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How to Leverage Life Insurance for Business

Updated: Jul 27, 2023

Life insurance, traditionally regarded as a personal financial tool, has increasingly become a versatile instrument for businesses to address various complex issues. From key person protection to funding buy-sell agreements, life insurance policies are no longer just about leaving a lump sum to your loved ones. This article will delve into some of the unique situations where life insurance can be an invaluable asset to businesses.

Life Insurance for Business

Key Person Insurance

Key person insurance is also known as key man insurance. Is there a difference between key man, key woman and key person insurance? No, all of this terminology is used interchangeably but they mean the same thing. We opt to use key person insurance as it is the most inclusive terminology.

This policy is taken out by a business on the life of an essential employee, such as an executive or a highly-skilled specialist, whose death would have a significant impact on the company's financial health. The company pays the premiums and is the beneficiary of the policy.

Key Person Life Insurance
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This type of insurance provides a safety net for businesses by compensating for the lost revenue, added expenses of recruiting and training a replacement, and any potential negative impacts on creditworthiness. For instance, a chic restaurant start-up might rely heavily on the expertise of an Executive Chef. If that person suddenly passes away, the death benefit from the key person policy can help the company to navigate the tumultuous period of finding a replacement and maintaining operations.

Funding Buy-Sell Agreements

In a way, a business partnership can be compared to a marriage. It may help to think of a buy/sell agreement as a sort of “prenup” between business partners. The buy/sell agreement is a contingency plan that outlines the conditions under which a partner’s interest in the business will be bought out by the other partner(s), or the business itself.

A buy-sell agreement is a legally binding contract between co-owners of a business that outlines the terms under which an owner’s interest can be bought by the other owners if the former dies or becomes incapacitated. Funding this agreement with life insurance ensures that the surviving owners have the necessary funds to purchase the deceased owner’s share of the business.

This is especially beneficial for small to medium-sized businesses, where the sudden loss of an owner can lead to significant financial strains. For instance, three partners in a medical practice can each take out policies on one another. If one partner passes away, the death benefit proceeds can be used by the surviving partners to buy out the deceased partner's share.

Executive Bonus Plans

Businesses often use executive bonus plans as a way to attract and retain top talent. Life insurance can be utilized as a funding mechanism for these bonus plans. In this arrangement, the company pays the premiums on a life insurance policy owned by the executive.

Executive Bonus Plans
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Selecting a plan focus is a very personal choice so, it is important to include the key employee in the decision process and allow him/her to determine which plan works best. More options translate into more value for the key employee with the goal of increasing employee retention. Not only does this provide the executive with valuable life insurance protection, but the policy’s cash value can also be accessed tax-free through loans and withdrawals, providing a supplemental retirement income. For example, a corporation could use a life insurance policy as part of the compensation package for its CEO. The executive would be the policy owner and could use the cash value accumulation for retirement or other financial goals.

Business Interruption Insurance

Business interruption insurance will help to pay for your loss of business income should you suffer a covered loss at your business location. If you suffer a loss and extensive repairs require you to close your business temporarily, you’ll lose out on crucial business income. Replacing business income lost because of theft, fire, vandalism or other specific events, this type of insurance could help your business cover:

  1. operating expenses if you had to move to a temporary location

  2. earnings and profits

  3. rental income

  4. loan payments

Ongoing business expenses can pile up like quicksand. Business interruption insurance can help you stay out of the quicksand. For example, a tornator whipped through your neighbourhood. The damage to your retail store will take weeks to repair. Your insurance will support the repairs, renovations, and lost revenues.

Collateral Assignment

Life insurance can also be used as collateral for business loans. Through a collateral assignment, the cash value and death benefit of a life insurance policy are assigned as collateral for a loan. If the borrower defaults, the lender can recoup its losses using the policy benefits. This can be particularly helpful for businesses that might not have enough physical assets to secure traditional loans.

For instance, an entrepreneur looking to expand his restaurant chain could use a life insurance policy as collateral to secure the necessary funding from a lender.

Funding Employee Benefits

Next to salary, having a good employee benefits plan is one of best ways to attract and retain employees. Especially in sectors where there are labour shortages, a benefits plan might not even be a choice. If you’re not providing one, you’re putting yourself at a disadvantage to your competitors.

Employee Benefits
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Companies can use life insurance policies to fund employee benefits, such as retirement plans and death benefits. By taking out policies on the lives of its employees, a business can use the cash value accumulation as a source of funding for these benefits.

Whatever benefit plan you choose. Don’t hesitate to be creative. This is your chance to create a unique company culture and reward your employees for their hard work. One way to indirectly reduce company's benefit costs is by offering a wellness program.

Your wellness program can help reduce employee stress, support to stop smoking, mental health counselling, fitness programs, flu shots and preventive health checks. Another option is to offer free and low-cost benefits. These include:

  1. more flexible working hours,

  2. working from home,

  3. social activities; and

  4. employee recognition programs.

Whatever benefit plan you choose. Don’t hesitate to be creative. This is your chance to create a unique company culture and reward your employees for their hard work. For example, In a competitive job market, a group benefits plan is a great way to separate yourself from the competition. A company may establish RRSPs for its employees and use the cash value of life insurance policies as a source of funding for matching contributions. You can use the cash value as an investment-like savings account and build a nest egg.

Estate Equalization in Family Businesses

Life insurance can play an essential role in estate planning for family businesses. In situations where one heir is actively involved in the business while others are not, life insurance can be used to provide an inheritance of equal value to the non-involved heirs. This prevents the need to liquidate business assets to distribute the estate equally among the heirs.

Estate Equalization
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For example, if a family owns a vineyard and only one of three children is involved in its operation, a life insurance policy can be taken out to provide the other two children with an inheritance equal to the value of the business share they would have inherited.

Explore The Benefits of Life Insurance for your Business!

Life insurance is an invaluable tool for businesses, providing financial security and flexibility in an array of specific situations. Whether it's protecting against the loss of key personnel, ensuring smooth transitions of ownership, attracting top talent, or supporting estate planning, life insurance policies can be tailored to meet the unique needs of any business. By understanding and leveraging these strategies, businesses can not only safeguard their operations but also promote stability and growth for the future.

For more information on the benefits of life insurance for your business, book your FREE strategy consult with Vellencia today.


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