What You Need to Know

A small business owner can buy two types of life insurance policies associated with the business.

1. 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.
2. A small business owner has the option to buy group life insurance for their employees. The premiums paid for this insurance can be deducted as a business expense for tax purposes.

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 to the policy, and you can take out policy loans against the policy’s accumulated cash value.

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 payout from a business life insurance policy is considered tax-free income, which can be used to cover business loans, including 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
• Incorporating life insurance into your employee benefits policy can enhance your ability to attract and retain 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 provides coverage for the business itself, but it does not safeguard your personal finances. Here are several ways the payout from a business life insurance policy can be utilized:

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 helps the business find and pay for 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 small business life insurance policy does not cover an individual’s personal debt, loss of income, or personal estate taxes.

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 relatively more affordable, numerous business owners choose that option. They acquire term insurance for a duration that matches a substantial business debt. For instance, if the business holds a loan on equipment valued at $200,000, business owners might obtain a term insurance policy for the same duration, amounting to $200,000, ensuring the loan is covered.

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.

1. MassMutual
2. Nationwide
3. Allstate
4. AffordableLifeUSA
5. OneAmerica

Choosing the Best Life Insurance Policies for You Your Employees, and Your Business Partners

Business owners face a variety of decisions and options, along with a multitude of companies to select for obtaining coverage.

1. Determine if you prefer term life insurance or whole life insurance for your business. Certain term life policies can be converted into whole life policies, allowing the business to access funds if necessary through a loan against the policy.
2. Determine whether you want to obtain key person life insurance for your business. It is important to inform the key person that there is a policy issued in their name.
3. If you currently have or plan to have a business partner, consider discussing options like a buy-sell agreement. Ensure that this agreement is documented in writing, signed, notarized, and included in the business plan.
4. 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.
5. Life insurance policies for individual employees can be for 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:

1. Network with other business owners, asking about coverage options and references for providers
2. Ask for quotes from each company you choose.
3. Review the variables in the quotes from each company.
4. Make appointments with a representative from each company.
5. 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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