How to Use Life Insurance to Protect a Small Business
Most people think of life insurance as a safety net for their families if they pass away unexpectedly. It can temporarily replace income, cover funeral costs, pay off a mortgage and other debt, and fund children’s education.
Did you know life insurance can also be used to protect a small business and provide cash for different purposes?
Let’s discuss a few ways life insurance can benefit your small business, both as a safety net and an investment.
Protecting Against the Loss of Key People
Think about what could happen to your business if the founder or an individual with highly specialized knowledge or skill were to die suddenly.
Key person insurance is purchased by a business to guard against the loss of an individual. Funds are typically used to cover lost revenue, hiring and training a replacement, and outstanding debt. The business pays the premiums and is the policy beneficiary.
Coverage is typically five to 10 times the key person’s salary.
If you’re the sole owner, life insurance can provide funding as difficult decisions are made about how the business will be managed, sold, or transferred to someone else.
Funding a Buy-Sell Agreement
This is specifically for partnerships. A buy-sell agreement determines how ownership is transferred or how a partner’s share is distributed if that partner dies, becomes disabled, or leaves the company.
Life insurance can be purchased by the company or partners. If one partner dies, the surviving partner receives the funds.
Life insurance policy agreements can also state that proceeds will be used to purchase the deceased partner’s stocks or share of the company for a fair price. This can prevent unqualified heirs from taking over partial ownership and key responsibilities.
Securing Business Loans
Small Business Association (SBA) loans and other types of loans may require life insurance before approving a loan. In this case, the policy is used to pay off the loan balance before anything else.
Building Cash Reserves
Permanent or whole life insurance is often considered an investment because it builds cash value over time. That cash can be accessed through a loan, usually without a credit application and at a lower rate than traditional bank loans.
Attracting and Retaining Top Talent
Just like retirement plans, health benefits, stock options, and other benefits are offered to top performers, life insurance provides individuals with a valuable, growing investment. In some cases, the employee owns the policy but receives bonuses to cover premiums.
To discuss how life insurance can protect your small business, and how to use life insurance as an investment in your business, contact Stanton Insurance Group today to schedule an appointment!
