As a business owner, your family members aren’t the only ones who could be devastated by your death. Should something happen to you, your team, partners, and clients could all face disastrous consequences.
To address this risk, you should seriously consider investing in life insurance. As we pointed out in a previous post, having the right business insurance in place is the first line of defense for a number of different liabilities facing your business. However, life insurance is designed to protect against perhaps the greatest, yet often overlooked, liability your business faces—your own death.
Life Insurance: Betting On Death
Depending on the type and purpose of your coverage, a life insurance policy pays benefits to your family or your business in the event of your death. As with most insurance coverage, the earlier in your life that you purchase your policy, the cheaper it will be. Of course, investing in life insurance early on also means that you’ll pay into the policy for a longer period of time.
Along those same lines, the healthier you are when you invest in life insurance, the less you’ll pay in premiums, since your policy is basically a bet between you and the insurance company. The insurance carrier is betting that they’ll be able to earn enough from the premiums you pay out before you die, so that they’ll have received more than enough money to pay out the death benefit to your designated beneficiaries by the time you pass away.
Life insurance comes in two main forms, which you can think of as permanent and non-permanent. With permanent coverage, as long as you pay the premiums, your insurance cannot be canceled, and your policy will pay out when you die.
With non-permanent coverage, known as “term life insurance,” you pay premiums over a certain number of years, usually 10, 20, or 30, and if you have not died during that period, the insurance ends, your premiums are gone, and no benefits are paid out when you die.
Term life insurance is much cheaper than permanent, and term policies are typically used by people who expect that they’ll only need the insurance for a certain period of time, and eventually, they won’t need the coverage anymore.
Permanent vs Term Life Insurance: Which Do You Need?
To determine which type of life insurance policy you should invest in for your business—permanent or term—you’ll need to consider a number of different factors. When it comes to life insurance for your business, you will need to die with life insurance coverage in place if any of the following three scenarios apply:
- You have a business that will need a cash infusion if you die to keep it running, until it can be sold or to buy out a business partner.
- You are likely to have dependents—senior parents, a non-working spouse, or dependent children—who rely on you for their financial needs and who will still rely on you at the time of your death, and you will not have enough saved up to provide for their needs for the rest of their life.
- You have an estate tax burden that you want to make sure is covered.
In each of these situations, you want to make sure you have either term life insurance that will continue long enough to address all of your needs, or you’ll want to consider purchasing permanent coverage.
Permanent Life Insurance
Permanent life insurance comes in many forms, and some of these forms include universal life, whole life, and variable universal life. Permanent life insurance can also be used as key-person insurance, which pays out benefits if you are a key team member in a company that would need cash upon your death to continue operating.
Permanent insurance can also be used to ensure there will be funds available to buy out a business partner upon your death, or it can be used to provide liquidity to your family in the event of your death, so they don’t need to continue running your company to get by.
Keep in mind: If you are considering permanent life insurance, you’ll want to have an experienced business lawyer like us join you when you meet with the insurance advisor to make certain you understand the terms of the policy you are buying and why you are buying it.
Permanent life insurance policies typically have two components: the amount that goes toward paying for the life insurance, and the amount that builds up as an investment, generally called the “cash value.” The cash value amount of your premium is invested tax-free, and you can use the cash value component in several ways: You can borrow against it throughout your lifetime, you can take it as distributions as part of your retirement, or you can use it to pay future premiums.
There are two caveats to mention here: Due to the high commissions on insurance products, you often need to pay premiums on a permanent life insurance policy for 10 to 15 years before there is enough cash value to borrow against or use to pay premiums. And you definitely want to either borrow against the cash value or withdraw it before your death, or it gets lost.
Covering Your Expenses
When it comes to purchasing life insurance, you’ll want to make sure you have enough term life insurance to cover the expenses that your dependents will require until they are no longer dependents, or until you are certain that you will have enough money in the bank to cover the lifetime needs of those dependents.
If you have children with special needs or a non-working/ homemaker spouse, they will require a longer period of care after your death, compared to a family with two incomes and children who will likely achieve their own independence in their late 20s or early 30s. To determine the right amount of term life insurance, consult with an experienced business lawyer like us or a fee-only financial planner.
If you plan on staying in your business well beyond the typical retirement age, if you are an absolutely indispensable part of your business’s success, or you will have estate taxes to cover upon your death, you should consider permanent life insurance. In that case, make sure you check the recommendations of your insurance agent with a lawyer or fee-only financial planner to ensure you are getting the right coverage for your money.
Get a Full Evaluation
Every business comes with its own unique risks, so there’s no way to know exactly what types and amounts of insurance coverage your company needs without a full evaluation. Before you sit down with an insurance agent, meet with us, as your Family Business Lawyer™, to identify the right types and amounts of insurance your business requires. Schedule your appointment today to get started.
This article is a service of Liz Smith, Family Business Lawyer™. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule.