Life insurance is always a sensitive subject because, let’s be honest, no one wants to talk about the possibility of death. “Yeah, I’ve thought about getting life insurance,” or “It’s on my to-do list” are the usual responses from people. But business owners should consider investing in a policy and explore the different options available for their company.
Whether you are a sole proprietor or in business with several partners, it’s smart to be prepared should something happen to you or your partners down the road. Just like a personal life insurance policy will replace your income and protect your family if you die prematurely, life insurance can do the same for your business in the event an owner, partner or key employee dies.
Types of Life Insurance
If others are dependent on you and your business, you need life insurance. There are three types of life insurance to consider when shopping around for the right policy.
Individual Life Insurance
If you are a sole proprietor, this is the type of life insurance for you. It’s simple; individual life insurance is coverage for a business owner’s family.
Should something happen and the business owner dies, loan obligations are passed onto the surviving members of the family. This scenario would create what is called a distressed sale. In this situation, the business could be sold for significantly less than its actual worth.
An individual life insurance policy taken out on the business owner for an amount equal to all obligations would protect the family against this.
Sticking to the above scenario, let’s say the surviving family does not have the proper skills to maintain the business, or maybe they simply have no interest or desire to keep it running. A buy-sell agreement is a contract that allows the deceased business owner’s surviving family to sell the owner’s share of the business at a predetermined rate through the life insurance policy.
A buy-sell agreement may also be implemented when an owner chooses to leave the business or is forced to leave. Of course, the terms must be acknowledged and agreed upon by all owners and partners prior to enforcement. Think of a buy-sell agreement to be much like a premarital agreement between business owners and shareholders.
Key Person Insurance
Key person insurance does not have to be taken out on a business partner or shareholder. This policy can be taken out on an essential leader or director, a top seller or any employee that produces a significant piece of your business revenue. So many unexpected costs can come with the loss of a valuable employee: a loss of clients or key relationships, replacing unique skills, or hiring and training costs.
The business would be compensated with a determined, fixed sum indicated on the insurance policy. The policy’s term, however, does not extend further than the period of the key person’s value to the business.
How Much Do You Need?
Every individual and every business is different. It’s best to seek professional advice before buying life insurance. Many people might have a preconception that all life insurance agents are out to get them. If you’re one of those people, try doing your own research and reaching out to friends and family to see what company they are insured by. Just as you would for a new pair of business slacks or comfortable dress shoes, shopping around for a company whose values and goals match up with yours is completely acceptable.
Take into consideration the people that will need to be protected and supported, and how much of your income they are dependent on. There should be enough capital set in place to keep the business going or in the case that the remaining members of the family choose to sell the deceased business owner’s share.
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