What clients need to know about how life insurance coverage can protect their businesses
Your clients likely understand that a life insurance policy can help protect their families, as it provides a cash death benefit to help support the surviving spouse and children. But life insurance policies aren’t only for personal use; separate policies can also help small business owners protect their businesses in the event of their own death or the death of a partner or other key employees.
“Life insurance is imperative for the health of a small business,” says Dave Mohr, national sales director for Nationwide’s business solutions group. “It helps ensure a smooth transition and continuity after the death of an owner or partner, so a business can continue to operate and move into its next phase.”
The people who work for your clients depend on them for business continuity, and so do your clients’ families. Often small business owners have much of their assets tied up in their business, and a smooth transition helps ensure that the business continues to be an asset client families can rely on.
With so much on the line, here’s what your clients need to know about buying life insurance to protect their small businesses.
What life insurance covers
Small businesses purchase life insurance for a number of reasons. It can be used to fund the daily operations of a business if a business owner dies, to buy out a deceased partner’s share from their family, or to provide income to help replace a key employee. In certain cases, life insurance also can be used to fund benefits for top employees.
Here’s an overview of the types of policies that entrepreneurs may find useful:
Personal life insurance. A personal life insurance policy is typically held separately from policies associated with a client’s business. Personal coverage provides protection in the event of an insured’s death to help the family financially.
Key person insurance. Business owners may want to take out individual policies on key employees such as partners, executives or salespeople who are top drivers of company profits. Policies should be owned by the business and cover the cost of replacing that employee, as well as the cost of potential lost revenue in their absence. Mohr says that it’s not unusual for businesses to buy policies worth five to 10 times an employee’s salary.
Buy-sell agreements. Life insurance can be used to fund a buy-sell agreement, which outlines a plan in which surviving partners buy out the shares of a deceased partner at a previously agreed-upon price. The life insurance policy, which is held by the business itself or the partners, covers that cost. The whole agreement is typically outlined in a contract among the owners of a business.
Funding executive benefits. Attracting top executive talent to a business often means offering attractive benefit packages. However, these packages can create unfunded liabilities, says Mohr. Life insurance can be used to help fund benefits such as bonuses or retirement benefits.
How to choose coverage
Small business owners can choose from a wide array of insurance products, such as term life insurance, variable life and universal life. What type of policy clients should buy and how much insurance they should purchase will depend on a company’s specific needs and size, says Mohr.
For example, a startup company that does not yet have a lot of cash flow would likely consider an inexpensive term life insurance policy to help cover the loss of an owner, he says. On the other hand, a more mature business with strong cash flow might use institutionally priced products that offer unique benefits to businesses.
“In general, small business owners have unique needs, and every case is different,” says Mohr. Consider using tools like Nationwide’s Small Business Solution Analyzer, which can help advisors give clients a complete view of the insurance products that can best help their business.
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