How to use life insurance to protect your small business

By Matthew Chiang

Advisor,  CAPCORP Financial


For a small business, the passing of an owner or key employee can threaten the organization’s very existence. Life insurance can help small businesses guard against the impact of unexpected tragedies, through mechanisms such as Split Dollar Arrangements, Key Person Insurance, Funding Capital Gains Tax on a Business at Death, Business Loan Protection and Buy-Sell Funding.

What is term insurance? What should I cover? What kind of insurance does my company need? Small business owners often wonder how life insurance can help keep their company afloat in the event of a sudden passing. Here’s what you need to know.

How does life insurance protect your small business?

Life insurance keeps the doors open and the lights on during the time it takes to bring in new leadership.

A small business owner with a life insurance policy ensures that her co-owners have the option of carrying on the business if she dies. The co-owners can, for example, use a buy-sell agreement. A buy-sell agreement spells out the terms of ownership in the event that one or more owners sell, retire, die or otherwise leave the business. This agreement gives the other owners the financial flexibility to buy the company. Otherwise, without the necessary capital, the business could collapse.

The amount of life insurance coverage carried by each owner should be regularly reassessed and readjusted according to the value of the business itself.

The business owner is often a key figure in the organization – the company can’t afford to lose them without bringing in a capable replacement. For the employees, the co-owners and the business itself, it is imperative to have the flexibility granted by a life insurance policy if the company hopes to continue delivering paychecks and making sales.

What is the difference between term insurance and permanent insurance?

Term insurance is for a dollar amount and number of years decided by the purchaser. It is low-cost, but doesn’t appreciate in value. Many businesses prefer term insurance when looking to replace a deceased owner or key employee, or when the company needs an infusion of cash until it can pay off a building mortgage.

The insurance pay-out is triggered by the passing of the insured. Unlike permanent insurance, insured persons don’t receive benefits if they cancel it. However, the insurer decides the amount and timing of term insurance payments.

Permanent insurance covers the remaining lifespan of the insurer. Unlike term insurance, permanent insurance acts as an investment, with savings growing over time, giving the insurer or business the option of borrowing against the cash value of the policy.

The key to permanent insurance is buying early. Purchased early in the lifespan of the business, permanent insurance premiums stay low over time. As long as the monthly premiums are kept current, the full coverage amount is paid out upon death.

Whole life, variable life, variable universal life and universal life insurance are all included within permanent insurance, offering maximum flexibility of coverage.

Whom should I insure?

In order to determine which owner(s) and/or key employees to ensure, you need to answer a few important questions.

  1. What is the dollar amount it would take to replace this person?

Each employee brings different skills and benefits to the company, but you may be able to quantify what it would take to replace key people.

  1. How indispensable is this person?

If a key employee is the only person in the office who knows how to talk to clients or operate a crucial piece of machinery, then you need to know how much money it would take to either re-hire or re-train to fill that skill gap.

  1. What would be the impact on customers, clients and other business collaborators?

Perception of your business is important. If clients and contractors see that an owner has passed away and the business does not have financial coverage they may panic and go elsewhere. If enough customers react this way the business will collapse.

Answer these questions and then fortify your company with enough insurance to cover the cost of indispensible employees or business owners and to protect the company’s assets.

How do I get the ball rolling?

Start by talking to an insurance advisor. They can help you figure out the type and amount of insurance you’ll need for each key employee or owner in order to safeguard your company. If your business has outstanding loans or mortgages then consult with your banker as well – you will need to have enough insurance to pay off any loans in the event of a claim.

The passing of an owner makes for turbulent times for an unprepared business. CAPCORP Financial and our team of trusted professionals, can help you develop a strategy to maintain company growth in the face of tragic loss.

Contact us:

CAPCORP Financial

1050 Morrison Dr. Ottawa, Ontario.

613-226-1964

mchiang@capcorp.ca

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