Life Insurance for Business Owners: Everything You Must Know

The last two years brought a lot of changes to our lives, but also to the business landscape. The number of people working from home or that made themselves more independent by setting up their own company significantly increased in many areas.  Some industries, for example, the travel industry, shifted their staff mix significantly from salaried employees to independent agents.

This change comes with some risks. Today we look at life insurance for business owners as a means of protecting their companies. This article covers businesses of different sizes, from independent contractors and one-man companies to mid- and large-size organizations.

Let’s dive in.

Benefits of life insurance for business owners

Running the business relies heavily on business owners. Should something happen to them, the company may stay partially or fully unprotected, not being able to deal with outstanding loans, ongoing business expenses, not being able to replace the majority shareholder’s position due to costs, or pay for taxes upon death. A properly designed and set up life insurance policy can mitigate many of these risks.

Types of life insurance for business owners

Business owners have access to two different kinds of life insurance, term life insurance and permanent life insurance.

  • Term Life Insurance: Term insurance covers just that – a term. They are usually classified as Term 10 (10 years), Term 20 (20 years) etc. Term is known as pure insurance, meaning, unlike some forms of permanent insurance, there are no extras like a cash savings account. It is the most straightforward kind of insurance. If the policyholder dies during the term, the beneficiaries are paid the benefit. In a business setup, a Term policy is usually used for a key person or to buy/sell insurance, or to cover business loans.
  • Permanent Life Insurance: Typically, a whole life insurance product when used for business, permanent policies do not expire. They cover the policyholder for as long as they live. Permanent insurance (whole life or universal life) also come with a cash savings account that can be used to enhance the policy. You can also borrow against the cash or surrender the policy to receive the cash. In a business context, a permanent life insurance policy is usually used for retirement and estate planning for shareholders.

Life insurance needs for various businesses

Life insurance needs often vary based on the organization size and complexity. Here are three typical scenarios.

1. Life Insurance for independent contractors/freelancers

Freelancers’ insurance needs usually include term insurance to cover business loans and other related expenses which may cause financial stress for the surviving family if the entrepreneur were to pass away unexpectedly.

2. Life Insurance for small business owners

Small business owners could require a range of different types of life insurance. For the owners themselves, they should have some type of term life insurance to cover outstanding loans and other expenses. They should also consider some type of permanent life insurance to plan for retirement and estate planning purposes. The business should also consider purchasing term life insurance for all the key employees as well.

3. Life Insurance for business owners of mid-and large-size organizations

Mid- and large organizations have all the needs of a small business, and more. Majority shareholders and key employees should consider using a combination of term and permanent life insurance to cover themselves. This will allow the business to take advantage of unique tax strategies through insurance. It will also ensure that sufficient working capital is available for hiring or reorganization in the event of a key employee or shareholder death.

How much life insurance do business owners need?

Life insurance needs for business owners can vary quite significantly depending on a variety of factors. Some things to consider include:

  • Outstanding loans
  • Ongoing business expenses
  • The cost of replacing the majority shareholder’s position
  • Tax costs upon death
  • and more…

Are life insurance premiums tax deductible for a business?

Life insurance is not deductible to the corporation except in very specific circumstances. It needs to be required as a condition for a loan from the lending institution and even then, only a portion of the premiums can be deductible.

Can a business own a life insurance policy?

Yes, it is quite common for a corporation to be the owner, payor, and beneficiary of life insurance policies on shareholders and key employees. There is a special mechanism known as the “capital dividend account,” which allows life insurance proceeds to be paid out to shareholders tax-free.

What other types of insurance should business owners consider?

Business owners should also consider a few other types of insurance:

  • Business overhead insurance: It covers business expenses in the event of a shareholder disability.
  • Disability insurance: It covers key employees and C-suite executives’ salaries in the event of a disability. Get a disability insurance quote.
  • Critical illness insurance: It provides a lump sum payment in the event of a critical illness, which can provide capital to cover salary expenses while the employee or shareholder recovers. Get a critical illness insurance quote.
  • Group Insurance/Group Benefits: It provides a benefits plan to your employees, making employment with you more attractive. Get a group insurance quote.

About the author:

Philip Setter is an insurance and investment professional based out of Calgary, Alberta. He is also the founder and managing partner of Business Critical – a multi-discipline advisory firm focused on corporate tax strategies.

Working with Philip as your business advisor and tax strategist will give you a clear overview and direction for your business. His focus is on education, transparency, and providing quality service customized to your unique corporate needs. He aims to build a long-lasting and trusting relationship with each of his clients.

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