Small businesses have a need for life insurance in several different contexts. As a business owner, you can offer life insurance on a group basis to all employees as a benefit. You can buy life insurance on a co-business owner to fund a buy-sell agreement. You can even buy life insurance for your business to protect your company against the loss of a key employee.
Whatever the need, be sure to work with an agent who understands small business life insurance. An independent agent in the Trusted Choice® network can help you compare quotes from multiple insurance companies and find the small business life insurance that is right for you.
Small Business Statistics
- According to the U.S. Census Bureau, as of 2008 there were 5,294,970 businesses in the country with 19 or fewer employees
- The same companies employed over 21 million people
- As a whole, these companies reported an annual payroll of about three quarters of a trillion dollars
What Is a Small Business?
The question of just what defines a small business comes up in an insurance context in the area of group life insurance. Most insurance companies will offer their most competitive rates to groups because they feel they are assured of a reasonable mix of policyholders. In other words, they will get people in the group of all ages and all physical conditions.
Some companies define a group as being as few as three people. Other companies want at least twenty before they offer group rates. If you are seeking small business life insurance, it is important to work with an agent that understands the market and knows which insurance companies will offer the most competitive rates for a given situation.
Group Life Insurance for Small Businesses
The main advantage of group life insurance for small businesses is that the group members can get coverage at a lower rate than if they bought an individual policy. Group coverage is almost always term insurance, as opposed to whole life insurance. Whole life insurance has a higher premium but builds cash value.
There are several different ways in which you can structure life insurance for your small business:
- You can offer group life insurance as part of your benefit package. If your company pays the full cost, your employees will automatically receive the coverage.
- If you expect your employee to pay all or part of the cost, the coverage will be optional.
- You might also choose to pay for a certain amount of coverage and offer your employees the option to increase the limits at their own expense.
Typically employers offer the option for employees who leave the company to retain their life insurance coverage and pay for it directly. The employee can also typically convert the policy from term to whole life. You can set up these options through your group life insurance administrator when you choose your plan.
Life Insurance in Buy-Sell Agreements
It is frequently the case in a small, privately-held business that the owners want to protect against the contingency of one of them suffering an untimely death. The solution is a buy-sell agreement whereby there is a contractual obligation on the part of the surviving owners to purchase the interest of a deceased owner.
You may want to consider this option for several reasons:
- It prevents a situation where the surviving spouse or other beneficiary of the estate gains control of the deceased's interest without wanting it, or without having the business skill to manage it.
- It provides for cash to the spouse or estate of the deceased owner to make up for the lost income from the business.
- It makes it less likely that the business will have to be sold to "buy out" the interest of the deceased owner.
Buy-sell agreements can be very complicated, so you want to be sure to work with an attorney who is well-versed in this area of law.
Business owners typically fund a buy-sell agreements by purchasing a life insurance policy on each owner. Depending on how the agreement is drawn, the other owners can be the beneficiaries, in which case they will have the funds to meet their obligations under the contract. In other cases, the company itself is the beneficiary, in which case it has the funds to buy back the interest of the deceased owner.
Buy-sell agreements can also be triggered by disability, retirement or simply by one owner wishing to leave.
If you are one of several owners of a small business and wish to set up and fund a buy-sell agreement, you will need a competent attorney and a competent insurance agent. A local independent agent in the Trusted Choice network who specializes in commercial insurance can be of excellent service.
Key Person Insurance
Formerly known as "key man" insurance, this type of policy is life insurance that a company purchases as protection against the death of an employee whose contribution to the business is critical.
A large company can generally survive the untimely death of any one employee, even if the person at the helm is essentially the heart and soul of the business. But a small business may be greatly dependent on the efforts of just one person. The proceeds of a key person life insurance policy will help the company survive the loss of such an employee.
Whole Life vs. Term Life
When purchasing small business life insurance, regardless of the purpose, you will typically have the choice between term life insurance and whole life insurance.
- Term insurance policies run for a certain period of time (the "term") and then offer no further protection after that time. Term insurance can have a level premium for the life of the policy or the premium may increase periodically if you want to keep the policy in force. Term insurance is nearly always cheaper than whole life insurance.
- Whole life insurance continues as long as the premium is paid, and builds a cash value over time that the policyholder can use in several ways. Usually, the premiums on a whole life policy will not change. There are different types of whole life policies.
As the owner of a small business, you most likely do not have time to learn about every aspect of small business life insurance in detail, so be sure to work with a knowledgeable insurance agent who can help you make the most informed choices about your coverage and employee benefits.
Compare Small Business Life Insurance Quotes
Life insurance for a small business can be a valuable tool in your overall benefit and perpetuation planning. The most important starting point is to gather information and compare small business life insurance quotes. That way, you can determine the best fit for your business needs and your budget.
You will need to fully assess the needs of your company and employees and assess a number of different options and rates in order to make the best choice. To review policies and costs, turn to a local independent agent who can navigate the complicated decision making process of small business life insurance.
Find a local member agent in the Trusted Choice network today and get the coverage that is right for your company.