Life insurance is considered an important part of protecting your family’s financial well-being in the face of death. With a life insurance policy, typically your family or other beneficiaries can claim a lump sum, called a death benefit, that can be used to help pay for the funeral, debts, and meet daily living expenses, potentially saving them from financial ruin.
If you are also a business owner, then there is the added factor of your company. Business owners can purchase life insurance for themselves and to benefit their businesses, allowing them to protect their employees and business interests. Life insurance can give business owners extra protection for themselves, their families, employees, and companies.
Protection for Your Family
Like any life insurance policy, business owners usually get life insurance primarily for their family and loved ones. If you were to die now, your family could be left with a funeral to cover, leftover debts, lost income, and potentially bankruptcy. Life insurance can give them the financial cushion they need to move forward.
To figure out how much life insurance you need to cover your family’s expenses, think carefully about how much income would be lost and how much they need to cover day-to-day costs. A life insurance calculator can be a valuable tool for determining an approximate life insurance amount.
Protection for Valued Employees
If you find good employees, do everything you can to keep them. There are several ways to help retain valuable employees, and one of them is to give them a good life insurance policy. Putting money aside toward a life insurance policy can give your employees peace of mind should the unthinkable happen.
Funding for Buyout Agreements
If you have one or more partners in your business, you need to have a plan in case one of the partners dies. A partnership agreement typically stipulates that if one partner dies or becomes incapacitated, the surviving partners have the right to buy their share of the business.
In this situation, the death benefit for a life insurance policy can be used to fund the transaction. The value of the death benefit for a policy purchased for this reason will generally be proportional to the relative portion of the company’s value. For example, if there are two partners, the death benefit may be 50% of the company’s worth. The money would be given to the late partner’s family, and the stake would go to the surviving partner.
To avoid any confusion and potential conflict in the future, the buyout process, including the intended use of any life insurance benefits and the capital dividend amount, must be documented in the partnership agreement. The parties’ lawyers and accounts should of course also be consulted.
Estate Equalization and Succession
Life insurance can be used to help a business owner who wants to pass a company to a single family member while leaving something for their other dependents. This process is called estate equalization, ensuring everyone gets an equal inheritance.
For example, let’s say you have two children. One works for the family business, and the other does not. The business owner can take out a life insurance policy in the amount of the company’s value and will name both children as beneficiaries even though only one will inherit the business. When the business owner dies, the estate can be structured such that the child who works for the family business will inherit the corporation’s shares, while the other child will receive an insurance payout. This strategy may generate more wealth for future generations and double or triple the estate’s value.
Keep Your Business Running with Life Insurance
You may not have to wait until you die to use your life insurance policy. If you own a permanent life insurance policy, the cash value component of your life insurance policy may be used to supplement income and pay off business debts. You can also use those funds for tax-free business growth. Before tapping into the cash value of your life insurance policy, consult with a financial professional to determine whether this is the option that best meets your needs.
The amount of life insurance needed for business owners may vary significantly based on various factors such as the size of the business, outstanding debts, and ongoing business expenses. An insurance broker can help you determine the amount of life insurance you need and may consult multiple life insurance providers to determine the best policy for your business.
421189 CAN (10/22)