A small business owner can buy two types of life insurance policies, associated with the business.
- A small business owner can buy a life insurance policy for the business. Typically, the policy is in the name of an owner or partner. The business pays the premiums, and the business is the beneficiary. Premiums aren’t tax-deductible.
- A small business owner can purchase group life insurance for employees. The premiums are tax-deductible as a business expense.
What is Business Owner Life Insurance?
Small business owners should have individual life insurance, separate from policies associated with the business. Individual life insurance will help the family handle personal expenses and settle a person’s estate. Both business life insurance and individual life insurance can be a “term life insurance policy” or “whole life insurance policy.
Term life insurance coverage is specific to a chosen number of years. For example, a term life insurance policy might provide coverage for 15 years. A whole life policy is permanent life insurance. An insurance company pays dividends into the policy, and you can take out policy loans against the accumulated cash value of the policy.
Group life insurance for business covers employees and is part of an employee benefits package. A business owner’s life insurance is owned by the business, and the business is the beneficiary. It is key person insurance that pays out when a key person – such as the owner or a partner – dies. You can add riders to be covered if a key person or partner becomes seriously ill or disabled.
Why You Should Take Out a Business Life Insurance Policy, and Employee Life Insurance Policies
Owners put their heart and soul into establishing and running their small businesses. A business life insurance protects that investment:
- The business life policy payout is tax-free income and can cover business loans, such as mortgage payments, and other debts
- By protecting the company, the policy will protect employees’ jobs
- If there are business partners, and there is a death of a business partner, the policy payout can help redistribute the deceased business owner’s share of the company
- It can help fund the search for replacing a key employee who has passed away
- It can be reassuring for employees to know that the company’s financial future is protected
- A life insurance policy for your small business will protect your company
- Providing life insurance as part of an employee benefits policy can help you compete for employees
- Premiums you pay for employee life insurance policies are tax-deductible
What is Covered by Life Insurance for Small Business Owners?
A business life insurance policy covers the business, but it doesn’t protect your personal finances. Here are some of the ways the business life insurance policy payout can be used:
Key Employee
For a business life insurance policy, the owner or partners can be the policyholders, or the policy can name a key employee. The key person’s life insurance is for an essential employee who is invaluable to the business operations. With key person life insurance, the cash value of the business life insurance policy pays to help the business find and pay a replacement after the key employee’s death.
Death Benefit
The business is the beneficiary and receives the cash value of the death benefit. The monies received from the business life insurance policy death benefit can be used to pay business partners for their share of the business or pay business loans or debt.
Lost Revenue
It makes sense that a business would experience a loss of income while it’s in flux due to the passing of an owner, business partner, or key employee. The death benefit monies can be used to cover business expenses.
Buy-Sell Agreement
With a Buy-Sell Agreement, each business partner takes out a policy on the other, or others. In the event of a business partner’s death, the death benefit payout is used by the surviving owners or business partners to buy out the deceased partner’s share. A Buy-Sell agreement should be defined in the business’s operating agreement.
Accelerate Benefits Riders
It will cost more but you can add riders to cover key employees such as the owner or partners should they become seriously ill, need nursing home care, or become disabled. The addition of accelerated benefits can be defined in buy-sell agreements.
What is Not Covered by Small Business Life Insurance?
A person’s personal debt, loss of income, and personal estate taxes are not covered by a small business life insurance policy.
As part of retirement planning and an estate plan, an individual should obtain individual life insurance coverage, so that death benefits can be paid to a family member or members.
How Much is Life Insurance for Business Owners?
The cost varies widely. Term insurance is less expensive than whole life insurance, for example.
Since term insurance is comparatively less expensive, many business owners opt for that. They get term insurance for the same length of time as a significant business debt. For example, the business has a 15-year loan on equipment worth $200,000. Business owners could get a term insurance policy for 15 years, worth $200,000 so that the loan would be paid.
Life insurance policies purchased as part of buy-sell agreements will vary in cost based on the status, such as age, of each insured employee. Those policies can be term or whole life insurance policies.
Fortunately, each company that provides life insurance for business has a formula. One of the best formulas we’ve found was developed by Affordable Life USA.
Life business insurance is calculated on a number of factors. An insurance company will want to know the age of the business owners, partners or key employees. The insurance company will want to know the dollar amount of the policy sought, and the length of time to be paid in. Also, they can be term or whole life insurance policies, with whole life insurance usually more expensive.
Here are some ballpark numbers: A 30-year-old business owner who wanted a $500,000 policy for 10 years would pay about $15 monthly. A 50-year-old business owner who wanted a $1 million policy for 30 years would be paying $252 monthly.
Best Places to Get Life Insurance for Small Business Owners and Employees
Business owners who are shopping for business insurance should consider ways to save. Many insurance companies are mutual companies that offer additional financial products and services. An insurance company will work closely with business owners to put together business life insurance, and other forms of insurance.
The representatives of these companies may also want to collect personal information and talk to business owners about investments and other services.
Choosing the Best Life Insurance Policies for You and Your Employees and Your Business Partners
Business owners have many decisions and options, as well as numerous companies to choose from and get coverage.
- Decide whether you want term life insurance or whole life insurance for the business. Some term life policies can be rolled into whole life, making it possible for the business to access the money if needed as a loan against the policy.
- Decide if you want to get key person life insurance for business. A key-person must be notified that there’s a policy in their name.
- If you have or will have a business partner or partner, discuss options such as the buy-sell agreement. Make sure the agreement is in writing, signed, notarized and part of the business plan.
- Consider the total cash value needed from a policy. The cash value should be enough to cover business debt and/or loans or cover the money needed to buy out partners.
- Life insurance policies for individual employees can be whole life, universal life or variable life. With whole life, the insurance companies pay dividends into the policy. With universal life, insurance companies pay interest on the cash value of the policy. With variable life, the cash value of the policy is invested and forms a portfolio. Check the estimated costs for each type.
How to Get Small Business Life Insurance
The most challenging part of the process is choosing from the coverage options. Here are a few steps to take:
- Network with other business owners, asking about coverage options and references for providers
- Ask for quotes from each company you choose.
- Review the variables in the quotes from each company.
- Make appointments with a representative from each company.
- Make a choice.
Can an LLC Purchase life insurance?
Yes. And that’s frequently done when an LLC has more than one member. Often a buy-sell agreement is formed and spelled out in the LLC’s operating agreement.
Can a business owner deduct life insurance premiums?
A business owner can’t deduct premiums that are paid for a business life insurance policy. That’s because the business is paying the premium and is also the beneficiary.
A business owner can deduct the cost of premiums he or she is paying for employee life insurance. Those costs can be deducted as business expenses.
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