Does Your Small Business Need Life Insurance?
Whether you’re a sole entrepreneur running your own company or a partner at your firm, life insurance is worth considering. Your family and all your employee’s families are financially dependent on you and your business.
If you’re a sole proprietor, life insurance could prevent your family from being forced to learn your business, or even carry the burden of any debt you may leave behind. Life insurance could also prevent your business from being forced to sell off assets or close its doors to settle with the surviving spouse of a deceased partner.
In this quick read, we listed the most common reasons that business owner’s purchase life insurance. We've also explained how these policies are designed to keep your business afloat in the event of an unexpected loss.
Here’s what we'll cover in this post:
Quick Article Guide
Here’s what we'll cover in this post:
To Collateralize an SBA Loan
If you’re starting a business, you may be considering an SBA loan or a small business loan. SBA loans require the lowest down payment, and offer the best interest rates, but they also typically require loan collateralization.
Loan collateralization essentially ensures that your bank or lender will be paid back for the full balance of your loan, even if you pass away before the loan is repaid. In turn, this decreases the lender’s risk and allows them to offer more aggressive interest rates to their customers.
To collateralize an SBA loan, most people purchase a term life insurance policy that mirrors the length of their loan and a face amount that matches their loan balance. Many of the business loans we see have a 10-year term, but if you need a longer to pay back your lender, 15, 20, 25 and 30-year terms may also be available.
As the loan is paid down, the coverage that exceeds the balance of your loan can be assigned to another individual such as your spouse using a collateral assignment form. If no one relies on you for an income, you may also be able to reduce your coverage and your cost of insurance with some companies.
To Fund A Buy-Sell Agreement
If you already own a business, it may be in your best interest to create a buy-sell agreement that is funded with life insurance. Buy-sell agreements are utilized by businesses with more than one owner to determine how the business would be divided if an owner were to pass away or leave the company.
Setting up an agreement beforehand prevents the surviving owners and their deceased partners’ family from going to court or being forced to sell the business. Instead, each owner purchases a life insurance policy that is equal to their ownership share of the business.
The company pays for the cost of the insurance, and if one of the owners passes away, the proceeds from the life insurance policy will be paid to their spouse buying out their share of the business. This allows the business to continue operating, and it prevents the surviving owners from being forced to sell the company or its assets.
There are two types of buy-sell agreements that are commonly utilized by small to medium-sized businesses: cross-purchase agreements and stock redemption plans. A cross purchase agreement is the best option for businesses with only two owners, because it each owner must buy a policy on the other owner.
If your business has three or more owners, a stock-redemption plan is a better fit because it will prevent your partners from having to purchase more than one life insurance policy. This also makes it easier to manage the policies and ensure that each policy is paid on-time.
If you still have questions about how each type of buy-sell agreement works, we recommend reading, “Cross Purchase vs. Stock Redemption: What’s the Difference?” This article will also help you determine the amount of coverage your business needs to fund its buy-sell agreement.
To Protect from the Loss of a Key Employee
As a business owner, you know how important your partners and key executives are. Without them, who would run the day-to-day operations of your company and maintain the important relationships with your clients?
Would you need to take time away from running your business to find and hire a replacement, or would you have to hire a “head-hunting” company to locate someone who can fill this role? To make matters worse, when small businesses lose a key-employee, its also common for them to lose important clients.
For this reason, may businesses purchase key-person life insurance on their businesses most important employees or owners. There are no restrictions on how the payout from the polices can be used, but typical reasons include: covering the financial loss of important clients, maintaining the business during the transition, and hiring and training a replacement executive.
Any funds that are left over can be used to focus on growing the company, or even funding retirement plans for the surviving partners or executives. To learn more about protecting your business from the loss of a key-employee, please see our article, “Beyond Key Person – 5 Creative Uses for Life Insurance in Your Business.”
An Example of a Business We’ve Helped
Last year, we worked with two women who had recently purchased a country club from their previous employer. Janet, the food and beverage manager, had fourteen years of experience managing the kitchen and the bar, and her partner, Susan, had managed the membership sales and client relations for almost two decades.
Under the terms of their agreement, Janet and Susan were to pay the previous owner of the club roughly $4,000,000 over the next ten years. However, if something were to happen to Susan or Janet, keeping the business running and making payments on their loan, would be impossible.
Janet and Susan decided to set up a cross purchase buy-sell agreement and funded it with a $2,000,000, 10-year term policy on each other. This way if something happens to either of them before the business is paid off, the surviving partner will have the money they need to continue making timely payments and train a new employee to help manage the country club.
How We Can Help Your Business
As business owners, we understand the amount of time and hard work that goes into building a successful company. Running a business and finding the time to call multiple life insurance companies seems impossible, especially with all the other obstacles that life throws at you.
Instead of adding more stress to your life and stretching your day thinner, let us help. We’ve helped thousands of businesses and families with their life insurance needs and we can help you too! Our agency is licensed to sell insurance in every state, and we offer more than 100 years of collective experience.
Every life insurance company sets its own pricing and underwriting guidelines, and some companies are more lenient than others. While some insurers charge absorbent rates to older applicants, or people taking medication for minor issues like elevated cholesterol or high blood pressure, other's specialize with these “risks”.
Why call dozens of companies and speak with multiple agents when you can compare rates from more than 50 companies in just a few minutes?
Give us a call today, toll-free at 855-247-9555, or you can request a free quote below to compare rates from dozens of companies in less than a minute. As a no-fee agency, our shopping services are free, and there is no cost to apply for life insurance.