As a business owner, there are a number of ways that you can use life insurance in both personal and business financial planning. This important tool can actually play a substantial role in the overall stability of your company itself.
You’ve put countless hours into your business. It’s your lifeblood.
Let’s imagine a dreadful scenario – something tragic happens to you. If you own a business, you need to think about more than just your family, you need to consider your work and your employees (if you have any).
Setting Up Life Insurance Business Protection Plans
When setting up business protection arrangements using life insurance, there are several ways in which they can be structured. Three key plans that are often used by business owners include buy/sell agreements, cross purchase plans, and the purchase of key person life insurance.
Buy / Sell Agreements
A buy/sell agreement is a contract between two or more owners of a business. When there are two or more owners of a company, the sudden passing of one owner could essentially devastate the company and quickly send it out of business. For this reason, the owners should set up a buy / sell agreement using life insurance as the funding mechanism.
Here, each of the business owners purchases a life insurance policy on the other. Then, should one of the business owners die, the proceeds from his or her life insurance policy can provide the funds that will be needed for purchasing the deceased owner’s portion of the company.
Depending on how the business is owned, the proceeds could also be paid to the deceased owner’s survivors for paying the decedent’s final expenses, as well as for the survivors’ ongoing living expenses, as they will no longer have the deceased owner’s income from the business.
Cross Purchase Agreements
One particular type of buy/sell agreement is the cross-purchase agreement. These arrangements are typically used when there are more than two partners who own a company. With this type of arrangement, each of the partners will purchase a life insurance policy on all of the others, naming all of the other partners as policy beneficiaries as well.
In this case, it is the individual business partners who are the parties to the agreement and not the company or corporation. Likewise, it is the partners who also pay the premiums. In addition, each of the partners will pay such premiums and have a percentage of the beneficiary designation, that is in the same proportion to their percentage of ownership in the company.
Key Person Life Insurance
Key person life insurance is another type of coverage that is oftentimes used as protection of a business. This coverage can help in protecting a business should a key employee pass away unexpectedly. When this occurs, a company typically stands to lose customers, and in turn, revenue, fairly quickly in some instances.
Therefore, if the company purchases a life insurance policy on the key employee, the proceeds of the policy can be paid out to the company in order to compensate for this lost income. Additional amounts of coverage may be added in order to cover the cost of locating, hiring, and training a replacement for the key employee who was lost.
In certain cases, the insurance policy will include a provision that allows the business to change the insured individual, without the need to cancel the existing life insurance plan should there be a change in the company’s employees.
Considerations When Purchasing Business Life Insurance
When purchasing business protection insurance, most policies should be permanent in nature rather than term. This is because the term life insurance policies will eventually expire, forcing the insured to re-qualify for coverage at a time in the future. Should the insured acquire an adverse health condition prior to that time, there is a chance that he or she could become uninsurable, and essentially no longer be eligible for the coverage, though there are other options that could be looked into with a higher premium rate, like a no medical exam life insurance policy.
No Medical Exam
The name says it all – it’s life insurance minus the physical. Sounds great, right? Hold up, it’s not all perfect.
Life insurance without the medical exam comes with a few problems, one of those is cost. it’s quicker and more convenient, which comes at a higher cost.
One reason a lot of people buy no exam life insurance is because they falsely think it’s their only option (usually because of their health). This isn’t true, there are carriers which specifically work with high-risk clients.
If you need a list of the high-risk life insurance carriers, we can help.
You will be limited in how much insurance protection that you can purchase without taking a medical exam. Some life insurance companies will cap you at $50,000 of coverage with a no medical exam plan.
If your family or business needs more coverage than that, you’ll have to purchase additional no medical exam plans or apply for a traditional life insurance plan.
Taking Your Next Steps
There are dozens of reasons for business owners to consider purchasing life insurance. The primary purpose is to keep the company running after the loss of an owner or key employee.
Companies can avoid many potential negative occurrences simply by placing life insurance on those who are important members of their staff. This type of planning should be an essential part of all companies’ financial and business operations.
Working with an independent insurance agent will get you the lowest rates available. We can help you compare all of the policies and find the one that works best for you and your business.