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What is Business Life Insurance?

It’s life insurance to protect your business.

If you’re a business owner and want to insure your life, a business life insurance policy can help you accomplish your goal.

Many business owners purchase life insurance policies to provide money needed for several reasons, including keeping their business in the family and continuing it’s ongoing operation.

Common Reasons to Buy Business Life Insurance


Key Man Life Insurance for Business Owners

With many small businesses the key man or key employee in the business is the business owner. Key man life insurance coverage can be purchased on the life of the business owner to protect the company in the event that the owner unexpectedly dies. With key man insurance, the business owns the life insurance policy and pays the premiums and is also the beneficiary upon the owner’s death.

If the business owner dies, the business receives the proceeds from the life insurance policy and can use the funds to hire a capable replacement, pay off debts or simply use the funds to buy time until the businesses assets can be sold and the business can be closed. Key man insurance on the business owner can provide much needed financial stability if there is a sudden and unforeseen death.

Life Insurance as Loan Collateral

Loans are crucial to the expansion and growth of a small business. Whether your business is acquiring funds from a local bank, the SBA or a private lender, many of these institutions will require life insurance on the business owner(s) as security for the loan.

In most cases, inexpensive term life insurance policies that offer guaranteed level rates for the duration of the loan (usually up to 30 years) can be purchased to satisfy this loan requirement. When buying a life insurance policy to secure a business loan, the company pays the premiums, owns the life insurance policy and is the named beneficiary of the policy.

As soon as the key man policy is effective, a collateral assignment agreement can be signed by the business owner and the bank. The collateral assignment is a lien against the policy proceeds. In the event of the business owner’s death, the bank would have first rights to the proceeds from the life insurance policy in the amount of any outstanding loan balance due the bank. The business would then receive any remaining proceeds left after the loan is paid off.


Life Insurance to Fund Buy-Sell Agreement

A buy-sell agreement is a legally binding contract stating that at an owner or partner’s death, disability, retirement or otherwise separation from the company, the individual’s interest in the company must be sold back to the business or to the remaining owners at agreed upon terms.

These agreements are crucial for small and closely held companies, as in many cases, the death or disability of a business owner creates a significant financial burden on the business as well as the remaining partners. To limit this potential risk, most buy-sell agreements are funded with life insurance policies and or disability insurance policies.

Depending on the type of buy-sell agreement, the business itself or the individual partner(s) acquires a life insurance policy on each owner/partner so that at death or disability the funds needed to "buy out" the individual’s ownership interest are readily available from the proceeds of the life insurance policy.


Estate Planning Life Insurance for Business Owners

In many cases, the large portion of a business owner’s estate is tied up in the value of the business. Without an effective estate plan, including a business succession plan, the business may have to close or be liquidated to pay estate taxes.

With the proper use of life insurance coverage, a business owner can provide the funds needed to pay any estate taxes due at the death of the business owner.

For example, an irrevocable life insurance trust (ILIT) can be established for the purposes of owning a life insurance policy on the life of the business owner (or business owners if married).

The trustee of the trust is usually the intended beneficiary. At the owner’s death, the proceeds from the life insurance policy are payable to the trust which can then, at the direction of the trustee, be used to pay any applicable estate taxes due.


Business Life Insurance Quotes


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Business Life Insurance Quote

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