Do you own your own business? Are you an entrepreneur? Have you launched a start-up or small family business? Then you know how uncertain the future of your business could be without you. Surely you have considered what would happen to your company if you died. Would the business manage to go on without you? Would it continue to support your family?
One way of protecting your business in the case of your death is by using life insurance. In this article, we will explain what you can do to guarantee that your business will go on even when you are no longer around, thanks to a life insurance policy. Keep reading to find out what techniques you can use and what types of insurance are best if you have a business to protect.
Protection with Life Insurance: Article Contents
Protecting Your Business with Life Insurance
In small, family and self-employed businesses, the owner’s leadership is like an engine. Their knowledge, abilities, contacts, and even their energy are fundamental to keeping the business running. For this reason, the death of this person often paralyzes the business: the employees don’t know how to lead it and no one is capable of taking the wheel.
The key person could also be not the business owner, but a very important employee, such as the chef of a great restaurant or the engineer who developed their software company’s star product. In these cases, the company can’t survive in the short-term without this employee. Lastly, the company might have various partners and will need to protect ownership if one of them dies.
If you are one of these entrepreneurs who has launched a small or mid-sized business, one of these cases might apply to you. You’re familiar with situations in which everything depends on you and, most importantly, with the idea that your family depends on this business’ continued earnings.
It’s a good idea to use life insurance to avoid this hit to the family income. If you own the business, you can take out a life insurance policy so that the payout can be used to keep the company alive if anything happens to you, and with it, your loved ones’ source of income. And if you want to protect an indispensable employee, you can take out a life insurance policy in their name.
The possible situations are the following:
- Life insurance for you. If you’re the heart and soul of the company and its revenue is dependent on your work, the life insurance policy should cover you and the company will be the beneficiary. Upon your death, the money will be used to keep the company in operation and prevent your absence from becoming an insurmountable obstacle. The death benefit will provide a respite for the company and allow your successors to organize your replacement, or hold the company over until it can be sold or even liquidated. In any case, this financial cushion will make the transition less traumatic. What’s more, if the death benefit is high, part of it can also be used to directly help your family or loved ones. To do so, you should also name them as beneficiaries.
In this case, the company buys a life insurance policy for an employee on whose success and viability it depends. The insured is the employee, but the policy is owned by the company, who will also appear as the beneficiary. Thus, if the employee dies, the company will receive the payout, money that will help it overcome the time it takes to replace this key employee. It can also be used to cover the cost of a new hire, and the unavoidable learning curve they'll have to face. And, if the employee is a manager, the payout will also cover any costs from the absence of their strategic vision and leadership.
- Life insurance for partners. Lastly, if your company is made up of two or more partners, life insurance can be used to protect the ownership of the company. For example, each partner will take out insurance and name the others as the beneficiaries. With this payout, the surviving partners will buy the part of the company owned by the deceased, thereby preventing these shares from falling into other hands. This is known as a buy and sell agreement, of which there are two main types:
- Cross-purchase agreement: Each partner buys a policy for each of the others and names the rest as beneficiaries. Thus, if one person dies, the others will use the payout to buy the deceased’s share.
- Redemption agreements: The company buys and pays for the partners’ insurance, and is also the beneficiary. When one person dies, the company will use the death benefit to buy their shares.
There are also other ways of using life insurance to protect a company’s interests. For example, the payout can be used to create an employee benefit program. Or, a life insurance policy can be taken out to act as a credit or loan guarantee for the company.
There are even companies that use life insurance as an incentive: they offer good life insurance as part of executives’ or managers’ salaries. And for the rest of the workforce, group insurance is also a type of payment in kind.
Which Insurance Should You Use to Protect Your Company
Once you’ve decided you need life insurance to protect your company’s interests, you’ll need to ask yourself which insurance is right for you.
Of course, this will depend on the needs of the business and on the person who will be insured. But in general, there are two main types of insurance: term or permanent.
- Term life insurance for businesses. Term life insurance, also known as temporary insurance, is designed for a set duration. Once this time has passed, it expires. These policies are less expensive and have simpler qualification processes and lower payouts.
For businesses, this type of insurance is a good solution to insure a key employee or manager. Simply taking out a 20-year term policy will cover a good part of their professional career. If they die while the policy is in effect, the company will receive sufficient payout to seek a replacement worry-free. What’s more, if necessary, term insurance can easily be converted into permanent insurance. The premiums will go up, but you’ll avoid going through the qualification process.
- Permanent life insurance for businesses. The other option is permanent life insurance: it accompanies the insured for their entire life, always provides a payout, and offers savings instruments that generate something called cash value, money the insured can use.
There are several types of permanent insurance, depending on their complexity and the needs of the insured. The simplest one is traditional or ordinary life insurance, but there’s also universal, variable, and variable universal life insurance. These variants are more useful for insuring small business owners or for partners mutually insuring themselves. The monthly premiums are higher and the qualification process is harder, but you’ll have much greater coverage and will be able to save money using built-in savings instruments. These insurance policies provide financial cushions for important businesses, which make them much more appealing for both the company and the insured, who can personally profit from some of the policy’s benefits.
In fact, some business protection strategies that use this type of insurance distribute the money so that the insured keeps the cash value but the company keeps the death benefit.
How Much Coverage Should You Purchase to Protect Your Company
Once you’ve decided on your type of insurance, you will need to figure out how much coverage you want to request. Choosing your life insurance coverage is very important: the cost of your monthly premiums, for example, will be depend on this number. But so will the success of your business protection plan.
You should be able to calculate how much money will stop coming into the company if you, this key employee, or a partner crucial to running the business are gone. Once you’ve calculated this amount, you’ll be able to determine how much coverage you need with a fair degree of accuracy.
Make sure you also take into account other important factors: such as whether the company has debts, mortgages, or loans. All of these factors influence the amount of money the company will need in the short-term to keep running.
Once you’ve determined this amount, request quotes from insurers and select the offer that best fits you. And don’t forget: life insurance can help you keep your business’ lights on once you’re gone.