The benefits of life insurance go beyond the financial cushion it provides to surviving loved ones. It can be an investment tool that allows your money to grow tax-deferred.
Business owners should consider buying life insurance because they have a lot more riding on them than the average person.
It’s not a fun topic, but it can’t be avoided. Business owners should have both personal life insurance and key person life insurance. If a business partner is involved, you should also have a buy-sell agreement, including life insurance.
Taking care of these arrangements in advance is the most responsible and thoughtful thing you can do for your business, business partner, and loved ones.
Life insurance is a versatile tool that businesses can use to provide a solid financial foundation.
A lot of organizations buy life insurance as an attractive benefit to bring in top talent and promote loyalty by helping employees protect the people they care about.
Beyond that, life insurance can also protect the company, partners, key employees, and family from an unexpected death.
Cash value is one of the key advantages of a whole life insurance policy. A portion of your premiums is contributed to your cash value, which consistently grows tax-deferred.
A cash valuelife insurance policy particularly appeals to those focused on building wealth. It has an investment-like component that can even earn dividends. The returns may not be as high, but it’s useful if you’ve already maxed out your retirement accounts.
You can even borrow against the cash value of whole life insurance for various reasons, such as overhead expenses or supplemental cash flow in a pinch.
Unlike a term life insurance policy, cash value life insurance lasts your entire life, and the premium payment is guaranteed to remain the same as long as you have the policy.
Jobseekers appreciate the added benefit of having life insurance which makes it an excellent way to compete for the best of the workforce. It’s an incentive for new employees to join the company, but it also improves retention as they want to maintain financial protection.
The insurance industry considers employee life insurance an “insurable interest” since a business owner may incur a financial loss if one of their key employees dies. The policy beneficiary can either be the business or the employee’s estate.
It’s a win-win for business owners all around. The business owner receives a tax benefit for paying the insurance premium and has access to the policy's cash value if needed to increase business cash flow.
Anyone who has dependents relying on their income should have life insurance. However, it’s even more important for business owners to have a financial plan because they have more complex issues in preparing for accidental death.
If the business owner or another key player at the company passes on, it affects the livelihood of a lot of people. The people employed are counting on the income, the community members utilizing the service, suppliers, vendors, business partners, and so on.
Life insurance plans create a system of order for how things will be handled and ensure the financial security of individuals and operations that depend on the business or another key person.
Life insurance coverage on a business will keep operations running, so there’s no lapse in income. Without a proper succession plan, there may not be enough finances to fund the business.
If you have a business with more than one owner, a “buy-sell agreement” is essential.
It creates an ideal exit strategy, like a prenuptial agreement for business owners.
You can set the price and terms for how the remaining partners will buy the deceased partner’s shares. Adding life insurance to a buy-sell agreement makes the whole process simpler by earmarking money for a buyout.
Life insurance has several tax advantages for a business owner to consider.
The most notable being the policy beneficiary receives the death benefit in one tax-freelump sum. Life insurance payouts aren’t counted as income for tax purposes.
As long as the business owner or business is not the beneficiary of a group policy, certain business types can deduct premiums they’re paying on behalf of employees.
The growth in cash value for a whole life insurance policy (including dividends) is tax-deferred. You’re only required to report it as income on your tax return if you surrender your policy and take out the money.
If it’s necessary to borrow from the cash value of permanent life insurance, it can be done without paying taxes as long as the policy loan is repaid properly.
If a key person or executive is diagnosed with a terminal illness, it can result in a major loss of revenue for the business.
There is a specific type of company-owned life insurance known as key person insurance. The business pays the insurance premiums and is listed as the beneficiary of the life insurance policy.
Key person insurance provides peace of mind to everyone involved in the company because it’s designed to keep the business afloat even if the owner or another key employee dies.
The death benefit can be used for:
When the unexpected happens, life insurance is the best financial vehicle a business can use to have the level of liquidity needed when access to capital is essential.
Upon the death of a breadwinner, a family’s assets may be tied up in the home, retirement account, or business. Without their main source of income, they may be forced to liquidate assets to generate capital, cover final expenses, or pay off debt.
Life insurance can provide the beneficiaries with instant liquidity, so they don’t have to sell their assets. Business life insurance can provide the liquidity needed when a key person or partner dies. It’s a source of capital to help cover the costs during the transition period.
If a business partner passes away, their family would be entitled to their share of the business. With a buy-sell agreement, life insurance is a funding mechanism for the business to have the liquidity to buy out the deceased’s portion of interest from the family.
It’s crucial for all established businesses to have a succession plan in place. In most cases, a life insurance policy is the cornerstone of that plan.
Unfortunately, only one-third (34%) of family businesses have a strong succession plan is documented according to the 2021 U.S. Family Business Survey by PwC. That leaves the company vulnerable to significant risks, such as fractured relationships or an incapable successor that could cause the business to fail.
This leads us back to the buy-sell agreement with a whole life insurance policy. If there are only two owners, a “cross-purchase” agreement is all that’s needed.
Each partner buys a life insurance policy on the one since they each have a vested interest in having their business partner alive. Should one of them pass away, the other one will have the money to keep the business running and buy out the deceased partner’s family.
Another policy option is life insurance with a “stock redemption plan” or “entity purchase agreement.” In this case, the business buys a life insurance policy to cover all the owners and then uses the death benefit to purchase an owner’s shares in the event of their death. This is ideal because the business doesn’t need to liquidate assets to buy out shares.
There are several types of insurance with specialized policies to protect different aspects of the business. Accidents, lawsuits, and natural disasters can be detrimental to your business without the right insurance.
These are some of the main types of business insurance you should consider to cover your company assets.
Business property insurance is coverage designed to protect your company’s physical assets from unexpected events such as theft, vandalism, fires, or windstorms.
Commercial property insurance or business personal property (BPP) insurance covers physical assets, including the business property that you own or rent, tools and equipment, inventory, furniture, computers, accounts receivable, and outdoor landscaping.
Businesses across all industries can benefit from commercial property insurance, especially if you have critical equipment and assets in a building other than your home. If an unexpected loss causes disruption or even shuts your business down temporarily, it’s critical to recovering quickly.
At a minimum, your business should have business personal property insurance and general liability insurance.
Business liability insurance is one of the most important insurance products. It protects your company from accusations that your business caused someone damages, injuries, or losses.
Liability insurance provides crucial protection against costly lawsuits. Even if your business is not directly responsible for an incident, a customer could sue over an accident that happened at your store or office.
For example, if someone slips on a wet floor at your business and gets hurt, they could sue you to cover medical expenses. Business owners are typically required to have liability insurance in order to secure leases and contracts.
Business crime insurance, or commercial crime insurance, is a type of insurance policy to protect a business from financial losses that stem from business-related crime. That includes embezzlement by employees, forgery, theft, robbery, and different types of electronic crime.
Most business policies don’t cover crime-related losses, so commercial crime insurance was created for additional coverage. The policy can cover the company’s cash, assets, merchandise, or any other property loss.
Companies can purchase business crime insurance as a standalone add-on to their existing insurance or as part of an industrial package. When purchased as a standalone policy, the business can specify the types of crimes it needs coverage for.
Business auto insurance is a commercial policy that applies to cars, trucks, vans, or any vehicle owned or used by the business.
It doesn’t matter if you’re a small business or have a large fleet; all businesses should be properly covered by a commercial auto insurance policy.
Business auto insurance has three basic components:
Beyond those coverages, you can customize your auto policy with endorsements such as roadside assistance or expanded towing.
Workers’ compensation insurance is typically referred to as workman’s comp or workers’ comp.
Workman’s comp provides employees with medical and wage benefits if they become injured or get severely sick “in the course and scope” of their job. The coverage includes medical expenses, lost wages, rehabilitation costs, or even death benefits if an employee loses their life on the job.
Workers’ compensation coverage is mandated by each state with varying medical and wage benefits.
Commercial umbrella insurance is an extra layer of liability protection to help pay for costs that exceed your liability coverage. Umbrella insurance complements your liability policy by taking over when your other liability coverage limit is reached.
Let's say your company is sued for $2 million because of a customer’s injury at your business, but you only have $1.5 million in liability coverage. The business workers’ umbrella policy could make up for the shortfall, as long as you have at least that amount in coverage.
Commercial umbrella insurance is not offered as a standalone policy. It works along with your general liability insurance.
Business workers' loss control insurance is a set of practices geared toward safety and risk management to reduce the likelihood of having to make a claim against an insurance policy.
It’s beneficial to both parties because it can lower the premium for the policyholder and cut down the number of claim payouts for the insurance company.
Loss control insurance involves a team of professionals that evaluate the source of risk and recommend the appropriate actions to reduce the risk.
The benefits of life insurance reach far beyond the death benefit we most commonly think of. Business owners can leverage life insurance as an investment strategy to protect the company and assets from going under in the event of an unexpected death.
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