Why Business Owners Need Life Insurance Protection
Life insurance is a peace-of-mind policy that individuals and business owners should possess. The investment in a life insurance policy is a business expense that entrepreneurs should consider a necessity rather than a luxury.
There are many reasons to invest in a life insurance policy for the business and several ways the business can fund a policy on the life of its owners and partners, including:
- Use a bonus plan to pay for insurance premiums. The life insurance policies for key employees and business principals can be used as part of a benefits or annual bonus package.
- If the business participates in a qualified retirement plan, profit sharing, pension plan, or a 401(k), the contributions can be used to purchase life insurance. The premium payments in this scenario would likely be a tax-deductible business expense.
- The partners in the business can purchase a life insurance policy on the other partners and the premiums can be paid by the company. Again, check with your accountant as some business corporation designations require that each partner is guaranteed a life insurance policy.
- Match premium payments with key employees as a way to provide them coverage as well as help defray the cost. The portion the company pays will be a business expense for tax purposes.
In some cases, a business owner will need a life insurance policy on the owners before it can enter into financial agreements with bankers. If the owner of the business dies, who would be responsible for outstanding debts? Who would take over the franchise? How would survivors keep the business viable until it could be sold? These are all questions that a life insurance policy could answer.
There are two basic types of life insurance policies: permanent and term. Under a term life policy, the owner determines the amount of death benefit necessary and chooses the “term” of the policy. The term is a set expiration date that could coincide with the repayment of a mortgage or other business debt obligations.
A permanent or whole life policy offers flexibility that allows it to be structured to provide not only an insurance payout on the event of the policy holder’s death but can also incorporate an investment component into the policy that builds cash value. Unlike a term policy that “expires” and the policy owner may not see a payout if he outlives the term, a whole life policy is permanent with the “expiration date” being the death of the policyholder. Permanent life insurance policies are more expensive than term.
Permanent life insurance policies can be purchased by and used for the business partners to buy out the portion of the business that had been owned by the deceased partner.
Life insurance policies are thought of as income replacement guarantees when used to protect the family of the business owner/breadwinner; but can also protect the future of a company because if the key employee, owner, or partner dies, the business could quickly lose viability.
The amount of life insurance to buy will depend on the income the policy owner expects to earn over a lifetime, future expenses, and the debts that need to be repaid. Your business insurance agent is a great resource to consult before you make any decisions on the amount of life insurance to purchase. They will be able to work with you on income and expense projections and help you make an informed life insurance purchase.