In 2020, 22 million Canadians had life insurance policies. That’s almost half a million in coverage per household with a total value of $5.1 trillion. This foresight and proper planning got many of them through a difficult year.
It assisted business owners as well. Personal insurance can cover your family’s immediate expenses. But it may not extend to your business’ debt.
This can be detrimental in the long run, if your family depends on your business’ income to survive. It may also leave your business partners and employees in a vulnerable position.
If you don’t have the proper insurance in place, they may need to sell the business. This may involve a quick sale at a less than ideal price.
These scenarios highlight the importance of life insurance for business owners. If you haven’t thought about this type of coverage, read on to learn more.
Life Insurance for Business Owners
Business owner life insurance covers your family’s financial needs after your death. It also helps to ensure business continuity after you’re gone. This includes covering business loans, purchasing shares, and severance payments.
You can have a personal policy or a corporate policy. Both provide tax benefits. A personal policy can cover funeral expenses and personal debts. It can also assist with your family’s living expenses.
A corporate policy provides a payout towards the business for the following:
- Your death
- The death of a partner
- The death of a key employee
It will help keep the business running and reduce cash flow issues. These are often the main concerns after such a significant event. When deciding the amount of coverage, you’ll need to take into consideration expenses such as:
- Your mortgage
- Credit card debt
- Living expenses of your dependents
- Your children’s education
- Student loans
- Spouse’s retirement
You’ll also need to include your business debts such as loans. This is important if you’ve used your personal property as collateral for them.
Types of Life Insurance for Business Owners
There are two main types of insurance for small business owners – Term and Permanent life insurance. These are very similar to personal life insurance policies.
Term Life Insurance
This type of policy covers you for a specific period, usually between 10 to 30 years. Your insurance company will determine the length of the term. They will also set the amount you pay in premiums or fees.
These may increase upon renewal of the policy. Once the policy remains in effect, your beneficiaries will receive the payout amount.
It will cover your loans. It will also protect your business’s cash flow and operations. Both in the event of your death or that of your partner or a key person in the company.
It’s usually more affordable than permanent life insurance. There are also term life insurance options for couples.
However, you may want to consider converting this to permanent life insurance. This is possible even if you’ve had changes to your job, lifestyle, or health.
Permanent Life Insurance
Under this coverage, you can choose whole life insurance or universal life insurance. Whole life insurance lasts for your entire life regardless of how old you are when you die. Your premiums also won’t change as you get older.
Once your payments are up-to-date your beneficiaries will receive a tax-free payout. This type of insurance has a minimum guaranteed cashback value.
Universal Life Insurance also provides lifetime coverage. But you can also use it as an investment. It has a cash value that can increase or decrease over time.
This will depend on the types of investment you choose and their returns. You’ll have the flexibility to choose how you invest your premiums.
You can also increase or decrease the premiums within your specified policy limits. But borrowing against it will affect the value of the death benefit your family will receive.
Both types of policies facilitate business continuity. They allow you to put plans in place to pass on or sell the business. They are, however, more expensive than term life insurance.
You can also get cashback if you cancel either. But this will be less than what you paid in premiums.
Life Insurance Strategies for Business Owners
Both policies are straightforward. They can be very beneficial to those dependent on a business owner. However, there are provisions that you can include for additional protection.
Key Person Insurance
A key person is anyone who plays a crucial role in the operation of your business. The business would be adversely affected by their ongoing absence. Key persons can have a business life insurance policy to cover any losses if they die or leave the company.
The company is the beneficiary of this type of policy. Payout of benefits will go to the business and can help cover expenses and any loss in earnings or sales. This includes the associated costs of recruiting and training a new person to fill the vacant position.
Are you the main income earner in your household? Income replacement can alleviate the financial burden on your family. The death benefit payout will cover the income lost as a result of your death.
Collateral and Debt Coverage
This protects any personal assets used as collateral for the business. It covers the full repayment of associated loans and can protect assets such as your home. It can also cover any other business debts that could adversely affect your family upon your death.
Buy and Sell Agreement
This plays an important role if there are partners in the business. If a partner leaves the company or dies, this can help to determine what happens with his/her shares.
The surviving partner can receive the death benefit. This can enable them to buy the deceased partner’s shares.
Executive Bonus Plan
This helps compensate specific employees. The company pays these employees cash bonuses.
The funds go toward the employee’s life insurance policy with a beneficiary of their choice. The company benefits as the plan is tax-deductible.
Business Estate and Succession Planning
This facilitates the transfer of assets from one business owner to another. It allows business continuity if you leave the business or pass away. This secures your finances and protects the company and your partners.
Do You Need Business Owners Life Insurance?
It’s natural to have doubts when making such an important decision. You may think you don’t need it because of the size of your business.
After all, it is a significant, ongoing financial investment. But do any of the following apply to you or your business?
- You’re the main income earner of your home
- You have business partners and employees
- You’d like your business to continue after you’re gone
- You’d like to continue the business if your partner leaves
- You’re always looking for ways to grow your income
If so, you should be considering a business owner’s life insurance policy. Your family may not be the only people that rely on you as the main income earner. Your death may also affect the income of your business partners and employees.
You’ll want them to have the ability to continue running the business after you’re gone. You’ll also want to have this option if one of your business partners leaves. You can if you ensure you have the money to purchase their shares.
Life insurance can also provide tax-free income growth. Most importantly, it also facilitates all of the above.
The Process of Getting Life Insurance
The importance of having life insurance as a business owner should be clear now. How can you ensure you get the coverage you need that’s affordable?
Determine What You Need
Start by reviewing your expenses. Ideally, you should calculate how much your business needs to operate for at least a year. This will include monthly expenses, unforeseen expenses, and other general expenses.
This will help you to determine the type of policy or policies you and your family can benefit from the most. Consider having one that covers your family and another that covers your business.
Select An Insurance Provider
When shopping for life insurance, Ontario has many providers. It may seem overwhelming when you’re trying to choose one.
It’s best to shop around and get quotations before making a choice. Choose an experienced insurance provider. One that will guide you on the best policy and coverage to suit your needs.
Complete the Application Process
You’ll need to complete and submit an application. A medical examination is often required.
Once approved, you’ll then need to sign the relevant documents. If you have more than one partner, each of you will need to apply for individual policies.
Proper Planning to Secure Your Loved Ones
Life insurance is one way to provide financial security for your family after your death. Life insurance for business owners includes specific provisions. Something you may want to consider to not only protect your family but your business legacy as well.
Your family can live comfortably after your death. It also protects your business partners, allowing your company to survive your death. However, it can be an emotional and daunting process due to the number of life insurance products available.
Choose a company that can guide you and meet your needs as well as that of your family. Bryson Insurance has been helping business owners for the past 40 years. We’re ready to help you too. Contact us today!