The Importance of Life Insurance for Small Businesses

There is a widespread belief that life insurance is a product only for individuals. While it is definitely important for anyone that has dependents and obligations, life insurance is also essential to ensure the long-term viability of a small business. Within any small business, there is a key individual (or group of individuals) that are important to company operations. How would your company be affected by the loss of such individuals?

Here are some of the ways life insurance can be used to protect a small business:

Key Person Insurance: As stated earlier, the loss of a key person, such as an executive or high-producing sales person, could be devastating to many small businesses. A life insurance policy can be structured to account for the adverse impact the unexpected loss of a key person would have on the business. For example, the policy can be structured so the company can receive a death benefit that covers the projected loss of revenue over a certain period of time, as well as the costs involved with finding and training a suitable replacement.

Business Succession Planning: It is important for small businesses to consider what the ownership arrangement will be in the event of the loss of a key partner. For example, in a three way partnership, if one of the partners dies, the other two may not wish to be in business with the deceased partner’s widow/widower. To prepare for this eventuality, a life insurance policy can be taken out in conjunction with a buy/sell agreement. The company would be the beneficiary, and proceeds would be paid to the estate of the deceased partner as compensation for his/her ownership stake in the business.

Employee Benefits: Life insurance is a great benefit to provide executives and key employees. For example, whole life policies could be taken out on key members of the organization. While they are part of the company, if anything should happen to them, a tax-free death benefit would be paid to their family. When the individual retires, the cash value of the policy can be used to (at least partially) fund their retirement.

Estate Planning: In many family-owned or closely held businesses, there are certain members of the family that are more actively involved with the company. This can cause a lot of tension and hard feelings if the company is divided equally among the heirs of the estate. To resolve this issue without shortchanging one (or more) of the heirs, a life insurance policy can be taken out which provides a death benefit to those heirs who are not involved in the company. This death benefit can be equal to the projected value of the share they would receive of the company, thus ensuring that the estate is divided as equitably as possible.

Take some time to evaluate the state of your small business and which insurance coverages you may need to add to ensure you (and your business) are fully protected. Speak with your small business insurance agent about life insurance and other available insurance products that can give you the peace of mind you need to prosper during this coming year and beyond.