Business Life Insurance is one the most under purchased life insurance policies. As a business owner there are many needs to have life insurance coverage on a business partner or a key employee in a business. They are one of your most important assets and something you can’t replace very easily. Life Insurance coverage can provide a cash infusion for the business in the untimely event of the death of one of the owners or partners. There are a couple types of business life insurance you should consider.
Buy Sell Life Insurance
Buy sell life insurance coverage is purchased when you have more than one owner in the business. First you have to determine the value of the company and the amount each owner owns. Then life insurance coverage is purchased with the same amount of coverage as the person owns in the business. At times you can even cover the owner for more than they are worth to account for growth in the business valuation. The way the life insurance policy works is the ‘business’ is the beneficiary and in the event that one of the owners dies, the business can use the cash from the life insurance death benefit to pay off the estate of the owner’s share in the business. Along side of a buy/sell life insurance policy there is a buy sell agreement, usually drawn up by an attorney, that states the amount that needs to be paid to the estate of each owner upon their death.
Key Person Life Insurance
Key person life insurance is insurance that is purchased when an employee in a company provides great value to a business and cannot be easily replaced. When an employee is so valuable to a company a key person life insurance policy is taken out on the employee and the business is the beneficiary. It’s often hard to calculate the value of an employee but the life insurance death benefit is usually equal to the amount of financial loss a business could face if the employee died.
Types of Life Insurance used for Business Life insurance:
- Term Life Insurance is used if the business knows the exact amount of time that the employee or business owner will be working for the company. This is the most affordable option to buy business life insurance which is why it is used when a company has a need for buy sell life insurance or key person life insurance but can only afford to pay for a term policy.
- Whole Life Insurance is used when the business has a long term need for life insurance coverage on an owner or key employee. Premiums are fixed and the death benefit is guaranteed to age 100. There is also a cash value account that accumulates based on dividends paid by the life insurance company. The cash value can be used for retirement funds for the employee. This is the most expensive option but also has the most guarantees built in to the policy.
- Universal Life Insurance is used when the business has a long term need for life insurance but isn’t concerned about the guarantees like a whole life insurance policy offers. This is usually less expensive than whole life insurance and instead of getting dividends paid in to the policy there is an interest rate that pays a fixed rate on the cash value in the policy. The interest rate can change every year but there is usually a minimum interest rate that is guaranteed in the contract. Premiums payments are also flexible. You have the option to pay more or less in to the policy each year.
- Index Universal Life Insurance is also used when the business has a long term need for life insurance but also wants to maximize the cash value growth inside the policy. This policy works very similarly to a universal life insurance policy but instead of the cash value growth being tied to an interest rate it grows based on a certain index. The most common index in an index universal life insurance policy is the S&P 500 index. The money can grow inside the policy up to a certain cap of 14% (varies between companies) when the index does well and if the index returns a negative return the policy has a floor of 0%, so you will never lose money. Historically an index universal life insurance policy performs very well in overall cost and cash value grow when compared to a universal or whole life insurance policy.
How do you decide the best option for your business?
The best thing to do is give us a call and discuss your situation. We are more than happy to give a free phone consultation to see what option is right for you and your business.
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