Rethinking Life Insurance for the self employed
If you are a sole proprietor or operate in another legal format (partnership, LLC, Inc. etc), obtaining life insurance means you have to buy it yourself.
You don't have the luxury of having group life insurance.
It's important to have business life insurance for many MANY reasons, but here are 3
1. Collateral for bank loans
If you have any kind of business loan, the bank might require you have life insurance (naming them as beneficiary) in case you die before the loan is paid back.
But apart from a requirement from the bank, if you have a permanent life insurance policy that has cash value inside (equity value), you can use the cash as an asset to show the bank you have money to repay the loan.
This is different than collateral if you die. Showing the bank you have money in a life insurance policy gives the bank peace of mind that you won't default on the loan if your business is suffering due to economic hardship.
So in other words, it could help you get approved for the bank loan or even negotiate a better interest rate.
2. Buy-Sell agreement
If you do have a business partner, having life insurance is even more important. Especially if you also are married.
Having a Buy-Sell agreement drafted is the first step. But is it funded? Or a better question, is it FULLY funded?
>>>If it is under-funded, get a quote to reduce exposure
In some types of businesses, upon the death of a partner, the spouse is legally entitled to the deceased partners share of the business.
Do you really want to be in business with your business partners' spouse?
Maybe you do...But wouldn't it make more sense to have the option of buying out his or her share? Life Insurance provides instant liquidity upon death. So you'll have the resources to buy-out the shares of your deceased partners' spouse.
3. Employee benefits
If you have a small business and have even a few employees, chances are they want some type of employee benefit. And even if they don't, it can act as a great recruiting tool to attract and retain quality employees.
You can also decide if you want to pay the benefit for them or just have them pay it through payroll deduction. It's still an employee benefit even if they pay for it.
They can choose to take the policy with them when they leave. And if the cost is shifted to the employee, it won't cost you a cent to offer this employee benefit.
Key Person Life Insurance
With any business, there are a million moving parts to keep the doors open and running smoothly. There are external factors and internal factors to consider when analyzing how profitable a business is and will be.
Employees and other stakeholders who are vital and "key" to the success of the organization often times are the firm's biggest asset, and sometimes even biggest liability.
These individuals will typically have a very significant impact on the revenue of the company, whether directly or indirectly. They might be a sales rep or executive who has strong relationships with customers. Sometimes, these relationships are so strong that the customer is only buying because of the recommendation made by the key person.
So if that key person ceases to represent your firm, you could be at risk of losing that customer.
Unfortunately, sometimes a key person will unexpectedly pass away, leaving your business at unintended risk. These key employees are usually not easily replaced. Perhaps due to the relationships or maybe their skillset.
Buying and owning a life insurance policy on the employee is sometimes referred to as "key man insurance" or "key person insurance." In the event this individual dies, your business will have instant liquidity so you can have the resources to recruit, hire, and train the right person, not just any person.
Finding the right person can take a while and can be extremely costly. It can potentially be costly for several reasons. One reason is because the salary requirement to attract a new person away from their existing employer might be hefty. Remember, ideally you're going to want to hire someone who can bring in the same or greater revenue as the previous employee. Which will at the very least, take time.
Time is valuable. Time is money. The longer your firm goes without the revenue from your deceased employee's relationships, the more your company might suffer.
So a key man or key person life insurance policy will provide funds for potentially lost revenue.
The cost of these policies are so miniscule compared to the risk of lost revenue due to a lost key person. We're here to help figure out the type of policy and amount that is best suited for your firm's specific needs.
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