2024 Simple Guide to Why Small-Business Owners Need Life Insurance
Written by Daniel Ray, Life Insurance Expert |
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Fact Checked by
Lisamarie Monaco |
Editorial Disclosure
Understanding why small business owners need life insurance is the cornerstone of responsible business planning, offering peace of mind and financial security for both the business and the families involved.
Life insurance for proprietors isn’t merely a backup—it’s a strategic asset. From term life policies covering specific timeframes to whole life insurance offering lifetime assurance, selecting the appropriate plan anchors your enterprise against unforeseen events.
In this blog post, I’m going to explore why small-business owners need life insurance and how they can go about getting it done right so they don’t leave their loved ones with a mess when they are gone!
Table of contents
Life Insurance For Business Owners
When you start out as a business owner you must have a vision. For instance, when you are thinking about how your business will be successful you probably have the end result in mind.
You think about hiring employees or subcontractors, how much money will you invest. In addition, you need to think about liability insurance, possibly bringing on business partners, etc.
When you put your vision to action it’s important to always keep in mind, the most important part of the business is, well YOU!!
If you are successful and your company takes off, you will have many responsibilities. In most cases, your company’s employees are your second family. Just like your immediate family, they all depend on you.
What happens if you die, or if one of your partners dies? What about a very valuable employee?
How Life Insurance Benefits Business Owners
Why Do Business Owners Need Life Insurance
Keeping your business strong is crucial, and life insurance for business owners plays a big part in that. It helps handle debts, keeps cash flowing, and covers costs to find someone new if something happens to you.
Also, if your policy builds cash over time, you can use that money to help your business grow without owing taxes. Pretty neat, right?
Got business partners? Life insurance can make sure your agreement to buy each other’s share is solid if one of you can’t run the business anymore.
For family businesses, life insurance keeps things fair for your kids. If one’s working with you and the other isn’t, life insurance can balance things out, giving company shares to one and money to the other.
And don’t forget your family! If you pass away suddenly, life insurance steps in to replace your income, so they can keep living life without financial worries.
Life Insurance Strategies For Business Owners
Again, when you have a business flourishing and profits are rolling in it’s important to financially protect your investment. When owning a business there are many pieces to the success of the business.
What happens if a partner dies? Would you really want the family members of the deceased partner coming in and having a say in your business?
Or, if key employees pass away, that key person brought those big accounts in, will they be at risk?
Worst case, if you the owner passes, there will be a lot of legality issues perhaps. It might be smart to have business life insurance in place to assist in estate planning.
Here are the two most important business life insurance to have in place, buy/sell agreements and key man life insurance.
1. Buy Sell and Key Man Life Insurance
Key Man, or key person insurance is to protect the company from the sudden demise of a key employee. This can be life insurance or disability insurance or the combination of the two.
This will give the company the time to find a replacement as there were big shoes to fill. This will also protect the company from the loss of business that the key person brought to the table.
A Buy-Sell agreement is when you have multiple partners. Life insurance can be structured to fund this agreement. In the event that a partner dies, his percentage ownership would be bought out by the life insurance policy via death benefit and payable to the deceased family.
These plans are very valuable because as an owner you do not want family members with no skills in the area of business to have a say. When structuring this type of policy the life insurance company will want to know the percentage ownership of all partners.
You can also have a disability policy in place in a combination to protect against if a partner becomes disabled.
2. Individual Owner Life Insurance
If you are the sole owner of the company what happens if you die? How will the company stay afloat?
Most business owners may have outstanding loans that the company is responsible for. Sometimes debt is vital to the business to keep cash flow and inventory in place.
The other option is for the family to have to liquidate to cover for these loans and debt, but why? I am sure the family has been through enough.
3. Business Insurance Premiums are Tax Deductible (Or Are They)
Above all, whenever you purchase life insurance you want to speak to a tax professional to make sure you can maximize write-offs on the business tax return for the tax year.
When considering life insurance premiums as tax deductions, the key factor is the policy’s beneficiary. Generally, if the business stands as the beneficiary, the premiums are not tax-deductible.
However, premiums for a buy-sell agreement can be an exception to this rule and may qualify for a deduction. On the other hand, for key person insurance, the premiums often do not qualify for tax deductions.
As far as disability insurance, premiums are tax-deductible on form 1040. These will assist with possible medical expenses if the partner or key person is disabled and is unable to work.
FAQs
What’s the role of key person insurance?
Key person insurance mitigates the financial impact of losing an integral team member, providing the business with the resources to recover.
Why consider a buy-sell agreement?
A buy-sell agreement, funded through life insurance, clarifies the transition of ownership, maintaining business stability and continuity.
Is life insurance relevant for solo entrepreneurs?
Absolutely, it covers personal and business liabilities, safeguarding your family and business commitments.
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Conclusion
Embracing life insurance is a testament to your foresight as a business owner. It’s not just protecting; it’s planning for your business’s prosperity and honoring your commitment to those who depend on you.
With that said, death usually happens unexpectedly.
Business life insurance is very important. If a partner dies, the buy-sell agreement will be funded by the policy. If a key man dies, the company can weather the possible storm created. And if a sole owner dies, the family can pay off debts and take the time to mourn and figure out their next move.
