Lisa Zeiderman, Esq., CDFA, CFL, a Managing Partner at Miller Zeiderman, LLP, is a matrimonial and family law attorney based in New York.
Life insurance isn’t just for individuals. If you own a business, there’s another type of life insurance to consider: business life insurance.
Business life insurance can protect a business by maintaining continuity and preserving its financial stability during times of transition due to owners’ or key employees’ marriages, divorces or deaths.
As a matrimonial attorney, I’ve seen firsthand how important business life insurance can be as it applies to valuation of a business interest. For example, life insurance may be mandated during a divorce to protect the non-titled spouse’s interest in the titled spouse’s business until the actual buyout for such interest is paid. This is just one of its many applications.
Types Of Life Insurance For Business
Depending on your business and needs, you’ll have various kinds of insurance to choose from, and you can have more than one type. They include:
Key Man (Or Key Person) Insurance
Key man (or key person) insurance is exactly what it sounds like: life insurance designed to protect a business in the event its owner or a key individual working in the business dies or becomes disabled. I’ve found this is the most common type of business life insurance.
Key man insurance has another important use: It may be employed as a factor when valuing a husband or wife’s interest in that business.
Buy-Sell Agreement Insurance
Many company owners have a buy-sell agreement in place. This is a contract made between business owners that stipulates that if an owner passes away, becomes disabled or retires, their share would be sold to the remaining partners or to the company. A life insurance policy is included as part of this contract to purchase the ownership share.
Business Loan Protection Insurance
Suppose you take a business loan and die before paying it back. Having an insurance policy can prevent your company from defaulting on the loan, enabling the business to continue running in your absence and keep surviving owners from having to liquidate assets or take other measures to repay the loan.
Group Life Insurance For Employees
Group life insurance offers financial support to the family of an employee who dies. Group life insurance is usually paid for or subsidized by the company, with employees often having the decision-making power to opt in or out.
Benefits For Businesses
Business life insurance can protect surviving owners. With the influx of cash, there can remain continuity, with surviving owners able to stay in place and run the business as usual.
Because of these protections and the security they offer, business life insurance, including group life insurance, can make a company more appealing to prospective employees. It can also help keep existing employees happy.
Lastly, business life insurance has its tax benefits. Business life insurance premiums could potentially be tax deductible depending on how the company is structured. Also, proceeds from life insurance are generally not taxed. Consult with a tax professional about which tax benefits can apply to your situation.
Common Misconceptions About Business Life Insurance
I’ve noticed there’s a lot of misinformation surrounding business life insurance. Consider the following misconceptions.
1. Business life insurance is the same as personal life insurance.
While there are key similarities between the two—including that they’re both premised on providing protections for beneficiaries—business life insurance specifically addresses issues relating to businesses, such as buy-sell agreements and business loan protection, among other concerns.
2. It’s cost-prohibitive.
Yes, there’s a cost to having business life insurance. But as stated above, that expense could be tax deductible. Also, I’ve found the benefits of business life insurance often outweigh the costs.
3. Business life insurance is necessary for only the business owner.
Business owners aren’t the only ones whose absence could negatively affect a company. There are other key players in a company, from C-level executives to top salespeople and other rainmakers, who keep a company operating and profitable.
4. This insurance isn’t necessary if you have savings or equity.
It can be difficult to estimate how much it will cost to run a business after a disruption. Even if survivors have savings or equity in the business, both can be depleted quickly. You also don’t want to be in a position where you put yourself at personal risk. Business life insurance can provide a safety net.
5. Business life insurance only provides death benefits.
This insurance can provide coverage if someone becomes disabled or retires. Depending on the policy, business life insurance could have a cash value and act as an investment.
6. Business life insurance is only for large companies.
Business life insurance can help small-business owners as much as large companies. With far fewer people working in a small company, one person passing away, for example, could affect the status quo more significantly than at a large company.
7. Insurance won’t do a thing to help recruit and retain employees.
Salary isn’t the only factor prospective employees and existing employees value. Offering multiple benefits, including group business insurance, that provide security could make a company more attractive.
8. Business life insurance isn’t necessary if you have business loan coverage.
Business loan coverage is one type of business life insurance. There are others that serve equally as important purposes. Having only one type could leave a business vulnerable.
9. Business life insurance will raise too many tax issues.
Not any that a skilled, experienced tax professional shouldn’t be able to handle. Not to mention, the tax benefits can outweigh the detriments. An accountant will be able to educate you about those as well.
10. It’s difficult to get.
An insurance broker who’s well-versed in business life insurance can get you up to speed about whether your business qualifies and what type of insurance coverage you would need. An insurance broker can also help guide you through the application process.
Finding Life Insurance
When investigating business life insurance, it can help to speak with an insurance broker about the various options. Your financial advisor or attorney likely has professionals they work with and can recommend.
Once your broker becomes familiar with the specifics of your business, they’ll create an insurance package that provides peace of mind. You’ve worked hard to make your business what it is. It’s time to protect it.
The information provided here is not legal advice and does not purport to be a substitute for advice of counsel on any specific matter. For legal advice, you should consult with an attorney concerning your specific situation.
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Based in New York, Stephen Freeman is a Senior Editor at Trending Insurance News. Previously he has worked for Forbes and The Huffington Post. Steven is a graduate of Risk Management at the University of New York.