A lot of entrepreneurs don’t understand how life insurance applies in business. And while it is vital to have life insurance for your business, some business owners don’t have it. The advantages of having life insurance for your business are many, and depending on the needs of your business, you have a wide range of selection to choose from.
Every business needs to assess their needs first then buy a life insurance policy with a coverage large enough to cater for these needs in the future. So, here are 5 instances when your business will need life insurance.
1. Covering a Key Person
Every business has a key person, this is a vital person whose skill set and knowledge about the business is vital to its growth. Such that, without this person, the business suffers because things are not working as they should, and replacing such a person is not easy. So if you own a business, you need key person life insurance.
When you lose an important employee, the business will not incur losses replacing them. Also, this means that most of the work they were doing comes to a standstill. If so, can your business still operate as it is supposed to? Key-person life insurance helps to keep the business afloat when you lose the important employee, and also helps cover the costs of replacing this individual.
Regardless of age, you can always find a suitable life insurance policy and according to over50lifeinsure.com, there are different products for people over 50 years.
2. Collateral Assignment
A lot of small businesses borrow capital to start or boost their businesses. This is mostly SBA loans, which are supposed to be paid back as the business grows. And just like any other loan, SBA loans have specific timelines before maturing. While a lot of small businesses take out such loans, most don’t have collateral so they end up losing their businesses or other assets to their creditors because of their inability to pay back the loan.
This is why a collateral assignment for any business is important. It appoints the business lender as the beneficiary of the death benefit from your life insurance policy should you die before fully paying back the loan or when the loan matures before you fully repay it. When signing a collateral assignment, avoid listing your lender as the sole beneficiary of the death benefits.
This is because if, for instance, you die before repaying the loan completely, they will claim all the proceeds of the death benefits regardless of whether it exceeds the loan amount or not. So, the best thing is to list a loved one as the beneficiary such that your lender only receives part of the death benefit enough to complete the outstanding loan amount.
Please keep in mind that you’ll need to allow yourself plenty of time to complete the application process. Melissa Thompson of Diabetes 365 mentions “If you have any type of health issues like diabetes, your application may take 4-6 weeks to be processed. Those applicants who need life insurance for an SBA loan need to give themselves the proper amount of time for the underwriting process to take place. Even once the application is approved, it could take another 5 to 7 days for the insurance company to assign the policy to the lender.
3. Buy-sell Agreement
A buy-sell agreement allows you and your business partners to buy out life insurance policies for each other. So, instead of buying life insurance for your own coverage, you buy it for your business partner. When one of the partners dies or exits the business, the surviving partners can suffer major losses buying back the shares of the deceased partner.
Even worse, the surviving partners might completely lose the business. And in some cases, inexperienced family members without the capacity to hold the empty positions are tempted to take over after their loved one passes on. This might also end up crippling the business in the future because of poor decision-making and underperformance.
But with a buy-sell agreement helps to prevent such outcomes. With such an agreement, it means that every partner is covered so should they die or exit the business, it will be possible for the business to buy back their shares without exhausting the finances.
4. Business Financing
Every once in a while, businesses are faced with financial difficulties. With unpaid debts and overflowing and pending bills, a business might undergo financial stress. The last thing you want is to spend most of the business’s income to offset debts and pay bills, there needs to be a balance. Even worse, you don’t want to borrow more to pay off these bills and debts. This is where a life insurance policy comes into play.
Most of the whole life insurance policies provide lifetime coverage, and apart from the death benefit component, they also comprise of the cash value component. When you pay premiums for your whole life insurance policy, part of it goes to the cash component.
This is also the savings component that allows the policyholder to withdraw or borrow money against their life insurance policy. So when your business is going through hard financial times, you can access financing from the life insurance cash value component. The only downside is that if you borrow more than the cash value amount, you risk losing your life insurance policy.
5. Attracting and Retaining Employees
One of the best ways of attracting new employees is through life insurance. Offering life insurance packages to potential employees is an excellent way of attracting them. One of the most common products for employees is group life insurance policies. This is cost-effective, and while it might not provide all the coverage the employees need, they won’t have to pay for a large coverage when buying personal life insurance.
Whole life insurance is excellent for attracting potential employees, it is also great for retaining your current employees. As mentioned earlier, not many businesses understand the importance of having life insurance. So if your business provides life insurance coverage for employees, it will be hard for them to leave your business for another one that doesn’t offer.
Healthcare is very expensive, and even if the coverage you are offering pays for a percentage of your employees’ healthcare bills, the chances are that potential employees will choose you over other employees because it is not always offered. So to say, this makes your business unique and attractive.
Every business needs life insurance. Whether you are buying it to cover a key person or to create a source of financing for your business, life insurance is indispensable. Also, don’t just buy a policy because you have heard of it or because someone told you about it. The amount of coverage you buy for life insurance should be big enough to sustain your business needs when the time comes.