Finance February 20, 2013 Last updated January 11th, 2022 2,404 Reads share

Businesses & Purchasing Life Insurance

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It is widely known that individuals are the ones who are in charge of whether they want to have life insurance or not, but it is not a usual practice to incorporate this on a business level – i.e. on an employer and employee level.  But while this is a good and optional idea, why should someone actually need life insurance for the people working in the business?

Business partners and life insurance

Not all businesses are a one-man deal.  For the most part, it involves partners or a group of people who run various tasks in the business . One partner might be on the product-development side, the other might be on the financial side, and the other on overall business strategy.

Google, per se, runs on three heads – the two co-founders Larry Page and Sergey Brin and their former CEO now executive chairman, Eric Schmidt.  But in the unfortunate event of someone dying earlier than expected, it could cause a dramatic decrease in revenue for a company.

Google may have a solid-rock foundation and pinch hitters who can step in, but what if your company doesn’t?  Without life insurance, the business might suffer after a premature death of one of the key persons.  While some companies believe that this type of planning is important many put the planning off and do not see key man life insurance as an urgent business matter that needs to be taken care of.

Life vs business insurance

How does life insurance in a business really work?  In individual life insurance, the policy will be able to give out funds to support your family, which may serve as a replacement for your income.  The same goes with life insurance for businesses – they can help ensure funds so the businesses will go on. For example, if you lose a key employee, you can have money to keep the business going while you search for a replacement.

Which life insurance policy?

As a business owner, you may also want to consider the type of  life insurance policy you would want to get.

  1. The first and simplest policy would be a term life insurance policy. Term life is fairly basic. You choose how much coverage you want, and for how long of a term you want coverage in place. For instance, if you had an employee that was extremely valuable to the business, you might ensure his life for a million dollar policy that can support the operations of the business until he was replaced, or perhaps you would use the funds to retire and shut down the business if the business can not run without that key employee. Term policies cover the business for a set amount of years and are cheaper than permanent policies. You can also use life insurance as an incentive to keep key employees – known as “golden handcuffs”. This would require a permanent policy with cash value.
  2. In a case where you want to make sure an employee doesn’t leave the company, you can purchase a whole life policy on the employee. The employee has to stay with the company a certain amount of years, and if he/she does, they would be able to take ownership of the policy and utilize the cash value and death benefit for their family. In permanent life insurance policies, as long as you pay the premiums, the insurance will be kept even for a lifetime.  Corporations buy life insurance on their executives all the time, and these are known as executive bonus plans. Life insurance is also used in business to fund the buy/sell agreements between partners.

Most people are aware of the many uses of individual life insurance, but are not aware of the uses of life insurance in business. While most business owners focus heavily on the growth of their business, they often neglect to focus on important issues that may affect the future of their business. If you are in this situation, take time out to evaluate your business and see if it makes sense for you to use life insurance to protect and grow your business.

Don’t put it off, put it on your to do list, and take the time to make sure your business, your income, and family are properly protected.

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Liran Hirschkorn

Liran Hirschkorn

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