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Life Insurance for Your Business and When You’ll Need it
Contrary to most thoughts, life insurance is not just for protecting families and other dependents. It can also protect your business. So, if you own or partly own a business, it is time you consider getting this policy to safeguard the future of your entity.
You shouldn’t just buy the coverage for your family and forget the source of your livelihood, the business. In the end, protecting the business means protecting your family financially and so they wouldn’t have to go through a hard economic time if you die.
But, when exactly do you need life insurance for your business? And what key benefits does the coverage bring? We provide answers to these questions below.
Common Situations You Need Life Insurance for Your Business – The Advantages that Come with it
Life insurance comes handy for your business in the following scenarios:
1. SBA Loans Coverage
Small business administration (SBA) loans are a common thing when running a small business. But like any other debts, SBA loans need paying. If you die, the payment obligation falls on your family. You surely wouldn’t want them to struggle to pay such a loan. Would you?
Life insurance comes to the rescue of your family in such a time. They can use the payout to pay off your SBA loan and any other business-related debt that you might have left behind. The idea is to protect your family from losing their home or any other valuable asset.
According to Ryan of Over50LifeInsure, SBA Loans usually will require you get a policy in place and has to be before the deadline.
2. Key Person Coverage
In a company, some employees (the owner included) are considered integral in the operations of the business. They form an executive team that makes crucial corporate decisions. Such individuals qualify for a specific business-owned coverage called key person insurance.
The coverage enables the business to continue remaining operational even after the death of the owner or any other key employee. In this case, it is the company that pays the premiums and not the business owner, and in return, the death benefits are paid to the company to cushion it financially.
The payout caters for any losses related to your death and the expenses incurred in searching for your replacement. So, if it is a family business, the financial benefits stay within the family.
3. Group Coverage
Employees can also take advantage of business life insurance to be eligible for compensation when the business owner dies. In this case, they don’t sign up as policyholders but subscribers. We refer to the coverage as group term life insurance, and it is vital in retaining employees who are afraid of not getting their salary and bonuses when the owner of the business passes away. With such a policy, you can hope to retain some of the best employees.
4. Buy-Sell Agreement
Buy-Sell Agreements are necessary for partnership businesses. They are a part of a business’ succession plan, which dictates what happens to the shares of a partner when they die. It is more of a prenup but in an entrepreneurial sense. The agreement declares the terms that the remaining partner or partners need to comply with to formally buy the business rights of the late partner.
But where does life insurance come into the picture? Well, life insurance provides the remaining partner with the funds they need to buy the dead’s shares. A special deed called a cross-purchase agreement is customarily signed to allow each partner to take life insurance for another. If one dies, the remaining owner receives the policy’s death benefits.
And, how does the deceased family benefits? The insurance payout eventually ends in the hand of the dead family or any other listed beneficiaries. They may not have rights over the business after your death, but they may get enough money to start one.
As an alternative to the cross-purchase agreement, co-owners of a business can sign up for an entity purchase plan. It allows the company not only to pay premiums for the partners but also to claim insurance payout if any partner dies. In such a case, the money goes back to the business to boost its survival.
Other Benefits of Life Insurance for Your Business
In addition to the above scenarios, life insurance benefits your business in the following ways:
1. Income Replacement
The life of your loved one continues when your stops. They’ll be having the same financial needs they had before your death, and this can be hard without life insurance or a source of income.
Assuming that you were the only breadwinner, your kids will need food and school fees. The family will also need to pay the mortgage, auto loan, and any other debt that you might have left behind. If you took life insurance for your business, the family would use the payout to cater for these expenses. At least, this will lessen the pain of losing you.
2. Estate Equalization
In family-owned businesses, not everyone is actively involved. Some give more of their time and energy than others. When the company president dies, there are often disputes concerning the splitting of the business assets and shares. Unfortunately, domestic disputes always disrupt the operations of a business.
Why don’t you save your family from such a mess by taking life insurance? The coverage allows those inactive family members to receive a financial payout from the insurance company that equals the shares that you leave for the active family members. So, it is a win-win for everyone.
3. Cash Infusion
Whole life insurance doesn’t just help t clear your SBA loan, but it can also help you procure one against your accumulated cash value. So, you can still reap the benefits of life insurance while you are still alive. You can use the payout to provide cash injection into the business.
Besides, life insurance can be used to build your creditworthiness. Since lenders always want to know if you have assets that you can fall back on if your business falters, they’ll pay attention to your life insurance policy. It demonstrates your financial stability, which makes you creditworthy.
Closing Thought
No doubt, every business needs life insurance. It benefits both the owner and the dependents. If you had concerns concerning the coverage, it is time you dispel it and start shopping for the best life insurance plan for your business. It pays in the long run.