You know your business better than anyone. Do you know how you can use a life insurance policy to protect or grow your business? Many business owners know life insurance can protect families if a primary earner dies, but it can also help protect your business if a key employee dies.
Key person insurance may make sense in many circumstances:
- If the business’ reputation and financial viability are critically linked to the key employee’s name, reputation or unique skills, and the key employee’s death could end the business.
- The death of a key employee like a top salesperson could quickly threaten the company financially.
- If a financial institution or other creditor needs collateral for a business loan and requires the option of putting a lien on a key person policy.
- If the business is a partnership and each partner wants to be able to buy out the other’s shares in case of an untimely death.
According to the IRS, premiums for a life insurance policy aren’t a deductible business’ expense on federal income taxes. There is no set formula for deciding the monetary value of your key person insurance. You may want to start by considering the financial effects a key employee’s death would have on your company.
For instance, if you are a sole proprietor buying key person insurance on yourself. You may want enough coverage to help your heirs close your business and pay off any company debts. If you own a larger company and are insuring a key employee, you may need enough coverage to replace that person’s sales income. It could also provide a financial cushion while you search for the employee’s replacement.
Many business owners use life insurance as an excellent benefit to offer valuable employees. Life insurance can be used to recruit, retain, and reward valuable employees crucial to the success of your business. Since it is not a qualified benefit, you can determine who is eligible without having to offer to all employees.
Permanent Life Insurance
Permanent life insurance policies allow you to build cash value within your policy as you pay premiums. This cash value can serve as a rainy day fund in lean times for your business because you can take out loans from the life insurance policy against that cash value.There are less credit score worries for your business to qualify for a loan, because the life insurance company will use your cash value as collateral. The loan will likely have a significantly lower interest rate than what you can secure from a bank.
One way a business owner can utilize life insurance is to help secure a business loan. Certain banks and lenders may allow you to list life insurance as an asset when being considered for a loan. Other lenders may allow a collateral assignment, where a business owner with a life insurance policy collaterally assigns the policy to the bank/lender.
If you die, the bank receives their portion of the death benefit based on your loan collateral agreement, covering some, or potentially all, of your loan amount. This can reduce your risk as a borrower and play a role in securing a potentially lower loan interest rate. If you need any of these or have any questions contact me. Share this post below if you enjoyed it.