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The Ultimate Guide to Life Insurance​

Commonly Asked Questions

As a business owner, you understand that buying commercial insurance is an essential part of your operational expenses. But with so many different types of commercial life insurance to choose from, it can be a challenge to know exactly what life insurance you need to buy. Whether you are looking to buy an individual life insurance policy on yourself as the owner of the business, or you want to purchase a group life insurance policy for your employees, this guide will contain all the information you need.

Quick References

Commercial Life Insurance Vs. Personal Life Insurance

Not all life insurance is created equally. Each individual life insurance policy is tailored to cover specific elements of a person’s life. There are so many different types of life insurance policies to choose from, and for both an individual, or a business owner, knowing which type of life insurance policy is best isn’t always a straightforward decision. To help you choose the right type of life insurance for your individual needs, this section about personal Vs. commercial life insurance will enable you to understand the key differences and benefits of each.

What is Commercial Life Insurance?

Commercial life insurance policies relate to core business holdings. There are many different types of business life insurance policies, each of which come with their own benefits and rules. One of the most popular types of life insurance policies is known as individual life coverage. This will necessarily pay the family of the subscriber enough money to prevent a forced sale of the company assets in order to satisfy any liens on personal property. The vast majority of small business owners will put up their family home as collateral. Other notable commercial life insurance policies include key person insurance and buy-sell agreements, all of which we will cover in more detail in this commercial life insurance guide.

What is Personal Life Insurance?

A personal life insurance policy will provide an income source to any of your dependents if you die. A beneficiary could be a child, spouse or another blood relative who is financially dependent on the policyholder. There are different levels of coverage to choose from. A whole life insurance policy will build up a cash value and a term life insurance policy will require the policyholder to specify the length of coverage they need.

What is business life insurance used for?

Buying commercial life insurance can help to support your company financially should something happen to you, your partner/s, or key persons in your team. There are many different types of life insurance that can all form part of a business life insurance package.

How do you know if you need to buy commercial life insurance?

Generally speaking, if there are people who count on you, then you need to buy business life insurance. Personal life insurance will protect your family financially should you pass, and a commercial life insurance policy will ensure your business can continue.

What types of life insurance are available for business owners?

There are two core types of life insurance policies you will need to choose from; permanent and term.

Permanent Life Insurance Explained

A permanent life insurance policy can prove to be both an investment as well as an insurance policy. A portion of your premiums will pay for the investment element of your policy, and the other part is for your actual insurance. This is quite different from term insurance which is simply an insurance-only offering. Once you are done with paying for your term insurance premiums and the term is complete, there is nothing for you to get back in return. A permanent life insurance policy will also have an investment element, and should the policy fall into lapsed status, and you will still benefit from having your investment account.

A permanent life insurance policy will cost more money than term insurance. However, as long as you keep up the policy payments, it will be in place for your entire lifetime. Depending on the type of permanent insurance policy you choose, there are different investment options available for your cash value. If needed, you can also borrow money against the investment portion of your policy; it is also possible to utilize the money that is in the investment account to pay your policy premiums.

In the event of your death, any beneficiaries of the policy will receive both the investment element of the account and the death benefit.

One of the ways a permanent insurance policy could be used in a business partnership could be to help the surviving partner to buy out the portion of the business that was owned by the partner who is deceased. However, this option is more expensive than buying a term life insurance policy.

Term Life Insurance Explained

A term life insurance policy is relatively simple to understand. You select how much money your beneficiaries will be paid when you die, also known as a death benefit; then, you choose how long you want the coverage to last for. For example, you may select a $400,000 policy for a 25-year term.

If you are considering covering the cost of a mortgage or college, then a term life insurance policy is usually a good choice. It is also a suitable option for company owners who have partners who may choose to retire on a specific date in the future.

For instance, if two partners make an agreement that if either one was to pass away before their retirement date, the surviving partner would purchase the half of the business which was owned by the deceased. Each would buy a term life insurance policy and make the other partner the sole beneficiary. So, if one was to die, the other would receive a payout that they could use to buy the other half of the company.

One of the negative elements of buying a term life insurance policy is that it will only remain in effect for a pre-determined term. As a person ages, the cost of purchasing life insurance increases.

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How to Choose Between Term and Permanent Life Insurance?

As the owner of a business, your family are not the only ones who depend on you. In death, this wouldn’t just have a grave impact on your loved ones, but it could also spell disaster for your business partner/s, and your staff too. Aside from this, it could ruin the business you have spent your lifetime building. You buy insurance for your car, your home, and most other assets you hold; for any business, its most valued assets are its people, and that includes the business owner too.

There are a number of key considerations you need to take into account when choosing whether a term or permanent life insurance policy is best.

  1. Your Business

Business owners need to buy life insurance for a number of critical reasons, the most compelling of which are to protect the future of the organization and income replacement. For instance, if a business owner, partner or key person should suddenly die, a business can quickly deteriorate. However, with the right type of life insurance in place, any surviving business partner/s will have the financial support they need to ensure the continuity of the company.

A term insurance policy can work well in the event of a key person suddenly passing away. The term of the policy can be set to align with their expected date of retirement. A term life insurance policy could also be suitable if a business partner personally guarantees and loans or leases for the company. Life insurance is also used as a tool to buyout any shareholders or partners in a buy/sell agreement in the event of an unexpected death of a business owner.

  1. Your Family

Family is always a paramount consideration. Buying life insurance can help to protect your family’s lifestyle and safeguard them from any loss of income in the event of sudden death. For older individuals, life insurance can be used as a method of transferring a legacy or wealth to their younger generations.

Some individuals and business owners opt for both permanent and term life insurance in order to satisfy differing needs.

So, how do you determine which is best for your company?

With a whole life insurance policy, you can build equity over time, and you also have the option to borrow money against the cash value of this policy too. A term insurance policy will not give you anything back once the term is complete. Of course, a whole life or permanent policy is more expensive, but there is a return that isn’t offered with term life insurance.

Unlike other types of commercial insurance coverage, the amount of commercial life coverage you can buy varies greatly. Working with a commercial insurance agent is often the best way to decide what type of business life insurance you need to buy. They can help you navigate the calculations and establish the best type of policy for your individual and business needs.

Why Should you Buy Life Insurance for your Business?

There are four main reasons your business should buy commercial life insurance.

  1. To protect the company against extreme or inflated debts

It’s not uncommon for a company owner to personally sign for loans in order to fund the operations of the business. In the event of the owner’s death, should the business be unable to make the repayments, the private estate of the owner becomes responsible for these debts. Buying business life insurance can provide an element of debt protection for the company so that the family of the owner of the business is not liable for the repayments. In some cases, a lender may request that a company owner buy life insurance to ensure they are repaid in the event of the death of the business owner.

  1. Maintain the value of the business should the leadership change

For companies with more than a single business owner, many opt to have a buy-sell agreement. An agreement of this type is legally binding, customizable, and it sets-out a pre-agreed price in order for the deceased’s share of the company can be bought. It is not insurance, but it stipulates what should happen to the assets of a company in the event that one of the business owners passes away unexpectedly. Life insurance can be utilized as a funding vehicle for such an agreement.

  1. Protection of family and personal assets

Buying life insurance can help to protect the personal assets of the business owner. If the proprietor passes away, then the majority of the business value could also be lost, and because of this, selling or continuing the company could prove extremely difficult. This could put the assets of the family at risk.

  1. Cover key people

Specific individuals within a company can, over time, become so vital to the business that if they were to leave or pass away, it could result in a significant financial loss. If a company is reliant on a core individual, then buying key person insurance should be considered. This can help to safeguard the company and its owners in the event that a valuable employee leaves the business or passes away.

It can also offer certain benefits to the individual employee as well as the business. For instance, if you purchase a whole life insurance policy on a key employee, the cash value of that policy will build up over time, and you have the option to use that cash value in order to fund a deferred compensation plan.  

How to evaluate commercial life insurance providers

If you want to buy commercial life insurance, choosing the best provider is vital, and while the cost of your coverage is essential, it shouldn’t always be your primary determining factor.  Here are a number of things to consider when you’re obtaining business life insurance quotes.

  1. The relevance and customizability of their products for your business and employees.
  2. The financial stability and track record of the provider.
  3. The helpfulness and ease of communication with the company and/or their representative.

As you will have already discovered, there are many complexities of business life insurance, and often, having a conversation with an experienced commercial insurance agent can help you feel more confident with the choices you make.

Partnering with a commercial life insurance agent who can offer stability, experience, and flexibility, along with an affordable cost of coverage is the package you should aim for when looking for the best business life insurance company.

How Commercial Life Insurance Works

A commercial life insurance policy works in the same way that a personal life insurance policy works, except it is owned by the company instead of the individual. The ‘insured’ is typically the owner or partner of the business, and the business life insurance is being purchased to ensure a smooth transition for the company in the event of the owners' or partners' death.

We have already covered the differences between term and whole life insurance. However, there are some other aspects of commercial life insurance we need to cover.

Group Life Insurance

Many businesses choose to offer a group life insurance policy to their staff as part of an enticing compensation and benefits package. One of the most significant advantages of a group life insurance policy is that its members can get coverage at a reduced rate compared to buying life insurance on their own. In almost every case, a group insurance policy will be term life insurance, but in some cases, whole life insurance is offered instead. There are many different ways your business can structure commercial life insurance for its employees.

You could offer group life insurance as one element of your employee compensation and benefits package. If you decide to pay the full cost of the premiums, then your employees will be fully covered under your company group life insurance policy.

If you want your employees to pay for some or all of the insurance costs, then you will need to make the coverage optional. Some small businesses will choose to pay for a limited amount of coverage on a group health insurance policy, but the company employees are then given the option to raise the policy limits at their own expense.

If an employee leaves the business, most employers will give them the option of retaining their life insurance but paying for it directly instead. In most cases, the member can also modify the coverage and/or change it from a term life insurance policy to a whole life insurance policy.  When you buy a group life insurance plan, these matters can be easily set up with an insurance administrator.

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Accelerated Benefit Riders

Irrespective of the type of life insurance you buy, you can select accelerated riders that can be added onto your policy; these are designed to pay out all or part of the death benefit while you are living in the event you need nursing care, become disabled, or you are diagnosed with a critical illness, such as heart disease or cancer for instance. These are important to consider because you do not necessarily need to pass away in order to become unable to run a company.

Buy-Sell Agreements

Many company owners who buy commercial life insurance will do so to cover themselves by using a buy-sell agreement. For example, if four equal partners own a company, and they want protection for themselves and their families, they may each buy a life insurance policy on the other business partners. In the event that one of the partners was to die, the insurance would provide any of the remaining business partners with the money needed to buy out the shares of the deceased partner. This particular arrangement is referred to as a ‘cross-purchase buy-sell agreement’ because each business partner is taking out insurance on each of the other three partners.

If there are more than four partners in a firm, then this type of arrangement could be considered too complicated. As such, an entity purchase agreement would be the most suitable option. In this case, the company would purchase one policy for each partner.

When Should you Use a Buy-Sell Agreement?

There is a range of scenarios when business owners or partners should use a buy-sell agreement. Here are the most typical:

  1. If you co-found / co-own a business and you want to place certain restrictions on the other partner/s of the business that prevents them from selling their company shares to another entity or individual.
  2. If you want to set a price for your portion of the company in case the other, another partner wishes to get out of the business or there is a dispute.
  3. If you want a guarantee that the present company owners sell their shares back to the business in the event that they become incapacitated or die.
  4. If you want to ensure that all of the remaining business owners will buy out the shares belonging to a deceased partner for liquidity purposes.

While there is no rule that states you need to fund a buy-sell agreement using commercial life insurance, there are many company owners who decide to do this because it is the most economical option when compared with having to fund the expense by themselves.

Non-Qualified Plans

The other area where commercial life insurance is utilized is with non-qualified plans. Unlike qualified plans which are governed by ERISA regulations, these can be structured in a range of ways in order to achieve different objectives. There are four significant types of non-qualified plans.

Key Person Insurance

This type of insurance plan can provide additional incentives to key employees without the owner of the company needing to forgo any control of the business. It is taken out on employees whose departure could have significant financial implications for the company.

Deferred Compensation Plans

A deferred compensation plan is often termed as a form of ‘golden handcuffs’ and is usually viewed as an incentive for key individuals to remain with a business. In most cases, this is funded by a cash value life insurance policy, but in some cases, other incentives or shares of company stocks are also used.

Split-Dollar Life Insurance

This particular type of policy is where there is a mutual purchase of life insurance by an employee and an employer. The death benefit, cash value, and premiums are each split according to a pre-determined portion, such as 50/50 or 60/40.

Group Carve-Out Plans

This is an additional type of cash value savings plan that can be added to a group term life insurance policy for a chosen group of people in a company who are essentially ‘carved out’ from standard employees.

Executive Bonus Plans

As the name suggests, this type of plan is used to facilitate an additional bonus to key company executives. It is essentially a cash value life insurance policy, and in some instances, a business will be able to add an additional bonus in order to cover the taxation for the policy. In this industry, this is referred to as a double-bonus arrangement.

Most non-qualified plans are structured as ‘golden parachute’ plans, which will additionally provide compensation to key employees or the business owners. They present an attractive way to offer extra rewards to staff who are loyal to a business. Although the administration and set-up of a non-qualified plan can appear to be quite complex, they are usually funded with a cash value life insurance policy.

As with most commercial insurance matters, speaking with an experienced business insurance agent can really help you break things down in a way you can easily understand their offerings and the true cost of the coverage.

In Summary

Buying commercial life insurance can help you meet contractual obligations, it can give you peace of mind, and it can also serve as a great incentive vehicle for attracting and retaining employees as well. As you can appreciate, there is usually an element of customization needed for any business life insurance policy, and there are many additional elements you can select to give you a tailored commercial life insurance package that works for you, your business, and your employees.

Speaking with a business life insurance agent makes good sense when you consider all of the above. It can also help to simplify the way your policies are structured and give you the benefit of their guidance and expertise.

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