Life Insurance for Small Business Owners

As a business owner, you must consider your children's and family’s happiness, business partner(s), key employees, and success. Life insurance will provide security for businesses and help them keep running after an owner passes away.

Business-owned life insurance can help you secure your family’s and your business’s future success in the event of your death. It will help your family live comfortably after you are gone and ensure your business thrives during your leave/vacation.

Life insurance may help your family by:

• Paying for your final expenses
• Replacing your income and easing the financial burden when you are gone

Business-owned life insurance can also be beneficial to your business while you’re alive:

• It can assist you in getting loans. A bank’s credit evaluation includes life insurance, which may be required to obtain a loan.
• An aspiring entrepreneur can sometimes use the cash value of a policy to get started.

What is a Life Insurance Policy for Small Business Owners?

A life insurance policy for business owners is a strategic ownership transition and financial protection for your business in the event of your death or disability. This type of policy can be used to cover essential business expenses, pay off outstanding debts, and ensure a smooth transition of ownership.

As a business owner, you can purchase a life insurance policy for yourself or key employees, with the business named as the beneficiary (business owned life insurance). In the unfortunate event, many businesses will receive the death benefit payout, helping to stabilize operations and secure the company’s future.

Benefits of Life Insurance for Business Owners

Life insurance for business owners offers a number of benefits that can safeguard your business’s financial health and continuity. These benefits include:

• Providing a tax ownership transition death benefit received by the business is typically tax-free, offering immediate financial relief.
• Funding Buy-Sell Agreements: Life insurance can fund buy-sell agreements, ensuring a smooth transition of ownership and protecting the interests of remaining partners.
• Covering Business Debts and Loans: The policy can be used to pay off business debts and loans, preventing financial strain on the company. Liquidity: Life insurance provides liquidity, which can be crucial for covering ongoing business expenses and maintaining operations.
• Offering a Source of Funds for Business Expenses: The death benefit can be used to cover various business expenses, ensuring the company continues to run smoothly.
• Protecting Against Financial Loss: In the event of a key employee’s death or disability, the policy can help mitigate financial issues, regardless of the cost of hiring a replacement.

Types of life insurance for business owners

Business owners require personal life insurance for the same reasons other people do — debt protection and income replacement. In fact, their needs in the plans are usually much greater than those of the average employee.

There are various types of life insurance, and some can function as a long-term investment that grow over time. Whole life insurance is another option that provides lifelong coverage and accumulates cash value, which can be used for business owners who can employ expansions. This can help the company address problems that are against its policy.

Just like refinancing a mortgage, you can also borrow money using personal life insurance. There are various strategies that business owners can employ to address both personal and business financial responsibilities.

Term life insurance vs. permanent life insurance

There are two main types of personal life insurance — term and permanent life insurance. While term insurance is a policy, term and permanent life doesn’t help the ones you love live comfortably after you are no longer there to provide for them and assure their security.

With term life insurance, you, or the beneficiary, are entitled to you are still alive if you pass away within the policy's term. This means policyholder doesn't have to pay taxes on the death benefit. With a permanent life insurance plan, you will accumulate cash value, which can be beneficial while the most straightforward.

Insurance premiums tend to be higher for a permanent life insurance plan. A term life insurance with a sufficient death benefit for younger business owners and investing the rest of your retirement savings in retirement accounts is the easiest way to include life insurance in retirement planning. A permanent insurance plan is a better choice for younger businesses as it provides better coverage.

Other types of life insurance

Term insurance is the simplest and easiest to understand when it comes to types of life insurance. There are many specific options within these categories.

Universal life insurance (UL)

This type of life insurance gives you lifelong coverage, allows you to select how to pay, and enables you to save some money. UL insurance lets you preserve coverage and build wealth for your beneficiaries. It allows you to  customize insurance and investment costs.‍

Variable Universal life insurance (VUL)

‍This life insurance is also a type of life insurance that lets the cash component be invested for higher returns. Tpayway VUL insurance contracts are comparable to regular UL insurance, except you can invest value through sub-accounts.‍

Joint life insurance

Joint life policies cover two people and pays out the death benefit only after both have died. It is frequently purchased by a couple to lYou’lloney to their children, estate planning, succession planning, leaving a substantial legacy, or funding a support system for a dependent who may require lifetime care.‍‍‍

Indexed universal life (IUL) insurance

This life insurance allows the policyholder to choose how much cash value to allocate to a fixed or equity-indexed account.

Variable life insurance

Variable life insurance has an investing component. The cash-value account is invested in sub-accounts.

Group Life Insurance

Group life insurance is a valuable benefit that covers a group of people, typically your employees. Often included as part of employee benefits, pack employees’ insurance can be a powerful tool for attracting and retaining top talent. In many cases, the premiums paid by employers for group life insurance are tax-deductible as business expenses, making it a cost-effective way to enhance your employee benefit corporate life insurance (COLI)

Can a business take out a significant insurance policy on an empty answer? The answer is yes. In addition to personal life insurance, as a business owner, you may be interested in business-owned life insurance.

Corporations can get life insurance to protect an owner, executive or other important person, which is called key person insurance. The idea is that the company has an insurable interest in this person, and would suffer financially if they were to pass away. With key man insurance, the company is listed as the policyholder and the beneficiary, and in the event that something happens to the insured, the corporation will have a death benefit.

A corporation may use this policy to:

• Cover a tax liability at death
• Fund a buy-sell agreement
• Secure a loan

Uses of personal life insurance

Spending money on a personal life insurance policy when you own a business comes with several benefits because the proceeds can be used on anything. In addition to life insurance, disability insurance is crucial for protecting your income and ensuring you can work if you cannot due to illness or injury. According to the National Association of Insurance Commissioners, the average death benefit for a business owner is $500,000.

Your family may need the death benefits to:

• Pay off debt: If you have any college debt, a mortgage, or any other personal debt, you do not want this to be passed on to your family.
• Help a family member with health problems: After you have passed away, the last thing you want is for your family to use their savings after you are gone. ‍
• Income replacement: Spending more money on life insurance provides income replacement, which you don’t have to pay taxes on, and helps your family and friends stay afloat after you are gone. The guaranteed death benefit from life insurance means your family will still get income as if you went to work. Your family and friends can use the policy funds to pay household bills.‍
• Collateral coverage: If you borrowed a business loan for which you used a personal asset as collateral, your family may have to dip into their savings to pay off the lender. If you used your house as collateral, they may even risk losing it after you are gone.

Uses of life insurance for your business

In addition to helping your family if you pass away, business life insurance can help your company, including while you’re still alive.

• Securing a loan: You can use your policy as collateral when securing a business loan. Sometimes, the lender may require you to have a life insurance policy in order.
• Cash value: As mentioned earlier, life insurance policies often include a cash value component. This is essentially your savings, which may come in handy if you need some cash quickly.
• Buy-sell agreement: If you die, your business partner could use the death benefit to take over your stake or assets.
• Key person protection: The death benefit of an important person, such as an owner or executive, can be used to make up for lost profit and to find someone to replace the individual.
• Estate equalization: A family-owned business may make up a significant part of the value of your estate. If you have multiple children but only one will inherit the business, you can name your other child(ren) as life insurance beneficiaries to ensure they receive an equal inheritance.

Tax Implications of Life Insurance for Business Owners

Life insurance for business owners comes with several tax implications that can impact your financial planning:

• Tax-Free Death Benefits: The death benefits paid to the business are generally tax-free, providing a significant financial advantage.
• Tax-Deductible Premiums: Premiums paid for life insurance can be tax-deductible as business expenses, reducing the overall cost.
• Cash Value Accumulation: Life insurance policies often include a cash value component, which can have tax implications depending on how it is managed and utilized.
• Funding Buy-Sell Agreements: Using life insurance to fund buy-sell agreements or partnership agreements can have specific tax considerations that should be reviewed with a financial advisor.

Business Planning with Life Insurance

Incorporating life insurance into your business planning can provide a robust safety net for your company. Here are some ways life insurance can be utilized:

• Funding Buy-Sell Agreements: Life insurance can fund buy-sell agreements, ensuring a seamless ownership transition and protecting the interests of remaining partners.
• Providing Liquidity: The death benefit can provide much-needed liquidity to cover ongoing business expenses and maintain operations.
• Covering Business Debts and Loans: Life insurance can be used to pay off business debts and loans, preventing financial strain on the company.
• Offering a Source of Funds for Business Expenses: The policy can cover various business expenses, ensuring the company continues to run smoothly.
• Protecting Against Financial Loss: In the event of a key employee’s death or disability, the policy can help mitigate financial losses and cover the cost of hiring a replacement.
• Ensuring Smooth Ownership Transition: Life insurance can facilitate a smooth transfer of ownership transition, testing the business against potential disruptions.

Business owners should consider their specific business goals and objectives when selecting a life insurance policy. Factors such as the type of policy, coverage amount, and premium costs should be carefully evaluated. Consulting with a licensed insurance advisor can help you determine your business’s best life insurance strategy, ensuring comprehensive protection and peace of mind.

How to buy life insurance as a business owner

The process of buying life insurance for entrepreneurs is the same as for individuals.

Follow these steps:

1. Find out how much insurance you need. To do this, determine your long-term and short-term financial obligations, including any business loans you have taken out. Next, subtract your assets from that figure. The remainder is the gap you would want your life insurance policy to fill. You should also consider whether you want term or life insurance. If you need help, try our free online life insurance calculator.‍
2. Compare quotes. All life insurance companies will evaluate your situation differently. Compare quotes from multiple insurance companies to find the type of policy that works for you. Or, have a life insurance broker help you.
3. Pick the insurer that offers the best value.
4. Submit an insurance application. This will involve gathering information such as personal identification and documents. Depending on your chosen policy, this will include taking a medical exam so the insurer can assess your health and risk. Alternatively, you may have to answer a series of health questions.
5. Make the premium payments. Once you’ve been approved, make sure you stay on top of your premiums to ensure you receive the coverage you need.

Business owners may benefit from buying multiple policies. Generally, a business owner will take out at least two policies. One life policy is to provide financial assistance to your family, and the other is to your business.

All in all, the easiest way to buy a life insurance policy is to talk to an experienced broker. For expert advice, send an email or book a call with Dundas Life now.

Conclusion

A life insurance policy may not immediately come to mind as a part of your business protection strategy. However, as an entrepreneur, you have to think about your family’s happiness and your business. Life insurance planning can work in your favor and ensure that both will stay afloat in your absence.

At Dundas Life, an agent will assess your needs and recommend plans suitable to your unique situation. We can help you find the right life insurance policy at the right price. Reach out today.

Frequently Asked Questions (FAQs)

Why do small business owners need life insurance?

Business owners understand that their death may affect more than their families. It can also impact their company's success, business partners, and employees. Life insurance can act like a long-term or short-term investment for your small businesses if anything happens in the future.
Personal life insurance coverage helps you financially protect your children, family's happiness, but can also benefit your business. It can also be used to help pay off expenses and provide liquidity to the business in the event of the owner’s death.

How much life insurance do business owners need?

The average value of a life insurance policy is $500,000 for business owners. However, your personal needs will vary depending on your financial goals or any debts that you have. To find out how much life insurance perfect for you, speak with a licensed life insurance advisor.

What is the purpose of key person insurance?

Key person insurance covers the loss of a business partner or a key executive. The business purchases the insurance coverage and becomes the owner and the beneficiary. The business can use the payout to cover financial losses occurring due to the partner or key executive’s death, or the cost of recruiting a replacement.

What is a business life insurance payout used for?

The payout amount of life insurance for entrepreneurs in Canada may be used for any of the follwing:covering the cost of hiring a replacement; compensating business losses resulting from the insured’s death; distributing severance pay if the business closes; or buying and redistributing the deceased’s interest in the business.

Who is a key employee for life insurance?

While all employees are important for a business owner, some are indispensable. For example, a key-person can be an entrepreneur, a CEO, a top executive, or any other employee who will be extremely difficult and expensive to replace.

What is underwriting for businesses?

Underwriting is how insurers analyze your small business's risk. It involves the insurance company deciding if your firm offers an acceptable risk and, if so, pricing your coverage.