Business Owners Need Life Insurance and Here’s Why

Many small business owners invest considerable time in developing a comprehensive business plan. They assess the market for their products or services. They set revenue goals and project expenses. They map out a marketing plan, an organizational structure, and more. But many entrepreneurs overlook one critical aspect of business planning. They fail to take into account what will happen to their businesses at the time of their death or the death of a key employee. While most of us think of life insurance as a tool for protecting our families from financial troubles after we pass away, a business, if it’s to survive and thrive, needs similar protection.

Is Business Life Insurance Different from Personal Life Insurance?

On the surface, business and personal life insurance policies work the same way. You pay premiums. When you die, your policy pays a death benefit. The larger the death benefit, the more you will play in premiums. But business life insurance can serve a variety of strategic purposes. Depending on who owns the policy and who you name as a beneficiary, the best business life insurance can protect your family, your business partners, your employees, and even your vendors. Business life insurance gives the people you care about more options when they try to figure out what should become of your business when you’re no longer around to run it.

What Kind of Business Life Insurance Policy Should You Buy?

Most businesses elect to carry term life insurance. Whole life insurance offers benefits for the living and is considered part of a comprehensive personal financial plan. But those benefits are less important to a business. What matters most to businesses is the death benefit a policy provides. Since term life insurance is the less expensive option, you can purchase more coverage for less money than you could were you to purchase a whole life policy.

What Can Business Life Insurance Do for You?

Like personal life insurance, business life insurance can put your mind at ease. The same goes for your family and colleagues. Let’s take a look at how.

Why might you choose to make a family member your policy beneficiary? If you’re a sole business owner, the death benefit your family receives can be used to hire someone to take on your responsibilities and keep the business humming. If you own your business in partnership, your family member might choose to use the policy’s death benefit to buy out a
willing partner.

The reverse is also true. Let’s say you make your partner the beneficiary of your policy. Then, if you leave your part of your business to a family member in your will, your business partner can use your policy’s death benefit to buy a family member’s share of the business. In a business partnership, it often makes sense to purchase multiple policies to cover each owner. Most business owners structure their policy purchases one of two ways. Under the first scenario, each partner purchases a policy that covers his or her business co-owners. The surviving co-owners are named as policy beneficiaries. That approach is known as a cross-purchase strategy.

Alternatively, insurance policies on each co-owner can be purchased by a business itself. The business is both the policy owner and the policy beneficiary. This is known as an entity agreement. When one partner dies, the proceeds of his or her policy are used to purchase the deceased’s share of the business from his or her heirs. Each surviving partner’s interest in the business increases accordingly.

For an added measure of certainty and control, both entity and cross-purchase life insurance agreements are usually moderated by a contract known as a buy and sell agreement. This agreement stipulates that the death benefit paid by a policy must be used by the policy’s beneficiary to purchase the deceased’s share of the business. A buy and sell agreement is one way to ensure that your family members get quick, simple access to the assets you wish to leave them and ensures a smoother transition for surviving business owners. A business law firm like MHA Law can assist you in drafting a proper, legally binding buy and sell agreement.

Before You Buy Life Insurance

You can’t establish an effective strategy without knowing your goals. Be very clear about what you want to see happen to your business should you die. And as difficult as it is to think about — and especially talk about — your own death, it’s critical to engage your family and your business partners before you purchase a policy or policies. Your vision may or may not align with theirs. It’s best to have everyone’s buy-in before implementing a life insurance strategy. Finally, because life insurance policies are complicated, seek out expert advice before making insurance decisions. Talk with an insurance agent who specializes in business insurance.
Consult with a tax accountant and find out whether you can purchase insurance in such a way that it reduces your tax burden. And seek advice from an attorney experienced in estate planning to be sure your insurance purchase supports your end-of-life wishes overall.

Author Bio: Susan Doktor is a journalist, business strategist, and principal at Branddoktor. She writes on awide variety of topics, including personal, family, and business finance. Follow her on Twitter@branddoktor.