Jeff is a well-known speaker and expert in life insurance and financial planning. He has been featured and quoted in Nerdwallet, Bloomberg, Forbes, U.S. News & Money, USA Today, and other leading finance websites. He is a licensed life insurance agent and has helped over 3000 people secure life insurance. He is licensed in all 50 states & DC. Jeff has spoken at top insurance conferen...

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Benjamin Carr was a licensed insurance agent in Georgia and has two years' experience in life, health, property and casualty coverage. He has worked with State Farm and other risk management firms. He is also a strategic writer and editor with a background in branding, marketing, and quality assurance. He has been in military newsrooms — literally on the frontline of journalism.

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Reviewed by Benji Carr
Former Licensed Life Insurance Agent Benji Carr

UPDATED: May 13, 2022

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Are you a small business owner or a co-owner of a company? Among the many days to day responsibilities you encounter, you also are responsible for your family. You need to protect your family at home as well as your business family. To that end, you may want to consider life insurance for business owners.

Life Insurance for Business Owners

Business life insurance for owners can help lay a proper financial foundation by protecting your current and future business. Let’s look into the different situations that life insurance can benefit your company or business.

Collateral Assignment Life Insurance

A life insurance policy can be used by business owners that require cash to begin a business or buy a company. Typically, when you purchase a life insurance policy, you will name a beneficiary. This beneficiary has an insurable interest in the insured.

This beneficiary can be a family member, spouse, business partner, or company. When you’re getting a life insurance plan for an SBA loan or bank loan – it is the same overall concept.

You have to assign a primary beneficiary, but the lender will be named the collateral assignee.

If you were to die, the lender would get the balance of the loan from the life insurance death benefit. Your primary beneficiary will then get the balance once the loan is paid off.

What would happen in the event that you didn’t use a collateral assignment? If you had the lender as the sole beneficiary, the lender would then collect one hundred percent of the life insurance policy’s death benefit. Collateral assignment life insurance can help you avoid that.

Executive Bonus Plan Life Insurance

With an executive bonus plan, you’re using a compensating method for specific employees by paying the life insurance policy

premiums on the key employee’s life. The employer or business owner will pay for a benefit that is owned by the executive or employee.

There are benefits for both the employer and employee when it comes to executive bonus plans.

For the employer, there is no administration needed, the plan is simple, and costs are tax-deductible. For the employee, the executive is the owner of the life insurance policy and of the cash values. The policy is not lost if they were to change employers. The death benefit can be income tax-free.

Key Person Life Insurance

The purpose of key person life insurance is pretty basic:

A company buys a life insurance policy on a key employee, business owner, or executive who is very important to the business. The company will apply for a life insurance policy, pay for all the premiums and own the policy.

The business is also the beneficiary of the life insurance policy. If the key person were to die, the company would receive the death benefit of the key person. The tax-free benefit can be used in a variety of ways. It can help make up for company sales as well as lost earnings.

The benefit can also help cover some or all of the costs of finding a good replacement and provide proper training.

What would happen if the key person were to die unexpectedly? Could your business move forward without a hiccup? The Life insurance death benefit can provide liquidity quickly, so you can provide ongoing financial demands.

How about securing loans for your company’s growth? Sometimes, small business loans are needed to help with the financing opportunities for expanding a business.

Your lender will often seek collateral as security and the death of a key employee may pose too much of a risk to your lender. It is very common for a lender or bank to require a key person’s life insurance on anyone that is vital to the life of your company.

One of the most important uses of a key person’s life insurance is when there’s a need to buy out a deceased co-owner’s interest in a company. There are some unfortunate situations that can arise if a key person policy isn’t in place.

How would the deceased co-owner’s family receive their share of the interest in the business without selling it off? How would the surviving owners pay off the dead owner’s family in order to avoid becoming partners with them?

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Buy-Sell Agreement with Life Insurance

When you’re an owner of a company or a partner in a business, a buy-sell agreement can be an excellent way to avoid uncertainty. When a partner or company owner dies, the life of the business and its future are uncertain.

With a buy-sell agreement, you can make sure you’re helping to protect yourself and your company from the unexpected or unintended transfer of ownership. By considering a buy-sell agreement and funding it with life insurance, you can provide protection and extend the life of your company.

The buy-sell agreement will aid the sale and purchase of a company based on a specified event. The most common events are retirement, disability, or the death of the owner of the company.

The buy-sell will lay out specifically who will get what with regard to shares of the business. It will define how much, and it will guarantee the buyer a predetermined price.

The buy-sell agreement also allows for the purchasing of company shares from the estate of the surviving family. Lastly, a buy-sell can be beneficial to creditors. Creditors will most likely be much easier to deal with when they can see that a company has protection established to make loan decisions easier.

Business Succession Planning

Life insurance plays an important role as the driving force in succession planning. It is key that you have adequate coverage for yourself and your business partners.

You need to get a formal valuation of your company and make sure that your coverage is updated with the growth of your company. Succession planning is a very important topic and can be vital to your business.

If you let the estate plan dictate how your company transitions, it may cause significant issues. There are many companies that have had disastrous results due to poorly designed succession plans. Just ask the Robbie family and the Miami Dolphins.

Getting a Business Succession Plan

If you’re ready to get started, make sure you work with the following 3 resources:

  • Attorney
  • CPA
  • Life Insurance Broker

You’ll need experts in each of these areas in order to secure the best strategy and policy for your business succession plan.

Last Thoughts on Business Owners Life Insurance

Business owners who don’t know how beneficial a business insurance policy can be to their companies often underestimate its value. Business insurance policies provide flexibility, growth, and security for companies.

Many Fortune 100 and 500 companies have utilized the power of whole life insurance for decades. Whether you’re a large or small business owner, buying business life insurance should be among your first priorities. The business owner receives a tax benefit for paying the insurance premium.

Talk to your CPA and your insurance agent to determine just how much insurance each key employee should have to help protect the smooth operation of the company.

Once your plan is in place, you can begin shopping for your life insurance policy. Simply use the free quote on this page to get an idea of rates.