Life Insurance For Business Owners: A Quick Guide
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Summary:
Life insurance for business owners allows business owners to protect their family, assets, and business should something happen. Certain types of business owner life insurance can also ease the succession of leaders and managers in the company should a principal or major shareholder die. Depending on the size of your company and what your priorities are, there are probably life insurance-related arrangements you should make soon.
Any entrepreneurs or business owners who have grown their company from a small seed into a successful sprouting tree of an enterprise will probably agree on one thing. Growing and owning a business is a lot like having a child. There are the good times, the bad times, and the ups and downs. But in the end, it’s more than worth it.
Therefore, business owners need to consider a business life insurance policy that will protect the whole family. This means choosing life insurance that will protect and insure their genetically related immediate family and their other “child,” the business.
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Why do business owners need life insurance?
Business owners might need life insurance for the following reasons:
Protect their family
Of course, most people who buy life insurance buy it with the goal of protecting their family should some unexpected events occur.
Protecting their company’s here and now
If an important executive-level person in the company gets in a motorbike accident in Thailand and dies, this could drastically affect the business. A company or business owner must consider how to make up for any lost revenue should a key employee die.
Protecting the future of the company
If a business owner passes away, then the succession and future management of the company is of utmost importance. This can help avoid a Game of Thrones-like succession situation in the future.
Pop-culture tip
Game of Thrones was a controversial but very popular streaming series based on a series of fantasy novels. It was known, among other things, for Machiavellian political activities. Also well known for killing off popular and beloved characters unexpectedly, the show ran from 2011 to 2019.
Life insurance for business owners
Let’s review the basic life insurance options available to you as a business owner.
Individual life insurance (1 person)
Standard individual life insurance is a must for small business owners, particularly those with families who depend on the business’s income. If something happens to the business owner, surviving family members know that they will be able to keep the lights on in the owner’s absence through a death benefit.
Individual life insurance (1–5 employees)
For small operations with employees numbering five or fewer, a small business owner might want to consider individual life insurance for all employees. It’s more of a “small business” life insurance strategy. This can serve as an alternative to “group life insurance” schemes if you want to provide your employees with life insurance. Depending on the policy, you might be able to use it as a business expense instead of a “benefit in kind,” which can help mitigate taxes.
Group life insurance
If your company has more than five employees, and you want to provide a life insurance policy as a perk, group life insurance for the whole business under a group insurance plan is probably the way to go. This is offered as a “benefit in kind,” so you will be taxed differently than if you had a smaller company using a non-group life insurance benefit.
Key person insurance
Key person life insurance works differently than individual or group life insurance policies in that the beneficiary is not an individual but is instead a company. It’s more of a “business life insurance.” Key person insurance ensures the survival of a business, and protects the owner’s interests if a “key employee” dies or something unfortunate happens. As an owner, you know which people can pass away and allow you to make do and which people definitely can’t die without putting the business in jeopardy.
Key person insurance allows your business to keep operating should something happen to you or your most trusted of employees. Philip Weiss, a principal at Apprise Wealth Management, has seen the importance of key person insurance in real life.
“You want it to leave the other owners with enough money to buy out the deceased owner's interest. Otherwise, their survivors may not receive the value of their interest. One of my client's father passed away late last year. She's left hoping the business survives and makes enough that she can be compensated for the value of his interest. With key man life insurance, this would not have been an issue.”Click to Tweet
Buy-sell agreement
Buy-sell agreements prevent epic battles on the island of Westeros regarding who is the proper ruler of the realm, or in this case, your company, should something unfortunate happen. A buy-and-sell agreement is smart to have in place regardless of the death aspect.
Pop-culture tip
Westeros is one of the four known continents in the fantasy world of Game of Thrones, referenced earlier.
If someone becomes disabled or wants to exit the business, there needs to be a plan. There are three main types of buy-and-sell agreements:
Entity purchase agreement
When a triggering event happens (death, disability, termination), the business agrees to buy out the leaving shareholder’s share. Funds from an insurance policy for which the business is the beneficiary pay the cost, for the most part.
Cross-purchase agreement
A cross-purchase agreement is an agreement that stipulates that the business owners can buy the shares of the company left by an exiting shareholder after a triggering event that the business partners agree on. It’s similar to an “option” in that it’s an agreed-upon price in the future.
Wait and see agreement
The wait-and-see agreement is a mixture of both a cross-purchase agreement and an entity purchase. With a wait-and-see agreement, the buyer of the business’s interest is not defined. The purchasers and the amount of the buyout are not defined until after a triggering event has happened. Usually, the company might have the first option to purchase the shares, followed by the business partner or shareholders. If the shareholders cannot purchase it, it reverts back to the business, which is then required to purchase the deceased business owner’s share.
Other things to consider for a business owner
Here’s a rundown of some additional items to keep in mind when choosing life insurance as a business owner.
Term vs. permanent life insurance
One of the things to consider is term vs. life with the insurance plans. If you just want to hedge against temporary instability in the company, a term key person insurance policy might be the route you would like to go. You will probably need to choose permanent life insurance for anything that isn’t temporary. Remember, term life insurance has no accumulated cash value, whereas permanent life insurance does.
Assets vs. liabilities
If your business is in a lot of debt or having problems cash flow-wise, you might be unable to buy different insurance plans with all the bells and whistles. In this case, you might want to opt for something more bare-bones, like a plan for just yourself and a key person insurance plan. A more successful business with money to spend should give itself as much cover as possible to ensure the continued successful operation of the business.
Pro tip: pay close attention to policy costs
According to Barry Flagg, the founder of Veralytic, a life insurance ratings and analytics platform, the costs of business life insurance plans can vary.
“Successful business owners often have life insurance for keyman and/or buy-sell purposes, and many fund such business continuity plans with cash‑value life insurance, but 𝘧𝘦𝘸 know what they're actually being charged inside those policies. Costs charged inside life insurance policies vary by as much as 80% and are excessive about 40% of the time. As such, benchmarking the costs charged inside these policies can be one of the most important things business owners should think about when it comes to life insurance.”Click to Tweet
Size of company & future growth
If you have a company that’s under five employees, then you will probably buy everyone individual insurance plans if you would like to offer it as a perk or benefit. However, a larger company, or one with good growth forecasts, might need to consider group life insurance sooner rather than later.
Tax implications
All business owners who are familiar with business expenses and taxes will probably want to consider how they want to structure their life insurance policies for themselves or the team. Again, one way to do this could be to consider individual life insurance plans for smaller companies rather than larger ones. It’s best to speak to a business accountant or tax adviser for most information on this.
FAQ
Can a business have a life insurance policy?
Yes, a business can have a key person life insurance policy. A business can also have buy-sell agreements in addition to a key person life insurance policy. The business might offer most other life insurance policies, but the business won’t be the beneficiary; the employees or owner will.
What happens if the owner of the life insurance policy dies?
If the owner of a life insurance policy dies, then the consequences will depend on whether and how the owner was insured. As a business owner desiring to ensure that your business runs smoothly and your family does well if you die unexpectedly, you’ll want to investigate your life insurance options and buy an appropriate policy.
Is owner life insurance a business expense?
If you have a small company with five people or fewer, then you can treat individual life insurance plans as a business expense. Key person insurance or group life insurance policies are not treated as business expenses.
Key takeaways
- Life insurance for business owners allows business owners to protect their family, assets, and business should something happen.
- There are three things business owners need to think about: how to protect their family, how to protect their business today, and how to protect their business in the future.
- Key person insurance can help ensure your business survives if you or one of your most important employees passes away.
- A business owner should consider several other things when in the market for life insurance, including assets and liabilities, taxes, term vs. life, and more.
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