Life Insurance for Small Business Owners

Just as financial security of a family is tied with the life of its breadwinner, financial viability of a business is tied with the life of its owners and employees. Life insurance can play an essential role in the financial strength and stability of the business. Buying life insurance on the life of owners and employees can help address some of the business issues such as:

  • Planning for succession– One of the main purposes of life insurance for business owners and the key employee is to protect the future of the business in the event of the death of one of the owners or the key employee. Buy/sell agreement and the key person life insurance are the tools to address such situations. 
  • Buy/sell agreement– This is a contract created between two or more business owners so that the deceased business owner’s share of business can be bought at a predetermined price through the proceed from the life insurance policy. Deceased owner’s family gets the life insurance proceed in exchange for relieving the deceased owner’s ownership interest in business to the surviving owner(s).
  • Key person life insurance– A key person is someone who is responsible for the majority of profits, or has a unique and hard-to-replace skill set that is vital to the business (for example, the head chef in a restaurant or a key sales person). The business buys a life insurance policy on its key employee to get compensated for the financial losses that would arise from the death or extended incapacity of the key employee.
  • Maintaining cash flow– Buying the type of life insurance policy on business owners and employees that builds cash value can create an asset on the balance sheet of the business. During lean times and emergencies, this asset on the balance sheet gives the business owners the ability to borrow against it, helping them manage their cash flows.
  • Funding capital expenditure– Life insurance enhances the credit worthiness of the business. The policy’s cash value can be used to borrow and obtain loans at preferred rates from a bank. These funds can be used for developing the business or making additional improvements to the existing business, like purchase of additional machinery or a bigger space for business, etc.
  • Attracting and retaining key employees– Attracting and retaining talented employees is one of the key challenges most businesses face, especially the small ones.  In such cases, offering employee benefits can help. A group life insurance is one of the relatively inexpensive employee benefits a small business can offer to attract new employees and retain the current ones. Small businesses that do not feel they can afford to provide an employer-paid life insurance, can still deliver a valuable service to their employees by offering life insurance as a voluntary benefit. So employees can get coverage more easily than if they buy their own life insurance as an individual, and the premium can be less expensive.

Every business is different and each has individual challenges and obstacles. The only way to smoothly handle difficult situations is to be prepared. Business life insurance may be a strategic and cost-effective solution to help protect your business, and can be an important part of your overall business plan. Choose a policy or plan that best suits your needs and requirements.

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