5 Reasons Why Business Owners Need Life Insurance

Many small and medium-sized business owners are surprised when they discover how beneficial a business life insurance policy can be. Aside from helping businesses earn tax advantages, support their employees, and break free from traditional bank loans, life insurance policies offer a number of unheard-of and useful benefits. 

Keep reading to discover five reasons why business owners need life insurance. 

Reason #1 – Allows Business Owners to Attract High-Quality Employees

Insurance companies issue policies because they recognize that the policyholder will incur a financial loss when the insured passes away. This is referred to in the insurance industry as “insurable interest.” Simply put, an insurance company will issue a policy as long as the policyholder can demonstrate that they have “insurable interest” over the insured.

Therefore, it’s not uncommon for insurance companies to allow business owners to take out an insurance policy on their employees since the business would incur a financial loss should the employee pass away. 

How does this benefit business owners?

Well, in short, business owners can use life insurance as an employee recruitment tool. Instead of paying into a potentially risky 401k plan, business owners have the choice to open life insurance policies for their staff members. The benefits of which are listed below: 

• Potential tax benefits awarded to the business owner for paying the insurance premium.
• Business owners can increase their cash flow by utilizing the policy’s cash value. 
• The business itself can be the designated beneficiary rather than the employee’s estate. 

Plus, there’s no need to worry if an insured employee decides to leave the company. The policy can be transferred with ease to the employee who wishes to move on. It’s then the employee’s responsibility to reassign the beneficiary and continue paying any additional premiums. 

The only downside is that the employee (after quitting) would potentially retain the cash value accumulated in the policy. 

Reason #2 – Protects Against Losing Key Employees and Business Partners

Key employees and business partners are responsible for generating a substantial amount of revenue for a business. As such, a successful business should take steps to ensure that any financial damage resulting from the loss of an employee is minimal. 

One way to guarantee this is to fund a “Key Person” life insurance policy. Key benefits of this policy are listed below: 

• Business owners can leverage the policy’s cash value to protect against future liabilities and expenses. 
• The death benefit offers capital that, used correctly, can off-set the cost of recruiting new employees after the insured employee leaves. 

Reason #3 – An Ideal Place for Business Capital

As mentioned above, life insurance policies (whole life in particular) earn cash value that the policy’s contractual owner has rights to. This is a result of interest, and since life insurance companies are required to distribute dividends to policyholders based on profits earned during the fiscal year. As such, whole life insurance policies can be used as an ideal place to store capital. 

Business owners can take out a “policy loan” equal to the cash value held within the policy. This is beneficial for the following reasons:

• Business loans can be used to cover unforeseen costs and expenses. 
• Owners can take out multiple loans each year.
• Business owners can avoid the high-interest rates that typical bank loans would enforce.
• The repayment schedule is decided by the policyholder.
• Capital is funneled back to the insurance company.

Reason #4 – Life Insurance Offers Unique Tax Benefits

Another reason that business owners need life insurance is that it presents a place to accumulate wealth tax-free. Whole life insurance offers several tax benefits that extend to the cash value growth and the death benefit amount after the insured has died. 

Even freelancers, contractors, and other self-employed individuals can benefit from whole life insurance. Listed below are the tax benefits business owners can expect to gain from whole life insurance:

• Tax-free retirement income.
• Tax-free policy loans.
• Tax-free use of cash value growth.
• Policies earn dividends and interest .tax-free
• The policy’s death benefit also has tax *advantages.

*Proceeds from an insured individual’s death benefit are considered inheritance by the IRS, not income. As such, the death benefit is exempt from income tax. It’s worth noting that there are still estate-planning strategies to be aware of that ensure any proceeds from the death benefit are not calculated into the estate’s income tax. 

Reason #5 – Provides a Business Succession Plan

A “buy-sell agreement” is an insurance policy that provides a business exit strategy. These days, businesses tend to fail for many reasons, but one particular reason is that companies have yet to agree and implement a succession plan. 

A succession plan is a necessary tool that designates what needs to occur should a business partner pass away or leave the business due to medical reasons or retirement. When this happens, often there aren’t finances available to continue funding the company, causing other partners to purchase the former partner’s portion of the company out of pocket. 

This can be avoided with a “buy-sell agreement,” during which a whole life insurance policy is taken out for each owner. When one partner dies, the surviving partner (the policyholder) will use the death benefit to fund purchasing the deceased partner’s portion of the business. 

Even in the event that one business owner needs to leave due to illness or disability, whole life insurance can help. When this happens, the life insurance policy contract is assigned to the remaining business partner(s), giving them complete access to cash value that increases business cash flow. The business will receive the death benefit when the departing owner passes away, regardless of how many years have passed since they retired or left the company. 

David Duford owns Buy Life Insurance For Burial, a virtual insurance agency helping seniors source quality final expense life insurance coverage. He is the author of 3 best-selling insurance sales and marketing books, including “The Official Guide To Selling Insurance For New Agents, “The Official Guide To Selling Final Expense Insurance,” and “Interviews With Top Producing Insurance Agents.” David is also a YouTube Influencer in insurance sales with more than 17,000 subscribers and more than 1.7 million total views.