To run a smart business today it takes more than a successful business model. Smart business owners are protecting the infrastructure they’ve worked hard to build by taking out life insurance policies. Just like individual life insurance policies protect a family financially in the event of a death or catastrophic accident, life insurance for small business owners protects the business, should an owner, partner or certain employee[s] die or leave the company.
Life insurance policies for small business owners can also be used to buy out a deceased partner’s share of the business from the family members. There has been a trend lately with more small- and mid-sized businesses opting to take out life insurance policies not only on the owners but on important employees – referred to in the industry as “key employees.” These employees are defined as “someone who has a major ownership and/or decision-making role in the business.”
There are three types of life insurance for small business owners: individual life insurance, buy-sell agreements and key person insurance. Keep in mind that within these options there are a number of plans available. Business life insurance policies should be designed with innovative solutions to meet the business’ goals. All policies should take into consideration the size of the company, the people to be insured and the needs of those left behind, should a business owner die or a business partner exit the company.
- Individual Life Insurance is coverage for a business owner’s family. According to smallbusinesstrends.com, what makes an individual life insurance policy important for a business is defense against a distressed sale. Many small business owners take loans out using their personal assets as collateral. When the business owner dies, the surviving family members sell the business to cover the loan obligations. This creates a distressed sale situation where the business might be sold for significantly less than actual value. An individual life insurance policy on the business owner for an amount equal to obligations defends against this type of situation.
- Buy-sell Agreements, also known as a buyout agreement, allows for a deceased owner’s share of the business to be bought at a pre-determined price.
- Key Person Insurance provides compensation to a business for financial losses that arise from the death or extended incapacity of an important member or revenue-producing employee of the business
Beyond the three types of life insurance for small business owners, there is a broader umbrella to choose from: term insurance or permanent insurance. Term insurance is considered the simplest and least expensive policy option. It is typically purchased for a particular timeframe and pays a benefit only if the insured dies in the insured term. If there is no death, there is no return on the policy. Term insurance allows the business owner to choose how much money the beneficiaries (family or company) will be paid upon death and for how long. Permanent insurance provides lifelong protection and the full amount will be paid upon death, as long the premium payments have been made. It also has an investment component, as savings build within the policy allowing for borrowing against the cash value.
When deciding to purchase life insurance designed for small business, it’s important that you work directly with a broker that not only specializes in life insurance but has the experience and knowledge in life insurance for small business. Understanding how you are going to use the life insurance policies will help you in choosing the right one for your business. When shopping for life insurance quotes, LifeQuote professionals understand how certain circumstances can affect how, when and why a small business qualifies for different insurance policies. The company’s insurance experts provide small business owners with guidance to protect their business from unforeseen risks by offering a quick and easy process to find the most affordable term life insurance policy on the market, from only trusted top-rated insurance companies.