Many of the day-to-day tasks of running a company fall on the shoulders of the business owner. But what if something were to happen to the owner? Same as it is necessary for individuals to take out life insurance to protect their families and home in case of death or critical illness, it is vital for business owners to also consider taking out life insurance for their small businesses in the same case of their possible death or critical illness. Permanent or whole life policies will protect the future of your family by providing stability and peace of mind during hard times. In the same manner, life insurance for a small business will ease financial concerns by helping your business operations and any partner in the company. We at IMC Financial, list here several ways in which life insurance can protect your small business.
3 Ways in Which Life Insurance Can Protect Your Small Business
Buy-Sell Agreement Funded with Life Insurance
A buy-sell agreement funded with life insurance allows the remaining business owners to purchase the company interests of the deceased owner at an agreed-upon price. This helps in guaranteeing that the surviving business owners will be promptly and fairly compensated for their share of the business.
Key Person Insurance
Key person insurance is a life insurance policy that is purchased by the business for the life of a key employee and payable to the business. If this key person should pass away, a life insurance policy would help in making up for lost sales or earnings and cover the cost of searching for and training a replacement.
Individual Life Insurance
An individual life insurance policy is one that you own individually. This can provide your family with additional money to pay off personal debts, fund future requirements such as retirement plans or college tuitions and cover ongoing living expenses.
How Much Life Insurance Does a Business Owner Need?
How much life insurance to take out largely depends on what you want your life insurance to cover. Your policy can cover your business, your family, or both.
Coverage for your Business
To protect your business, you may opt for a life insurance policy that will cover multiple scenarios. As a small business owner, there is usually a long list of business expenses that have to be paid in the event of your death such as inventory, rent or mortgage payments, payroll, loans, utilities, vendor payments, and other operating expenses. To calculate the ideal coverage amount, you will have to assess the possible financial impact of your death on the business. For instance, you may choose business owner’s life insurance coverage to pay severance to your employees if your company shuts down and to help compensate for potential losses.
Coverage for your Family
When deciding on life insurance to protect your family, chose a policy that will help in replacing your income, thereby allowing your family to cover upcoming debts and expenses, be it mortgage payments or college tuition fees. One rule of thumb for an individual policy is to purchase 7 to 10 times your annual income in life insurance, however, the ideal amount varies for every individual.
Choosing a Life Insurance Policy as a Business Owner
Permanent Life Insurance
Permanent life insurance will be effective for as long as you keep up with the premiums. When you die, your beneficiary will receive the benefits of the life insurance policy that you have invested in. Permanent life insurance develops cash value that you can tap into at any time to cover business-related or personal expenses. As such, this policy costs more compared to term life insurance, but the guaranteed payout can prove to be extremely useful if you need some money to help your business partner or family.
Term Life Insurance
Term life insurance policy is a more pocket-friendly and flexible type of coverage, and hence a more common option for many people. When setting up term life insurance, you will have to determine exactly how long you want the life insurance policy to last, with term lengths ranging from 10 to 30 years. When you reach the end of term, you also have the option to extend it or simply let it expire if you no longer need the coverage.
At IMC Financial, our goal for the last 30 years has been to offer our clients the best advice when it comes to various life insurance policies. We offer our clients the right financial products that are best suited to their situation and budget. So, if you are looking for life insurance for your small business, then contact IMC Financial for more information.
Interesting Related Article: “How Much Protection Do You Need? Calculating Your Life Insurance Coverage“