5 Ways Your Business Can Benefit from Life Insurance

Clifford PendellWritten by Clifford Pendell
business owners meeting in warehouse

When you think about life insurance, your mind probably goes directly to protecting your family members so they have the financial means to carry on after you die.

Many business owners don’t realize they should also carry life insurance for their business—in addition to their personal life insurance.

Even if you are aware of the need, you likely have a busy schedule that keeps you from seeing it through, or you’re reluctant to take on the additional expense. But understand that while life insurance might be an expense on paper, it provides several benefits that far outweigh the cost of premiums, such as:

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1. A Plan

If a partner or key person in your business died tomorrow, what would you do? Business owners who don’t have business life insurance usually stumble over this question.

It’s certainly upsetting to think about one of your closest colleagues dying. However, it’s also distressing to picture the grief being compounded by your business going under. Money aside, life insurance forces you to create a plan of action for a situation you are otherwise likely to avoid visualizing. And trust us, once you get into actually applying for life insurance, the discomfort lifts, and you become focused on securing the coverage you need.

2. Protection

This is a given, but let’s talk about the different ways life insurance provides protection specifically for businesses.

Cross Purchase Agreement

A cross-purchase plan is a type of buy-sell agreement in which each business owner or partner buys a life insurance policy on the other partners. Each policy’s face amount (the money that is paid out if the insured dies) is equal to the insured owner’s share of the net worth of the business.

Aside from protecting the business as a whole and each of the owners, another benefit of this type of buy-sell agreement is the avoidance of taxes. With a cross-purchase agreement, the family of the deceased owner will receive an amount equal to their loved one’s fair market value of the business, tax-free, at the time of death.

Cross-purchase agreements are ideal for businesses with two or sometimes three owners. With more than three owners, the paperwork begins to pile up because each owner must buy a policy on each of the other owners for the buy-sell agreement to be completed. For example, a company with five owners would require 20 life insurance policies:

  • Owner 1 would need to buy a policy on owners 2, 3, 4, and 5.
  • Owner 2 would need to buy a policy on owners 1, 3, 4, and 5.
  • Owner 3 would need to buy a policy on owners 1, 2, 4, and 5.
  • Owner 4 would need to buy a policy on owners 1, 2, 3, and 5.
  • Owner 5 would need to buy a policy on owners 1, 2, 3, and 4.

Stock Redemption Plan

To avoid having to put together a large number of life insurance applications, businesses with three or more owners can create what’s called a stock redemption plan. In a stock redemption plan, partners or stockholders buy life insurance equal to the respective shares of the other stockholders.

If a stockholder dies, the death benefit is used by the surviving stockholders to 'buy out' the shares belonging to the deceased person’s heir(s) at an agreed-upon price. The deceased owner’s heirs receive immediate liquidity at fair market value for their business interest.

This prevents the business from having to sell off or liquidate assets to raise the money needed to pay off the deceased owner’s share of the business to their surviving family members. The deceased owner’s family also avoids paying taxes on the money that is left behind for them because life insurance settlements are typically paid as a tax-free lump sum.

Key Person Policy

Every company, regardless of industry, relies on key personnel beyond its owners, including senior executives, top salespeople, and experienced clerical staff. Key person life insurance serves as a safeguard against potential business income loss resulting from the sudden death of an employee with specialized skills.

For instance, in the real estate industry, the loss of a longtime associate broker can lead to the dissipation of their book of business. Key person life insurance helps mitigate the agency’s lost revenue that the broker was generating before their passing.
Determining the required life insurance for a key employee is a complex task with no one-size-fits-all answer. Most life insurance companies approve coverage of up to 5-10 times a key employee’s annual salary, including bonuses, with some going as high as 15 times the annual salary.

If the key employee is responsible for generating business income, insurance companies may allow coverage for the business’s future profits. Typically approval ranges up to 3 times the business’s annual gross profit or 5 times the business’s annual net profit.

Factors such as age, health, the nature of the business, the company's inception date, its net worth, if the key person is an owner, and whether all key people will be insured also play a role in the underwriting process.

3. Time

The death or a key employee doesn't only result in direct financial impacts; it initiates a series of challenges. Key person life insurance essentially buys you the time needed to interview potential replacements, onboard a new hire, and provide training to fill the void. Finding a suitable replacement for a key employee is a time-consuming process, and integrating them into the business can take even longer.

Without the financial support that life insurance offers, attempting to replace a suddenly deceased employee can lead to rushed decisions due to anxiety. Many businesses experince a decline in profit and customer base when a key employee passes away. Key person life insurance steps in to replace your business’s lost earnings for up to five years, enabling your business to stay afloat while your executives take the necessary time to hire the right candidate.

4. Funding

If you’re seeking funding to start or grow your business, life insurance is often a prerequisite to qualify for a SBA (U.S. Small Business Administration) loan. Life insurance policies purchased for SBA loans must cover the entire amount of the loan, and your lender should be designated as the primary beneficiary.

This serves as the SBA’s method of insuring their loans, protecting them from financial loss if a borrower passes away before repaying the loan. Simultaneously, it serves as a safeguard for an entrepreneur’s loved ones, ensuring that they aren't burdened with the business debts if the entrepreneur dies.

To learn more about securing an SBA loan with life insurance, refer to our detailed guide

Beyond obtaining funding for a start-up, the death benefits from a key person life insurance policy can also be allocated to settle existing business debts or finance executive compensation plans. There are no restrictions on how the money can be utilized by the business. If your business requires funding for initiation or expansion, key person life insurance can enhance your ability to secure and attract investors.
Commercial lenders perceive key person policies as assets that improve a business's overall creditworthiness. In some cases, businesses face closure when a key employee passes away. Having life insurance in place instills confidence in potential investors, as your business will have the necessary funds to settle any outstanding loans in the event of an unforeseen loss.

5. Peace of Mind

All of the above add up to the invaluable peace of mind that comes with knowing your business is prepared for a worst-case scenario. You’ve invested considerable time and effort into building your business, and there's no reason to leave it or the families of your partners vulnerable to the consequences of an unexpected death within the company.

Chooosing to contact an independent agency like JRC ensures a higher level of attention compared to big-box insurance companies, as we are not restricted to the offerings of a single provider or driven by daily sales quotes. In just a few minutes, we can shop from over 50 top-rated life insurance carriers to find you the best rates, leveraging decades of combined experience to address your specific needs.

Take the first step in safeguarding the future of your business with life insurance by calling us toll-free at 855-247-9555 or requesting a free quote online.

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Written by:

Clifford Pendell

Clifford Pendell

Managing Partner and Co-founder

Cliff is a licensed life insurance agent and one of the owners of JRC Insurance Group. He has helped thousands of families of businesses with their life insurance needs since 2012 and specializes with applicants who are less than perfect health. In his spare time he enjoys spending time with family, traveling, and the great outdoors.

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