A Family Business Owner’s Guide to Life Insurance

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As a business owner considering life insurance, you not only need to protect your family’s finances but also keep in mind how your business will be impacted by your loss. Continue reading below to learn more.

Types of life insurance for business owners

There are three main types of life insurance policies that you should consider as a business owner.

Personal life insurance

Most people, when they consider life insurance, are thinking about personal life insurance. Normally it involves insuring your own life and making your family the beneficiary of the policy. If you pass away, your family will receive a payout from the insurer.

Key person insurance

Key person insurance is a policy designed to protect your practice. Here your business pays monthly premiums, and if you pass away, the business will receive an insurance benefit. The money can be used to train or hire a replacement or simply to pay any outstanding business debts. This protects your business partners and your family from being saddled with debt after you’re gone. 

Life insurance to fund a buy-sell agreement

If you have partners or co-owners in your practice, it’s a good idea to have a buy-sell agreement in place. The agreement specifies that if you die, your partners will buy your share of the practice and sets out a specific price. Your partners then take out an insurance policy so that if you die, they’ll have an insurance payout to cover the cost of your shares.

How much life insurance to buy

When you’re considering how much insurance cover to purchase, remember to consider your family’s finances but also your business obligations.

Personal expenses

Consider what expenses your family will face after you’re gone. Are there debts or a mortgage that need to be settled? How will they cover daily expenses? If you’re not around to do your share of the household chores, such as cleaning, cooking, or minding children, will they need to hire help? Remember to factor in large future expenses, too, like college fees.

Business expenses

How will your partners or co-owners be affected financially if you pass away? How will they compensate for the income you normally bring to the practice? Are there business debts, and will they become responsible for your share of the debt after you die? Will the practice close, or will your partners buy out your share, and how will they raise the capital?

How to apply for life insurance as a business owner

Though it can seem overwhelming, there are a few simple steps to applying for life insurance if you’re self-employed.

Type of policy

We’ve discussed the main policy types above, and you might find you need to purchase a combination of them. For example, if you have a business partner, your buy-sell agreement is likely to be reciprocal. This means you may need two policies; one insurance policy works to protect your life and the other to insure your partner’s life.

Policy owner

Remember to also consider who is buying the policy. For example, if the insurance covers business debts, then the business is the purchaser, but if the insurance is covering a buy-sell agreement, then your partner is the purchaser.

Beneficiary

Similarly, it’s important to clearly set out who the beneficiary of each business policy is. Is it the business or your co-owners?

When it comes to personal policies, it’s important you take your beneficiary’s circumstances into account. For example, if you have young children, you may need to set up a trust that their guardian can access. You may also want to consult your lawyer to make sure your will and insurances are in line with your wishes.

Insured amount

It’s a good idea to get an independent assessment of your practice so that you know how much it’s worth and the value of your share. Because the value of the business can change over time, you may need to update your insured amount from year to year. Usually, an accountant can help you with the valuation.

A life insurance professional can help you decide how much personal insurance you’ll need to protect your family’s future.

Quotes

It’s a good idea to shop around. There are a lot of insurers and many different products available so you can find a great deal. If you’re feeling overwhelmed by the options, you may want to consult a broker.

Application process

When you apply for life insurance, you usually need to answer some medical and lifestyle questions. You may also be required to get a medical exam for each policy. When it comes to business life insurance policies, your insurer can tell you who needs to fill out the form and who in the business should sign it.

The bottom line

The important thing is that you start early. You never know what the future holds, but you can make sure your family and your business are protected.

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