk and even the future of the business you’ve built from the ground up.
Why Business Owners Need Life Insurance
First there’s the obvious reason: replacing your income to take care of your family. This is especially important if you have young children, but even those with grown kids or no kids likely still have people in their lives that depend on them, or personal obligations or debts that need to be covered. Life insurance ensures you can meet the needs of your loved ones in the event of your death.
After family, business owners also need to consider a separate life insurance policy for their business obligations, which will provide cash to ensure the business can continue in the event that you, a partner or a key employee dies. These funds may be used in different ways depending on your situation. If you are the sole owner, they may be used to keep the business afloat while your family sells or takes over the business. If it’s a partnership, the death benefit can be used to buy out the deceased partner’s share by the other partner. If the covered death is a key employee, the funds can be used to replace lost income and keep positive cash flow while the company works to replace the loss.
How much personal and business life insurance coverage you need will depend on your unique situation. How much income do you need to provide for your family and for how long? Do you have any debts? What is the value of your business or share? How much would you need to keep business running if a vital employee were to die prematurely? These are the types of things you will need to consider when determining the right policy and coverage amounts to buy.
Types of Insurance
Although there are many different types of policies available, they all fall into two main categories: term life insurance and permanent life insurance.
As the name suggests, term life insurance policies are purchased for a specific term. Term policies are more economical than permanent life insurance policies and usually they are all most people need. For example, you might decide you need a 10-year policy to cover you while you’re paying off a mortgage. If you’re raising children, you might look for a 20-year term to provide coverage until they are grown. In a business situation, a term policy may be taken out on partners in the event they don’t live to their planned retirement date. The payout could then be used to buy out the deceased partner’s share of the business or help provide income in the case of the business being sold or closing down.
Permanent life insurance on the other hand has no time limits – it lasts as long as you do. That’s the first big difference between term and permanent life insurance. The second difference is a permanent life insurance policy includes a cash value investment component in addition to the death benefit. With a permanent life insurance policy, part of your premiums pay for the insurance and the rest is invested. The insurance remains in effect until your death, plus you have the additional cash value that will also be paid out. Permanent insurance is a lot more expensive than term insurance, although you are guaranteed benefits unlike term policies in the event you outlive your policy.
A couple of specific policies that are worth mentioning are no exam life insurance coverage and corporate-owned or key person life insurance. Individuals with certain medical conditions will not be eligible for life insurance, but with a no medical exam insurance policy, you can purchase life insurance with no medical testing. The premiums will be higher than a policy with testing, but for some people this is the only option.
Key person life insurance is what you will want to look into if you have employees that are crucial to the running of your business. These might be executive or highly specialized staff that would be hard to replace and without whom the business may suffer substantial losses. These policies may be term or permanent.
How to Choose Your Coverage
Choosing the best policy will depend on your personal needs and your business. You might need multiple policies to cover your business, especially if you have a partner or one or more key employees that generate the majority of the business income. Whether those policies should be term or life will depend entirely on your business circumstances and how long you expect you will require coverage.
If you and your partner have a firm retirement date, then a term deposit is likely sufficient. If not, you might want to look at permanent life cover or a combination of term and life policies. And how much you should purchase will depend on how much your death or the death of your partners or employees will affect the business.
The same applies to any policies you wish to take out to cover lost income or debts that would otherwise fall to your family members. Perhaps you also wish to leave an inheritance, which a permanent life insurance policy would provide.
Determining how much you need to buy will be based on factors like your expected lifetime income, your current assets, debts and future expenses. You’ll also need to consider how much your dependents will need for living expenses and for how long.
Before You Buy
It’s a good idea to seek professional advice before you purchase life insurance. A financial adviser will review your personal and business situations and make recommendations on the type of policies and amount of insurance you should buy, in addition to explaining how the policies work. The ideal choice is a qualified, independent financial adviser or broker rather than going directly to an insurance company. That way you can be sure you’re getting the best policy for you – not just the best option that particular company can offer.
Other helpful tips (especially if you are not using an adviser) include:
- Educate yourself on the basics of life insurance
- Compare policies and premiums from numerous companies
- Make sure the insurance company you choose is highly rated
- Ensure you fully understand all of the components of the policy
- Read all of the fine print before purchasing