Many people assume that life insurance only offers personal benefits, but it can also serve as a vital asset to help safeguard the future of your organization during difficult periods.

For many entrepreneurs building a business is a dream come true. But, as with anything in life, it comes with a lot of uncertainties. Luckily, there are many tools available at your disposal to help you prepare for such challenges—including life insurance. Traditionally associated with protecting loved ones, it can also be a powerful way to provide a safety net for your company and better coverage for its financial stability, both now and after you’re gone.

Why you need life insurance

As a business owner, your enterprise is likely your largest asset, making it crucial to take steps to secure it however you can. Life insurance offers two primary ways to help accomplish this. First, should you pass, it can provide funds that can be used for managing outstanding debts and expenses, including payroll and taxes. And if you have a policy with cash value, you can even withdraw or borrow money from it while still alive to pay off loans, supplement your revenue as needed, or take your business to new heights.

Additionally, if you have a business partner or run a family-owned business, a life insurance policy can help fund and facilitate the succession of ownership. A buy-sell agreement with a life insurance policy, for instance, can cover the cost of a buyout by the surviving partner, keep the business running without interruption, and minimize stress for family members. Ultimately, the right life insurance can provide peace of mind and greater security for any situation, fortifying your organization against whatever unexpected hurdle may arise.

Policy options

There are three main life insurance policies worth considering, and which one you’ll need will depend on your personal circumstances, the size and structure of your business, and your finances. Each can provide an important cash fusion during a difficult time, making it an essential component of creating a well-rounded business.

Personal life insurance
Whatever your circumstances, you likely need a personal life insurance policy to protect your loved ones, especially if they rely on your income. The cash benefit of these policies, referred to as the death benefit, can replace your salary and help your family pay off any debts, thus easing the financial burden they may otherwise experience upon your passing.

Buy-sell agreement
This type of coverage is specifically designed for business partners. A buy-sell agreement lays out what will happen to your shares after you pass away or leave the organization. By tacking on life insurance, you can guarantee that funds will be available to acquire these shares and fulfill the terms of the agreement.

There are two types of buy-sell agreement policies: cross-purchase and entity purchase. For the former, each partner buys a life insurance policy on the other. The death benefit is then used by the surviving owner to buy out the other’s portion of the company. For the latter, the business takes out a life insurance policy on each owner. In this case, the organization is the beneficiary and receives the death benefit, which can then be used to purchase the deceased or exiting owner’s shares.

Key person insurance
This type of policy offers coverage on the life of an owner or essential employee, with the business being the beneficiary rather than an individual. In the event of this key person’s death, the business receives a payout that can go toward covering financial challenges incurred due to their absence, such as hiring and training replacements or compensating for lost revenue.

Choosing the right one

Picking an insurance policy for your business involves carefully considering several factors. The type of business structure you have, such as a sole proprietorship or a corporation, will primarily influence your needs, as will your organization’s financial situation, including debts and payroll. These dynamics will help you determine if you need to purchase a term or permanent life insurance policy.

Term life insurance is the most common policy type and offers coverage for a specific period, generally ten, twenty, or thirty years. If the policyholder passes away within this term, the beneficiaries will receive the coverage amount; otherwise, the policy closes at the designated end date and the death benefit is terminated. Term life is also often the most affordable policy, making it an attractive option if you’re on a tight budget.

Permanent life insurance, on the other hand, provides coverage for the policyholder’s entire life. As long as the premium is paid, the death benefit will be active, ensuring a safety net for the beneficiaries. These policies also accrue cash value as you pay into them, which you can access through loans for business needs or personal emergencies; just note that the restrictions and regulations may vary depending on the details of your policy. Because of these upsides, permanent policies are typically more expensive than term life ones.

For whatever route you choose, make sure to evaluate your role within the company and how your absence would impact the success of the organization as well as the lives of the employees or family members who financially rely on you. Ideally, the death benefit should be enough to cover these obligations to avoid adding any excess strain to your business and loved ones.

Finally, don’t forget about potential tax implications. Life insurance policies typically offer tax benefits on premiums paid, and those that accumulate cash value do so on a tax-deferred basis. The payout is also typically tax-free to beneficiaries. Consulting with an insurance professional can help you better understand these implications and how they may benefit your organization. Even more, this individual can work with you to assess your specific needs and navigate the different types of policies available to tailor a plan that meets all your requirements.

Your life insurance needs will evolve as your business does, so plan to review your policy annually or whenever you experience a significant change, whether that’s taking on new debt, hiring key employees, or expanding your business. By carefully considering your available options, you can establish a financial safety net that helps protect your business even in the face of uncertainty.

TAKE ACTION:
Work with an insurance professional to better understand your life insurance options, and consider which policy may help safeguard your organization and your oved ones.