What is business life insurance used for? This post explains how business life insurance can be valuable to your financial planning.
To run a successful business, you’ll need the right personnel. Besides the founders, you’ll need to hire and train other individuals as part of a formidable team that’ll drive your business to greater success. At some point, you’ll have to contend with the question of what will happen if you lose an individual you have invested so much in. How would you cover the losses your business will likely suffer in their absence? This article highlights the importance of business life insurance and its application in financial planning.
What is business life insurance?
Business life insurance is a life insurance cover that businesses take on the lives of its team members. The business may pay all or part of the premiums, and retains the master contract. Different versions of business life insurance exist, such as shareholder protection insurance, key person insurance, and even self-employed income protection insurance. Business life insurance benefits both the business and the team member’s dependents. Let us look at some of its uses.
What is business life insurance used for?
Enhanced protection for top talent and executives
The executive team members usually take large salaries and demand larger death benefits than what typical group benefits offer. Business life insurance offers a more suitable cover at that level, thus satisfying their specific needs. This also applies to top talent, where your business can comfortably attract and retain the best in the industry with lucrative offers.
Since succession planning has value in terms of the premiums paid and the value of the cover, a business owner can borrow against that sum. Financial institutions are open to extending credit facilities on the value of such policies, thus enabling business owners to access cash in emergencies, for expansion purposes, and for other needs.
The question of what happens when a key member of your organisation passes on is answered through business life insurance. The proceeds from the cover will become available to the business, to be used to purchase the deceased’s shares in the company from the dependents. This way, the business will continue operating smoothly while the dependents access much-needed cash. Business life insurance saves all parties from incurring that hefty share purchase cost or the expected conflicts.
Balance of benefits
In family-owned and operated businesses, some members are actively involved in running the business, and others are not so actively involved. When sharing the business among family members, those who dedicate their lives to it may feel aggrieved with equal sharing. To prevent such an eventuality, the patriarch or matriarch can purchase business life insurance and share its proceeds among those who aren’t so actively involved, leaving the business to those who are passionate about it. This way, no one has a reason to complain, and everyone does what they are best at.
Key person cover
This is a critical use of business life insurance. Most businesses cease to exist when the founder dies. To prevent such an eventuality, business life insurance on the founder’s life ensures there is enough money to settle the company books and find a suitable replacement to keep the business running. Alternatively, the proceeds from the cover can settle all company debts, pay all employees, and ensure the business shuts down correctly.
Types of business life insurance
After looking at the importance of business life insurance, here are some you need to consider for your business:
Key person insurance
The sum assured for this cover is based on the value of the key person to the business. For example, the founder, lead designer, top salesperson, executive board member, or others contribute a certain percentage to the business’ success. Therefore, the company will suffer proportionately from their contribution in their absence. Key person insurance protects the business from such a loss and helps it find a suitable replacement.
Relevant life insurance
For small businesses, there is a need to protect your team’s dependents. This policy pays the dependents in case of death or terminal illness of a team member. In addition, the policy can include factors you deem necessary to attract and retain top talent.
Business protection insurance
This is used to shield the business from debt. Since cash flow may not handle a sudden request for loan payment, business protection insurance can cover those expenses, thus protecting business operations.
In a partnership business, you must consider what would happen after a partner dies. Their dependents may wish to step in and change things in the business, or they may ask for a lump sum in exchange for their inherited shares. This policy provides the other partners with enough cash to settle such a request and to keep the business running.
Business life insurance is a critical consideration for any business, as it benefits the business and a team member’s dependents. Reach out to us and let us help you purchase the right cover for your business.