The Insider’s Guide to Business Life Insurance

Business Life InsuranceLife insurance is commonly purchased to provide financial protection to families, but life insurance can also provide valuable protection to businesses as well.

Setting up a contingency plan with life insurance can provide your business with the safety net it needs to stay afloat in the event of an executive or an owner passing away.

Business life insurance can also prevent future disagreements and legal battles that can financially cripple or bankrupt a business.

Life Insurance Strategies for Business Owners

    1. What is Business Life Insurance?
    2. Securing a Business Loan
    3. Funding a Buy-Sell Agreement
    4. Key-Person Life Insurance
    5. Executive and Employee Benefits

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What is Business Life Insurance?

Merriam Webster Dictionary defines “Business Life Insurance” as:

  1. Insurance on the life of a member of a partnership or upon an officer or stockholder in a corporation payable so as to finance purchase by surviving owners of the insured’s interest after the insured dies
  2. Insurance on the life of a sole proprietor payable so as to finance the purchase of the business by an outside interest at the owner’s death
  3. Insurance on the life of a key employee for the benefit of a business concern

Traditionally, business life insurance is any form of life insurance that provides funding to a business when an owner or key executive passes. These proceeds are usually used to buy the deceased owner’s share of the business from their surviving family, or to provide emergency funding to the business.

Business life insurance can also provide collateral to secure a small business loan for a startup venture. In fact, some companies even use business life insurance to provide additional benefits to their employees.

Term life insurance is ideal for most business needs. It provides a guaranteed amount of protection for a fixed number of years. Universal life insurance, on the other hand, exposes the business to more risk because it relies on investment performance, and historically, these policies have not performed well.

If your business needs lifelong protection for tax advantages, more affordable and less risky options are available. Instead of purchasing outdated traditional universal life insurance, we recommend buying guaranteed universal life insurance.

Guaranteed universal life insurance provides fixed rates and coverage until the age of 90 or later, without any investing or risk!

We’ve included the four most common life insurance strategies we’ve seen business owners utilizing below:

Securing A Business Loan

Securing a Business LoanMost businesses require a loan or start-up money to get off the ground. Depending on your health, age, and the amount of the loan you’re applying for, your lender will probably want you to secure your debt with life insurance.

Also known as loan collateralization, or collateralizing a loan, purchasing a life insurance policy ensures that the lender will receive the full balance of their loan if the borrower passes away before they’re repaid.

Many business owners purchase no-exam term life insurance to expedite the approval process and focus on developing their business. SBA loans are usually less than $500,000, and lenders only require a 10-year term, so these policies are often competitively priced with term policies that require an exam.

No-exam policies usually offer an expedited approval process that takes as little as 24 hours to 7 days, and as of 2018, one company is even are willing to offer a death benefit as high as $2,500,000 to eligible applicants under the age of 60.

Funding a Buy-Sell Agreement

If one of your business partners were to pass away, how would your business compensate their surviving family members for their ownership share of your business? Would you be forced to shut the doors, drain your accounts, or sell valuable assets that are needed for day-to-day operations?

A buy-sell agreement is a legal document that outlines what will happen to the ownership shares of a business if one of the business’ owners were to pass away. Many small businesses utilize buy-sell agreements funded with life insurance as a contingency plan to buy-out a deceased owner’s share of a business.

This prevents the deceased partner’s family from becoming involved in the business, and it prevents the business from going to court. In exchange for the deceased owner’s share of the business, their family will receive a lump sum of cash that is equal to their ownership of the business.

Financial advisers recommend term life insurance for buy-sell agreements due to its affordability and guaranteed benefits. This provides the business with more capital for growth while sidestepping the adjustable and rising cost of life insurance (COI) that usually accompanies cash-accumulating policies.

Term life insurance does not carry any investment risks, so most business owners select a term that exceeds their planned retirement date. If you retire early, you can always transfer the benefits to your family or cancel the policy without penalty.

Key-Person Life Insurance

key personMost small to medium sized businesses rely on a couple of “key” employees or executives that manage the day-to-day operations within the business. If one of these executives were to pass away, the business would likely suffer serious loss.

To prevent the business from suffering financially as well, key-person life insurance can provide the business with an influx of cash to offset financial any losses. The death benefit from these policies can also be used to hire and train a someone to fill the lost executive’s role.

Executive and Employee Benefits

In addition to funding a buy-sell agreement or protecting your business from the loss of a key employee, business life insurance can also provide additional benefits to your employees and executives. Below we’ve listed four of the additional benefits that business life insurance can provide:

  1. Group Life Insurance – Employer sponsored life insurance that is provided to key-employees or all employees as an additional benefit of employment. Group life insurance is also commonly used to attract new employees who may not otherwise qualify for coverage.
  2. Death Benefit Plan – These policies provide a non-taxable death benefit to the deceased employee’s selected beneficiary.
  3. Split Dollar Insurance – With split dollar life insurance coverage, the policy’s death benefit is usually paid to the business. Any cash value that has accumulated in the policy will be paid to the employee’s listed beneficiary.
  4. Reverse Split Dollar Insurance – Reverse split dollar life insurance works just like split dollar life insurance except, the employee’s family receives the death benefit from the life insurance policy, and their company receives any accumulated cash value.

Some life insurance companies also offer less-traditional life insurance policies that may be more suited to your specific needs, and some types of life insurance are better suited for specific goals. In these situations, recommend consulting with a knowledgeable expert will save you time and stress.

Want to Learn More about Life Insurance for Businesses?

Call UsIf you need help determining which option is the best for your business’ needs, please feel free to give us a call. Our services our free, and our experts offer a minimum of five to ten years of experience in the insurance industry. Toll-Free 855-247-9555.

JRC is an independent, non-partial life insurance agency that is licensed in all 50 states and represents more than 40 top-rated insurers. Our licensed experts do not have sales quotas or daily sales goals to meet, we’re here to provide you with the best customer service in the industry.

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Cliff Pendell

VP of Marketing at JRC Insurance Group
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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