A guide to buying life insurance for small business owners
My firm, Lasting Wealth Principles, does not sell any insurance products, but I still believe that life insurance is a particularly important wealth protection tool, especially for small business owners. Deciding on the type and amount of life insurance to purchase depends on an individual’s specific financial situation and goals. As I go through the insurance planning part of my financial planning process with small business owner clients, I provide guidance to them throughout the life insurance buying process. Splitting up an estate equally, business continuity, and buy-sell agreement are all reasons why small business owners should obtain life insurance, so it is important to understand how the buying process works. Life insurance is a wealth protection tool that pays a predetermined amount (i.e., death benefit) to an individual’s stated beneficiaries in the event of death. Life insurance is a contract between an individual and an insurance company. An individual agrees to pay regular premiums, and in return, an insurance company agrees to pay a death benefit when applicable.
Types of life insurance: Term vs. Permanent
Term life Insurance
Term life insurance provides coverage for a term period, which is generally 10, 20, or 30 years. If an individual dies during this term period, then their beneficiaries would receive a death benefit. However, if an individual outlives the term period, then the policy would expire with no payout. The primary advantage of term life insurance is it is more affordable than permanent life insurance. Paying less for life insurance can free up cash flow for small business owners to address investments in their business and other financial planning goals. The primary drawback of term life insurance is that it has no cash value and coverage will end at the end of the term period. Note that most term life insurance policies allow an individual to convert their term life insurance to permanent life insurance during a specified window of time.
Permanent life insurance
Permanent life insurance remains in-force if premiums are paid, and an individual is alive. A portion of premiums paid goes to establish cash value, which can grow over time and be accessed while an individual is alive. The primary advantage of permanent life insurance is its cash value accumulation and lifelong coverage, which could provide small business owners an asset that provides long-term protection. The primary drawback of permanent life insurance is it is considerably more expensive than term life insurance. Paying more for life insurance can potentially have a negative impact on cash flow for small business owners, which could limit the flexibility to use cash flow for other growth opportunities.
Shopping for life insurance
Research insurance companies
The key is to find a reputable insurance company that has financial stability. AM Best can be a valuable resource as it rates the financial strength and creditworthiness of insurance companies and their products. JD Power is another resource that can be used to provide insight into life insurance companies.
Get multiple quotes
Getting quotes from multiple insurance companies allows an individual to compare premiums, coverage options, and terms. This can provide more of an understanding of the life insurance marketplace and what is considered a reasonable amount to pay for premiums.
Understand policy terms
It is important to review specific policy details such as premiums (are they affordable?), type of coverage (how long does policy last?), and riders (are there additional options that can enhance coverage?).
Consult with professionals
Before my small business owner client talk with an insurance agent, I provide them a recommendation on the type of and how much life insurance they should purchase. Note that as a fee-only, financial planner, I do not receive commissions from any insurance company (i.e., I do not get compensation on the sale of life insurance), which makes my advice and recommendations to clients objective and unbiased. My goal is for my small business owner clients to obtain life insurance that best aligns with their overall financial planning goals and strategies.
Application process
Application form
Completing a form that provides personal and business information to an insurance company.
Underwriting
An insurance company will review an individual’s application and medical history. Depending on an insurance company’s underwriting requirements, an individual might need to have a medical examination completed. The underwriting process determines if the insurance company will approve an individual’s application and if yes, then at what risk level and premium rates.
Policy Approval
If an individual is approved, then they can expect to receive a policy document that summarizes the details of their coverage and how much they are expected to pay in premiums.
Supporting my clients
The buying process can be inconvenient, but life insurance is such an important protection tool for small business owners, so I am here to support them throughout this process. Life insurance provides peace of mind to small business owners because they know that if something where to happen, then their family and business would both be taken care of financially.