Why life insurance is important for business owners
Dan Levenson October 26, 2021
One of the many reasons people start their businesses is to provide a better lifestyle for their families. Most business owners are both financially and professionally risk-takers by nature. Although entrepreneurs need to spend most of their time preparing for the rewarding business meetings and elevator speeches, only a handful give equal importance to the concerned families & start to think about life insurance.
A business owner must plan for contingencies, especially when there is a family to look after. For an entrepreneur, the entire business setup is like their baby and needs protective backing of its own. This is where life insurance policies come into the mix.
Life insurance for a business owner is desirable because it is a protected asset in case of bankruptcy. So, why is life insurance important for business owners?
A life insurance policy is often the cornerstone of a business’s succession plan. When a company uses life insurance as the funding vehicle of a buy-sell agreement, the death benefits purchase a deceased partner’s share of the business from their estate.
This can help reduce conflict between all parties involved and allow the company to keep running smoothly. When used to fund a one-way buy-sell agreement, the chosen successor can also use the policy’s accumulated cash value as a source of funding to purchase the company at the owner’s retirement.
Attraction and Retention of Employees
When an insurance company issues a policy, they do so because it is determined that the policy owner will incur a financial loss when the insured passes away. A business owner may incur a financial loss if a key employee dies. Insurance companies generally let business owners have an insurable interest in their employees.
This gives business owners a unique way to use business life insurance as an employee benefit. Instead of paying an “employer match” into a 401k plan, employers may open life insurance policies on their employees. The business owner receives a tax benefit for paying the insurance premium.
If your family relies on your income, they’ll need money to care for themselves after you’re gone. The death benefit can cover your salary and your other contributions to the household, like childcare. When you’re trying to decide how much life insurance you need to replace your income, think of all of your debts and expenses.
Access to Cash Value
A business owner who has a life insurance policy can borrow against the accumulated cash value for various work-related purposes. Life insurance enjoys favorable tax treatment. Cash value withdrawals are treated on a first-in-first-out (FIFO) basis. Therefore, cash value withdrawals up to the total premiums paid are generally income-tax-free.
Key Person Life Insurance
If a business owner or executive who is very important to the business dies, the company will receive the death benefit of the key person. The tax-free benefit can be used in a variety of ways. It can help make up for company sales as well as lost earnings. The life insurance death benefit can provide liquidity quickly so the business can provide ongoing financial demands.
It can help with estate planning and the management and distribution of your assets. Passing on an estate can involve numerous issues, depending on your circumstances and the amount of investment at hand. What if there are multiple heirs to an estate, but properties aren’t that easily split up? In instances like this, life insurance in an estate plan can fill the gap and equalize an estate inheritance among heirs.
Business owners need insurance for similar reasons: income replacement and to protect the future of the company. Make sure you have the right policies to cover all of the people who depend on you. If you want to make sure that your new business is protected, contact us today. We will be glad to talk to you about your options to make sure that you and your business are protected.