Life Insurance for Small and Medium Businesses
There are a couple of different types of life insurance that a business owner may be interested in. If the business owner is looking to protect their dependents should they die then the business owner should be interested in life insurance on themselves. There are three main types of life insurance to look at, term, whole life, and universal life insurance. Business partners might also agree to buy a combined life insurance policy called a buy-sell agreement in case one of the partners dies. This type of policy will provide the money needed to buy the shares of the deceased partner should they die prematurely. There is also key person insurance which is used to cover a person that would be very difficult or expensive to replace if they were to die or become otherwise incapacitated. The last type of life insurance policy a business owner should consider is offering it as an employee benefit.
Business Owner Life Insurance Types To Consider
The death of a business owner can destroy a business very easily as well as anybody that depends on them for income. The business owner’s family likely relies on their steady income in order to pay the mortgage on their home, the vehicles they drive, food, educational expenses, and everything else in their lives. They very likely won’t be in a position to take over the business and might find it very difficult to sell. Even if they are able to sell the business it will likely be at a steep discount as they need to unload it quickly or at a time when the business is not at optimal value due to market conditions.
Business partners might also be left in a tough situation if one of the other partners die if they don’t have a buy-sell agreement in place. They might not have the resources to buy the shares of the deceased partner’s share of the business or there could be a disagreement with the deceased person's family on how much the business is worth.
Sometimes there are certain employees of a business that are key to its survival. They have a specific set of skills or knowledge that can’t realistically be replaced very quickly or at all. Key person insurance will provide the business with money if this critical person were to die so that the business has the resources and time needed to deal with the situation and have an opportunity to rebuild the business.
A good benefits program is a great way to not only have great employees interested in working for your company but is also a way to retain them. Offering a life insurance policy through your company can help in this regard.
Term And Universal Life Insurance
Term life insurance is a type of life insurance policy that covers for a specific number of years and then lapses. It’s the least expensive type of life insurance. If the person named on the policy dies while the policy is in force than the beneficiaries that are named on the policy receive the face amount of the policy.
Whole life insurance is a permanent life insurance policy that doesn’t lapse assuming the premiums are paid. These types of policies offer a consistent premium and the cash value accumulation is guaranteed. These policies are more expensive than a term policy because you are paying more so that the life insurance company can put a part of the premium into a high-interest savings account which grows on a tax-deferred basis. As time goes on the value of the policy increases due to this build-up of cash value. The business owner can borrow against this cash value and if they cancel the policy they also get this cash back.
Universal life insurance is also a permanent policy. This is a flexible policy as you can pay less or more into it at any time after setting the policy up and paying the first premium. Unlike the other policies you can also increase the face amount of the policy, although you need to pass a medical exam in order to increase it. You can also decrease the face amount of the policy which of course doesn’t require a medical exam. They also have two options for the death benefit. You can choose to have this amount fixed to the face amount of the policy. You can also choose to have the benefit be the face amount of the policy plus the cash value if you choose to pay more than the minimum and so it has an increasing amount of cash value incurring in it.
The cash value in a universal life insurance policy also grows on a tax-deferred basis. There is a minimum interest rate you’ll earn as outlined in the policy on this cash value and you can earn more if the insurance company does well on what it invests this money in. You can also access the cash value of the policy. If you cancel the policy you get back the cash value of the policy minus any surrender charges if they’re applicable. If needed you can also stop paying on the policy altogether for a period of time and, assuming there is sufficient cash value, it will pay the premiums keeping the policy in force.
Life insurance policies can be complex but this overview should help you get the general gist of how each of these types of policies works. Each type of life insurance policy is suitable depending on the circumstances of the business owner and what they think is appropriate. A 20 year term life insurance policy might be suitable if you don’t believe you will have anyone depending on your income after that period of time. A permanent policy can last a lifetime and provide a one-time payment to your beneficiaries once your life is over.
A business that was formed through a partnership is a good candidate for a type of life insurance policy called a buy-sell agreement. This policy puts a life insurance policy on every partner. Written into the contract is the agreed price of each partner’s share of the business which becomes the face value of the policy. Should one of the partners die the policy will enable the remaining partners to buy out the deceased partner’s shares in the company at this previously agreed to price.
A buy-sell agreement helps avoid a number of headaches should one partner die and helps the company continue on. It avoids the family of the deceased partner having to sell their share of the company in a time of stress and uncertainty or becoming involved in a company they may not have the desire or competency to take on. It gives the remaining partners the resources to deal with the situation as they may otherwise not have had the money on hand to buy out the deceased partner’s share. Also, it helps avoid the uncomfortableness of holding financial discussions during a period of grief while coming to an agreed upon amount of money that the deceased person’s share of the business was worth. These types of policies remove a lot of uncertainty that would likely otherwise exist should one partner of a business die prematurely.
Key Person Insurance
Key Person Insurance can be placed on an employee who plays a critical role in the success of the company. Should they die, become disabled, or otherwise not able to function in their role the business will receive money as the beneficiary of the policy. This person can be the owner of the business or one or two key employees. If a business would cease to exist overnight due to the loss of that person than this is a type of life insurance policy a small business should consider.
If this type of policy is in place a business has a much better chance of continuing on versus being finished almost literally overnight. Some people have certain positions, skills, or knowledge without which a business simply can’t function. Once the key person insurance policy pays the company they will have options they otherwise wouldn’t have. If possible, the money they receive can give them time to find a replacement for this person which is likely going to be time consuming and expensive. If that isn’t possible than the money can be used to wind down the business. This can involve paying off existing loans, giving employees severance pay, and/or paying money to any investors in the company so that they recoup their interest in the company.
Life Insurance As An Employee Benefit
Hiring and retaining good employees is an important part of any business outside that of a sole proprietorship. There have been many surveys of employees that state a good benefits program are key in what companies they are willing to work for as well as their willingness to stay at. Life insurance can be one of these benefits that employees look to.
Offering life insurance policies to employees can also be a way to share the cost of these policies. The beneficiaries of the employee are covered with both the employer and employee sharing the cost of the life insurance policy. This can also be offered on a voluntary basis with the employees able to take part in the plan or decline based on their own needs and those of their families. It also a relatively inexpensive perk to offer, especially compared to healthcare. Usually, the coverage offered is $100,000 per employee which, with employees paying part of the premium, shouldn’t cost the business much more than $10 or so an employee per month. Some insurance carriers can also accommodate each employee increasing the face value of their individual policy for an additional charge.
Where To Buy A Life Insurance Policy
Most insurance agents sell life insurance policies that are suitable for small to medium-sized business owners. The first agent to look to is the one that handles your other business insurance such as general liability, commercial auto insurance, or professional liability insurance. It can be easier to keep all of the policies through one agent just for the sake of making record keeping easier.
However, it can also pay to shop around. Different insurance companies have different rates even for someone that is the same age and in the same state of health. At least three of four agents should be talked to in order to give you a quote. For any type of life insurance policy you’ll need to obtain a medical exam that ascertains your health and risk factors.
How Much Small Business Owners Will Pay For Life Insurance
There are several factors that go into how much a small business owner is going to pay for a policy. These factors can include the age of the person named on the policy, their sex, health condition, if they smoke cigarettes, engage in dangerous activities, and a host of other questions the insurance company is going to inquire about.
As indicated previously, when obtaining insurance on the business owner themselves a term life insurance policy is going to be the least expensive. For a 20 year policy a male that is 35 and in good health, and a non-smoker, with a $500,00 policy, will likely pay around $35 a month. A similar person that is a smoker could pay over $200 a month. A similar female would pay about $35 a month as a non-smoker and about $150 as a smoker. Someone in otherwise good health that takes out a policy at age 50 could pay $120 a month as a male nonsmoker or $500 a month as a smoker. A 50-year-old woman will likely pay $90 a month as a non-smoker and $335 as a smoker.
A whole life insurance policy will be more expensive than a term policy. This will also be determined by the applicant's age, sex, smoking habit, and other factors. A whole life policy with a face value of $250,000 might cost about $200 a month on a healthy 30-year-old male or $180 a month for a healthy woman. Older people that start the policy could pay substantially more.
Universal life insurance policies are also going to be more expensive than a term policy. The premiums are flexible and the insured can pay more on the policy in order to build cash value if they so choose. As the person gets older each unit of the policy will get more expensive which can be paid either with the premium or from the amount of cash the policy has accumulated. These policies are less expensive than a whole life policy, though, while more expensive than a term policy.
A buy-sell agreement insurance policy can offer tax advantages as it can be considered a business expense. On the flip side, however, the payout might be subject to income taxes. As with other life insurance policies, the rate will depend on each partner’s age, sex, health, and other key factors. If one partner is young and the other relatively old the policy will cost more than another policy that covers two partners that are both young and in great health. The premium paid for the policy will also be determined by how much the face value is for which is determined by how much each partner’s share in the company is worth. A smaller company with not too much value built up will likely not cost that much while an older business that is worth quite a bit, maybe millions, will have a higher buy-sell agreement policy premium amount to pay.
Key person life insurance costs are going to depend on how many key people there are and the amount of insurance purchased. It also depends on the person’s (or people’s) age, gender, and health. Assuming a 40-year-old male in great health that doesn’t smoke and a $500,000 policy, the business could pay about $400 a year for this type of policy. A woman will cost a bit less as they tend to live longer. If the person smokes that could rise to over $1000 a year.
When purchasing a group life insurance policy the business can share the costs with employees in order to keep the costs lower. The premiums depend on how many men vs. women are employed at the company as well as their ages and health conditions. The premium can also change every five years.
How A Business Owner Can Save Money On Life Insurance
As shown above, the most obvious and best way to save on any form of life insurance is for the business owner to stay healthy. Also extraordinarily important is to not smoke, and if a smoker to quit as soon as possible. Smoking cigarettes increases the cost of life insurance by 250% or more plus it’s a very expensive habit on its own. Over time the cost of life insurance for a former smoker will eventually drop to something far more affordable than the premium an active smoker will pay.
Another way to save money, but not nearly as important as the last paragraph, is to shop around. Different insurance companies charge different rates so it pays to get three or four quotes in order to compare them, their rates, and their terms and conditions.