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Business Life Insurance
Life Insurance for business is an umbrella term. It is used to describe a collection of policies that protect a business when it is impacted by an unexpected loss. These policies safeguard all those involved in the business when something unexpected happens to endanger its continued success. This insurance covers the period when the company is not able to operate and bring in revenue. It allows the company to pay all its expenses while it is trying to restructure itself and look for a solution.
There are three essential business life insurance policies that offer protection when a business is facing a crisis:
1. Key person insurance.
2. Business partner insurance.
3. Business expense insurance.
Let us take a closer look at these three different types of policies to see how they work.
Key Person Insurance
A key person is somebody whose knowledge and expertise is essential for the success of the business. This person can be considered "indispensable." They cannot be easily replaced by another person.
A business owner will ensure a key person because they are able to create substantial amounts of revenue. Should anything happen to this person - trauma, permanent disability, or death - the business will experience a sudden loss in revenue. The insurance provides coverage to cope with the financial losses the business experiences when something happens to the key person.
For example, suppose the key person is a gifted presenter, perhaps a motivational self-help expert, who is responsible for selling the seminars and personal growth products that the company offers. This person has knowledge, experience, charisma, and the ability to win over an audience interested in the solution his company offers for their problems. If something were to happen to this person, the business would no longer have a way to bring in revenue. It would need time to find someone else to fill their role or to restructure itself. If the company had Key Person Insurance, it could afford to stay in business until it found a replacement. .
Business Partner Insurance
Referred to as Buy/Sell insurance in the insurance industry, Business Partner Insurance protects a business when something happens to a business partner. Like Key Person Insurance, this kind of insurance also provides a solution in the event of a trauma, permanent disability, or death to one of business partners.
This insurance allows the surviving business partner to get the necessary funding to buy out the other partner's share of the business from the deceased partners family. The legal agreement must detail a strict guideline of the arrangement. In addition to a business partner policy that will buy out the surviving spouse, it is important for people with high net worth to purchase an individual life insurance policy as well. The surving spouse gets taxed on the inheritance, depending on the size of their estate. The funds from the buy/sell insurance policy act as income replacement to the spouse since her spouse will no longer be there and bringing in money necessary to keep him/her in a life style they've grown accustomed to. If those funds are used to pay final expenses, debts, and taxes, there will not be much left over to provide income to the family. Life insurance for those with higher net worth become very important in these types of scenarios.
For example, suppose two accountants are in a business partnership. While the business is staying solvent, there is no extra cash in the event of an emergency. One of the partners has an unexpected heart attack and dies. The widow now inherits his share of the business, but she has no interest in accounting or in running a business. Rather than close down the business, the surviving partner would like to continue with it. But, since the business was not earning surplus revenue, but just enough to pay for the office, pay staff salaries, and keep the lights on, this business partner would be hard-pressed to come up with the necessary funds to buy out the widow's share of the business. However, if the surviving partner had Business Partner Insurance, the funds would be available to buy out the widow's share of the business. This type of insurance can be purchased as a term policy or a permanent policy. If term policy is purchased they usually opt for a 10 year or 20 year term life insurance policy. How ever long they believe that person will be employed at the company. A permanent policy, such as whole life, is purchased on some occasions. If a permanent policy is purchased they usually cease payment or make the employee take over payments on the policy at date of retirement or termination, but every company has it's own policy in terms of compensation.
Business Expenses Insurance
Every business has its level of overheads ranging from paying the lease for the premises to providing the staff with wages. In a small to medium business that is dependent on one particular person to bring in most of the revenue, these expenses will not be payable if an illness or accident were to happen to the main income earner. However, should the company have Business Expense Insurance, it would be able to pay overheads and take care of the day today expenses should something happen to the main income earner. This is different than a standard life insurance policy required if you have an sba loan still outstanding.
This type of insurance is only available to a business that has less than five employees who produce company revenues. While a company may have a bigger staff, not all are considered income producers. In a hairdressing salon, for instance, the four hairdressers would be considered income producers, but the receptionist, while essential to running the business, would be considered a non-income producer.
For example, suppose a business is run by a roofer and his family. While the roofer takes care of the contract work, his wife and grown daughter may work in the business taking care of administrative duties. If the roofer were to fall off a roof during a job and be forced to stay in bed for six months because of his accident, business expense insurance would keep the company afloat while the roofer's Personal Income Protection Insurance would take care of his family's personal expenses.
A company that does not have Life Insurance for business, risks going under or putting a financial strain on the company, in the event of an unexpected loss or disability of its chief income earners. However, with this type of insurance there is enough funding to buy the time for the company to restructure itself and come up with a solution.