Business life insurance

As a business owner, it’s not just your family and loved ones who rely on your income to survive. You have a duty to your business partners and employees, too. That’s where a life insurance policy can come in. Along with giving your workers a sense of financial security, it can also provide you with the peace of mind of knowing that your company will have the cash flow it needs to continue running if you pass away.

3 types of business life insurance to understand

There are three main types of business life insurance that can protect your company. These are:

1. Key man insurance
2. Buy-sell agreements
3. Business overhead expense insurance

1. Key man insurance

Key man insurance is a life insurance policy that insurers the employer against the loss or permanent disablement of a key worker in the business.

What is this used for?

You can take out key man insurance on any employee whose loss would impact the companies profitability and result in additional costs including:

• Cost of hiring a temporary worker
• Cost of recruiting a successor
• Loss of ability to conduct business until successor is trained

Who needs it?

As well as a business partner, other employees who can be considered a key person in a company include:

• Managing director
• Financial executive
• Computer programmer
• Sales manager

This is far from an exhaustive list, but a key person is basically anyone who provides a business with a direct and substantial economic gain.

2. Buy-sell life insurance agreements

A buy-sell life insurance agreement is a written agreement that sets out each business owner’s obligations when it comes to the transfer of business equity in the event one partner passes away or becomes permanently disabled.

What is this used for?

Buy-sell agreements typically have two parts:

• Transfer agreement. The transfer of the departing owner’s interest to the remaining owners is outlined in this part.
• Funding agreement. How the departing owner or their estate is compensated for their share is the second part.

Who needs it?

Those who own the business take out a buy-sell agreement. It ensures a smooth transition for the business should one partner be forced to leave, and means your business remains financially protected should something go wrong.

3. Business overhead expense insurance

Business expenses insurance provides an ongoing monthly benefit to help you cover your fixed business expenses when you’re unable to work due to illness or injury.

What is this used for?

Business expenses insurance is used to keep paying staff, clients and other regular bills until you’re back on your feet. It can be used to fund:

• Staff salaries
• Rent
• Phone, Internet and utilities
• Vehicle and equipment leasing costs
• Business repairs and maintenance
• Loan repayments

Who needs it?

Business expenses insurance is generally available to businesses with less than five employees that produce an income. It’s a crucial consideration for many small and medium business owners to keep your business afloat if you’re temporarily unable to work.

Why business life insurance is a good idea

Business life insurance covers a wide range of potential costs that result from a business owner passing away or becoming totally or temporarily disabled. It can kick in to help your business in the following ways:

• Cut the cost of hiring a temporary or permanent replacement for a key worker
• Reduce the financial burden of not being able to operate as normal without a key worker
• Prevent hiccups in business transitions when an owner is forced to leave by laying out guidelines ahead of time
• Pay salaries, rent, bills and other business costs while you’re temporarily unable to work.

How to buy business life insurance

The process for buying business life insurance is similar to taking out a personal life insurance policy. There are a few ways to go about buying coverage:

• Buy directly from the insurer. This is the most straightforward way to buy coverage — but you’ll need to do some research first. After comparing policies from a few insurers, you can go ahead and apply with the insurer that best suits your business’ needs.
• Talk to an insurance agent.These agents usually represent one or more companies, and they can guide you to choosing the right policy for your needs and budget.
• Work with a broker.While agents sell policies from specific companies, brokers work with you, the buyer. An insurance broker will assess your situation and then use their experience and expertise to find you the best possible policy.

Should you buy personal life insurance too?

With business life insurance, your company is the beneficiary — which means the money will go back into the business if you die prematurely.

If you have financial dependents, debt or assets to protect, it’s a good idea to purchase a personal life insurance policy, too. That way, if you pass away, your loved ones can use the payout to cover living expenses, maintain their lifestyles, pay off any outstanding debts, and fund their retirement.

A personal policy can also add an extra layer of protection if you put up some of your assets as collateral to secure a business loan. Unfortunately, your debt doesn’t die with you, so a life insurance policy can ensure your family won’t lose their home or any other assets if you pass away.

Bottom line

Business life insurance offers coverage that can help keep your business afloat if you lose an owner or key member. Alongside a solid personal life insurance plan, it can help protect the business you’ve built and secure your employees’ and business partners’ financial future in the company.

Frequently asked questions

• Are there different types of buy-sell agreements?

  Yes. If you’re using insurance to fund a buy-sell life agreement for your business, there are several ownership structures to be considered. Each structure has its own tax implications.

  Structures include:

  • Sole proprietorship
  • Partnership
  • Corporate ownership

• How much coverage should I get?

  The amount of coverage you get depends highly on the specifics of your business. Revenue, hiring costs, employees’ wages, your own salary, loans and other financial factors impact how much coverage you’ll want to purchase.

  A financial advisor can help you determine what you need to take out to fully protect your business.

• Are business life insurance premiums tax deductible?

  Your business life insurance may be tax deductible. Work with a tax professional to find out what plans are deductible, and how to properly file for them.