Life insurance for a business owner is vital. It saves his family from a financial crisis and keeps his business afloat despite his death. He needs business and personal life insurance. If he wants to leave behind a business legacy, it can prove the key.
Why is life insurance for business owners essential?
Life insurance for a business owner keeps the business alive even after his death. The owner plays the anchor role in managing the business. So, his sudden death causes disruptions and panic. However, the cash received as a death benefit gives the company a breathing space.
The company uses this cash to settle liabilities and manage business operations.
Types of life insurance for a business owner
Personal life insurance
A business owner needs personal life insurance to give a financial cushion to his family. If you suddenly die, your family will need to settle debts and mortgages. It will require a replacement of your income to manage the daily affairs of the house. If you don’t have personal life insurance, your sudden death can financially cripple the family.
The coverage you need depends on your liabilities and family expenses. Suppose you have taken a business loan by placing the family home as collateral. And your children are still minor, needing family support for some years. It demands a handsome life insurance package to sail through the challenging period.
For funding a buy-sell agreement
It is a common practice to use life insurance to fund buy-sell agreements among the partners. The partners may agree in advance to buy a deceased partner’s share. So, each partner acquires life insurance for the other partners and registers himself as the beneficiary.
When a partner dies, the remaining partners use the death benefit to buy out his share of the business.
For a balanced distribution of inheritance
Life insurance for a business owner can also help distribute his inheritance in a balanced manner. It proves handy where some family members have direct involvement in the company, and some have no concern with it.
After the owner’s death, the life insurance benefit can compensate those family members who will not participate in the company’s profits. The amount they get must be proportionate to the value received by members managing the business.
This way, the company continue to operate without any disruption. It avoids the need for legal battles that can put the company in a bad light.
Key man life insurance
A business owner should also buy life insurance for his most important employee. If something happens to that person, the company will suffer. It will lose revenue and business opportunities. It will need a replacement and capital to train the new team member. The death benefit received can compensate for some of the loss.
The company can invest that money in training the new hire. It can use these funds to market its services and attract new business ventures.
How much life insurance does a business owner need?
A business owner needs two types of insurance. Personal insurance to protect his family financially in case of sudden death. Business insurance to keep his company operational when he is no more.
The amount of personal life insurance depends on his debts and liabilities. He should also consider his family. If his children need financial support, he must register for a plan that will prove sufficient.
The amount of business insurance depends on its financial position and the size of operations. It should prove adequate to run the business smoothly in a critical time.
Term life insurance vs permanent life insurance
Depending on his needs, a business owner can choose between term and permanent life insurance. Both plans have their advantages and drawbacks. Below is the comparison:
Permanent life insurance
- Permanent life insurance for a business owner is an asset. It has a cash value that grows over time. A company can use this amount to expand its operations.
- Permanent life insurance is comparatively expensive due to its cash value component.
- The premium amount remains constant as permanent life insurance does not need renewal.
Term life insurance
- Term life insurance for a business owner is a liability. The company pays premiums for a specific period. If the owner survives that duration, the business receives no benefits.
- Term life insurance is relatively less expensive as it has no cash value component.
- It requires renewal after the expiry of the term. The insured will pay a higher premium according to the new terms and conditions.
From where to buy life insurance as a business owner?
Buying life insurance as a business owner is simple. You can directly purchase it from an insurance company or engage a licensed broker. The broker will ask for rates from different companies and close the best deal for you.
Life insurance for business
A company can also register for life insurance as a person. It will have the same rights and liabilities as any other person. The company can buy life insurance for its most influential member and get compensated in the event of his death. It can also purchase life insurance to buy out the share of the deceased partners.