Should Your Bank Be Your Beneficiary? When looking for life insurance to cover a business loan, many business owners ask if they should name their bank as the beneficiary of their life insurance….It seems like it would make sense, right? Making the bank your beneficiary may be a huge mistake! As a business owner, you […]
The decisions you make today will impact your business for many years to come. The good news is that there are easy steps to take to help your business.
Business Life Insurance Overview
Business life insurance protects your business from the unexpected. From basic protection to deferred compensation, business life will help you with:
- Collateral for Loans
- Key Person Life Insurance
- Buy-Sell Agreement Life Insurance
- Deferred Compensation
What type of Insurance Does Your Business Need?
Our simplified process will help you navigate the choices available. You may have questions such as:
- Is key person life insurance necessary?
- What happens if my buy-sell agreement is not funded?
- How much will this cost?
- Can my business afford this?
- What happens if I change my mind in the future?
We’ll help you answer these questions and more.
Life Insurance Type by Business Insurance Need
Traditionally, there were many career agent companies that pushed permanent cash value life insurance as the only solution for business planning.
While that may be great in theory, many business owners do not want to commit that type of cash flow to life insurance when their business may need it.
Life Insurance Types Available for Business Planning
- Term Life Insurance
- Return of Premium Term Life Insurance
- Universal Life Insurance
- Index Universal Life Insurance
- Whole Life Insurance
It’s hard to beat term life insurance when it comes to business planning. It’s one of the easiest and cheapest ways to fund a buy-sell agreement, provide collateral for loans or to protect your key employees.
When considering term life insurance, look for policies with good conversion privileges as the term policy you have today may be used in the future for deferred compensation, executive bonus plans or to possibly sell in the future as a life settlement.
Term life insurance works for many business life insurance needs….in fact, the majority of situations may be addressed with term life insurance.
Something to keep in mind with term life insurance is that most policies are convertible to a permanent insurance policy without having to go through medical underwriting again….start off with a term policy and convert it later on as the business grows and needs change.
Collateral Assignment of Life Insurance
If you borrow money for business, most lenders will require a life insurance policy with a collateral assignment. Term life insurance is usually the best choice for bank loans as it allows you to get the coverage needed at the lowest possible price.
What is a collateral assignment?
A collateral assignment ensures that the lender gets what they are owed and nothing more.
Your life insurance policy gets “assigned” to the lender, protecting them in the event of your demise.
Collateral Assignment Example:
- Business Owner Loan = $500,000
- Lender Requires $500,000 of Life Insurance as collateral.
- Business owner takes out a life insurance policy and completes a collateral assignment.
In a typical scenario, the business owner pays down the loan over time. Imagine a scenario where the business owner dies a few years later when the outstanding loan was only $200,000.
With a collateral assignment, the bank receives their $200,000 and your beneficiary receives the rest.
Key Person Life Insurance
If you have employees vital to the operation of your business, key person life insurance protects your business from the unexpected loss of the employee.
Key person life insurance provides the business with money to carry on operations of the company and to recoup from the economic loss incurred from the death of the employee.
Think of an executive, top sales person or manager that is key to the continued success of your business.
A term life insurance policy works well for key person coverage, and some businesses may even want to consider a Return of Premium term policy where you get all the money back at the end of the term.
Buy Sell Agreement Life Insurance
If you have other owners in the business, you need a buy sell agreement funded with life insurance.
A buy-sell uses life insurance to buy out the deceased owner’s interest in the business.
A legal agreement drafted by your lawyer, the buy sell describes the terms of the agreement including the value of the business, and the price that the surviving owner will pay.
The life insurance proceeds are used to pay off the deceased owners interest in the company.
While any type of life insurance policy may be used, a term life policy works for many. Just make sure you get a policy with great conversion features as business owners may become uninsurable in future years due to health problems.
Cash value life insurance is used by businesses to attract and retain valuable employees by providing them with a future cash benefit that may be used in retirement for supplemental income.
Executive bonus plans are easy to setup, allowing the owner to provide this additional benefit to the employee, while providing the employee with benefits that may be used in future years.
Permanent insurance such as universal life, index universal life and whole life insurance policies work for deferred compensation plans.
Just keep in mind that deferred compensation requires a sustained commitment to paying premiums. A term policy with good conversion may be used in basic initial planning and then converted in future years when ready to commit to a deferred comp plan.
The Business Insurance Planning Process
What are you looking to accomplish as the business owner?
Basic key person, buy-sell, collateral assignments are simple and easy to take care of, while deferred compensation will require a more in depth process.
Whether you’re a startup looking for some basic help or have an established business looking to address longer term planning, we’ll show you how to get there.
We’ll ask you questions, and help you develop a plan of attack. We’ll show you how to approach those key employees
Life Insurance for Business Loans Your bank has agreed to lend you money for your business. You soon receive the requirements that need to be satisfied in order to close on your loan, and sure enough having a life insurance policy in place as collateral is a requirement. While obtaining life insurance for a business […]