A small business owner can purchase two types of life insurance policies associated with the business.
- A small business owner can purchase life insurance for the business. Usually the policy is in the name of an owner or partner. The company pays the premiums and the company is the beneficiary. Premiums are not tax deductible.
- A small business owner can purchase group life insurance for employees. The premiums are tax deductible as a professional expense.
What is life insurance for entrepreneurs?
Small business owners must have individual life insurance policies separate from business-related policies. Individual life insurance policies help the family deal with personal expenses and settle a person’s estate. Both business life insurance and individual life insurance can be “term life insurance” or “whole life insurance.”
Term life insurance coverage is specific to a chosen number of years. For example, term life insurance provides coverage for 15 years. A life insurance policy is a permanent life insurance policy. An insurance company pays dividends in the policy and you can take out policy loans at the accumulated cash value of the policy.
Group life insurance for companies covers employees and is part of a benefits package. A business owner’s life insurance policy is owned by the business and the business is the beneficiary. It is a key person insurance that pays out when a key person, such as the owner or a partner, dies. You can add riders for coverage if a key person or partner becomes seriously ill or disabled.
Why You Should Get Business Life Insurance and Employee Life Insurance
Owners put their heart and soul into setting up and running their small business. Business life insurance protects that investment:
- The business insurance payout is a tax-free income and can cover business loans such as mortgage payments and other debts
- By protecting the company, the policy protects employees’ jobs
- If there are business partners and there is a death of a business partner, the policy payment can help to redistribute the deceased business owner’s share of the business
- It can help fund the search to replace a key employee who has passed away
- It can be reassuring for employees to know that the company’s financial future is protected
- Life insurance for your small business protects your business
- Offering life insurance as part of an employee benefits policy can help you compete for employees
- Premiums you pay for employee life insurance are tax-deductible
What is covered by life insurance for small business owners?
Business life insurance covers the business, but it doesn’t protect your personal finances. Here are some ways the business life insurance payout can be used:
For a business life insurance policy, the owner or partners may be the policyholders, or the policy may name a key employee. The key person life insurance policy is for an essential employee who is invaluable to the business. With a key employee life insurance policy, the cash value of the business life insurance policy is paid to help the company find and pay for a replacement after the death of the key employee.
The company is the beneficiary and receives the cash value of the death benefit. The funds received from the death benefit of the business life insurance policy can be used to pay business partners for their share of the business or to pay off business loans or debts.
It makes sense for a business to experience a loss of revenue while on the move due to the death of an owner, business partner, or key employee. The death benefits can be used to cover business expenses.
In a Purchase-Sales Agreement, each business partner takes out a policy on the other or others. In the event of the death of a business partner, the death benefit is used by the surviving owners or business partners to buy out the deceased partner’s share. A purchase-sale agreement must be defined in the company’s business agreement.
Accelerate Rider Benefits
It will cost more, but you can add riders to cover key employees like the owner or partners if they become seriously ill, need nursing home care, or become disabled. The addition of accelerated benefits can be defined in buy-sell agreements.
What is not covered by small business life insurance?
A person’s personal debts, loss of income, and personal estate taxes are not covered by small business life insurance.
As part of retirement planning and an estate plan, an individual must obtain individual life insurance coverage so that death benefits can be paid to a family member or members.
How much does life insurance cost for entrepreneurs?
The costs vary widely. For example, term life insurance is cheaper than term life insurance.
Because term insurance is relatively cheaper, many entrepreneurs opt for it. They get term life insurance for the same duration as significant corporate debt. For example, the company has a 15-year loan on equipment worth $200,000. Business owners can take out 15-year term life insurance, worth $200,000, so that the loan can be paid.
Life insurance policies purchased as part of buy-sell agreements vary in cost based on the status, such as age, of each insured employee. Those policies can be term or whole life insurance policies.
Fortunately, every company that offers life insurance for businesses has a formula. One of the best formulas we’ve found was developed by Affordable Life USA†
Business life insurance is calculated based on a number of factors. An insurance company wants to know the age of the business owners, partners or key employees. The insurance company will want to know the dollar amount of the policy being sought and the length of time to be paid. It can also be term or whole life insurance, with whole life insurance usually being more expensive.
Here are some margin figures: A 30-year-old business owner who wanted a $500,000 policy for 10 years would pay about $15 a month. A 50-year-old business owner who wanted a $1 million policy for 30 years would pay $252 monthly.
Best Places to Buy Life Insurance for Small Business Owners and Employees
Entrepreneurs looking for business insurance should consider ways to save. Many insurance companies are mutual companies that offer complementary financial products and services. An insurance company will work closely with business owners to put together business life insurance and other insurance policies.
The representatives of these companies may also want to collect personal information and talk to business owners about investments and other services.
Choosing the best life insurance policies for you and your employees and your business partners
Business owners have many decisions and options, as well as countless businesses to choose from and get coverage.
- Decide whether you want term life insurance or full life insurance for the business. Some term life policies can be rolled out for a lifetime, making it possible for the company to access the money as a loan against the policy if needed.
- Decide whether you want to purchase business life insurance for key persons. A key person should be notified that they have a policy in their name.
- If you have or will have a business partner or partner, discuss options such as the purchase-sale agreement. Make sure that the agreement is in writing, signed and notarized and is part of the business plan.
- Consider the total cash value required for a policy. The cash value must be sufficient to cover business debts and/or loans or to cover the money needed to buy out partners.
- Life insurance policies for individual employees can be whole life, universal life, or variable life. With whole life, the insurance companies pay dividends in the policy. With universal life, insurance companies pay interest on the cash value of the policy. With variable maturity, the cash value of the policy is invested and forms a portfolio. Check the estimated costs for each type.
How to get small business life insurance
The most challenging part of the process is choosing from the coverage options. Here are a few steps to take:
- Network with other business owners, ask for coverage options and provider references
- Request quotes from any company you choose.
- View the variables in each company’s quotes.
- Make appointments with a representative from each company.
- Make a choice.
Can an LLC Buy Life Insurance?
Yes. And that is often done when an LLC has more than one member. Often, a purchase-sale agreement is formed and described in the LLC’s operating agreement.
Can an entrepreneur deduct premium for life insurance?
An entrepreneur cannot deduct premiums paid for business life insurance. That’s because the company pays the premium and is also the beneficiary.
An entrepreneur can deduct the cost of premiums he or she pays for employee life insurance. These costs are deductible as professional expenses.
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