No one knows when your time will come, but if you run a business, entrepreneur life insurance is a must. here’s why.
Reading: A business will typically use which type of life insurance
why entrepreneurs need life insurance
Life insurance for business owners is as much about protecting your business financially as it is about protecting your loved ones. Here are some ways you can use life insurance as a business owner.
to keep your business running
Business owners life insurance is also a great way to keep your business afloat in good times and bad. it could be used to pay off your business debts, supplement cash flow, and cover expenses needed to find your replacement if you die.
Similarly, if your business owner’s life insurance policy has a cash value component, you could leverage those funds to fuel business growth tax-free, even while you’re alive.
Related: Cash Value Life Insurance
to finance association agreements
If you have business partners, you most likely have a partnership agreement in place. This agreement generally provides that if a partner dies or becomes incapacitated, the surviving partners have the right to buy out their share of the business. life insurance can help finance this purchase.
to match an estate
If you have a family business, you can also use life insurance to make sure everyone receives an equitable inheritance.
For example, suppose you have two children. one works for the family business, while the other does not. “Insurance can help with estate planning to allow the child in the business to inherit the shares of the corporation while the other child receives an insurance payout,” says Daniel Kachani, financial strategist and partner at Aria Heritage Solutions. in the end, everything is the same.
to protect his family
What would happen to your family finances if you died unexpectedly? they could be left with substantial debt, no income, and possibly no way forward. life insurance can replace your income so your loved ones can maintain the same standard of living.
How does business life insurance work?
The primary purpose of business owners life insurance is to provide financial protection for the business in the event of the death of the owner. The beneficiary can use the death benefit to pay debts, support the family, or keep the business running, whatever the policyholder wants.
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For example, if you have business partners, business life insurance could be used to buy out your (or your) share of the business in the event one of you dies. That way, the business can continue to run as planned and your family doesn’t have to worry about what to do with it.
3 types of life insurance for entrepreneurs
1. personal life insurance
Personal life insurance is for your family and any personal debt you may have. it can be used to replace your income, pay off personal debt, leave an inheritance to your children, and keep your family financially secure.
A general rule of thumb is to have a personal life insurance policy 10 times larger than your annual income. For a more accurate estimate, use our life insurance calculator.
related: how life insurance works
2. key man life insurance
Key person life insurance, also known as key person life insurance, protects your business if you lose an owner or employee who is critical to the success of the business.
“an owner or key person performs various functions that are vital to the survival of a business, from maintaining assets to meeting debt obligations to operating functions, and the sudden loss of that person can cause the company to take a nosedive very quickly.” says matt miller, founder and CEO of embroker.
“Key person life insurance focuses on sustaining the needs of the business until it can get back on its feet by covering outstanding debt and share buybacks, covering the cost of hiring and training a new employee, and even paying the severance obligations in the event the business needs to close or lay off workers,” Miller says.
3. purchase-sale agreement
The last type of business owners insurance you should consider is a buy-sell agreement. this is especially important if you have business partners.
A buy-sell agreement is a legally binding contract between business owners that dictates what will happen to the business if one of the owners dies, becomes disabled, or wants to sell their interest in the business.
There are two main types of buy-sell agreements:
cross-buy purchase-sale agreement
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In a cross-buy buy-sell agreement, the business owners each buy a life insurance policy for the other owners. the death benefit is paid to the surviving owners, who then use the money to purchase the deceased owner’s interest.
entity purchase purchase-sale contract
In an entity purchase agreement, the company itself purchases a life insurance policy for each of the owners. the death benefit is paid to the company, which then uses the money to buy out the deceased owner’s share.
Term vs. Permanent Life Insurance: Which to Choose?
Term life insurance and permanent life insurance are the two main types of life insurance. Permanent life insurance includes products such as whole life insurance and universal life insurance. Here’s a look at the main differences between term life insurance and permanent life insurance.
It depends on your situation whether you should choose term or permanent life insurance. for example:
- “if your need is temporary, such as for a key person, then a term life insurance policy may be appropriate. but if it’s a permanent situation, like a buy-sell agreement, then a permanent policy may be warranted,” says jason veirs, president and owner of insurance experts.
- “The cheapest access is term life insurance products, but they don’t provide the growth potential of permanent policies that have a cash value. consider your cash flow and where your business is in its lifecycle,” says catherine valega of green bee advisory.
- the size of your business
- your overheads
- the number of employees
- the financial stability of the company
- your personal financial situation
- the amount of debt the company has
- if you have a current purchase-sale agreement
- Decide how much coverage you need. Consider factors such as how much money your business would need to make up for the loss of key personnel, replacement of lost income, and payment of any debt or loans.
- Shop for the best rates. Life insurance rates for business owners can vary widely, so compare life insurance quotes from different companies before making a decision.
How much life insurance should a business owner have?
“If your life insurance is financing a buy-sell agreement, then your coverage should typically be commensurate with the fair market value of the business,” Veirs says.
For other types of business owners insurance, consider factors like:
Ultimately, the goal of business life insurance is to make sure your business (and your family) can continue to run smoothly without you.
It’s smart to consult a financial advisor or insurance agent who can help you identify the right type of life insurance and the amount of coverage.
how to get life insurance for business owners
You can get business life insurance directly through major companies like state farm, fidelity life, massmutual and across the country. You can also buy coverage through an independent broker, who can compare prices with multiple companies for you. Here’s how to get started:
Business owners life insurance helps ensure your business can stay afloat in the event of your death. it can also provide the necessary funds to pay off debts.
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