Contributed by Garett Evans
Garett Evans works as a business manager at day and as a blog writer during his free time. Even after 25 years of work, he remains fascinated about how businesses operate and continues to look for ways to help companies meet their goals. When he’s not managing or writing, he’s fishing with his buddies.
Although some businesses are more vulnerable to change than others, all businesses need insurance. For one, employees rely on their employer for their income. For another, families of business owners also depend on the company revenue.
According to Statista, businesses have realized the value of having various types of insurance, and the portion for directors and officers alone measured more than USD$449 million, as reported by Axa SA. The global estimate should be much higher if that is the amount from only one insurance provider, leading to the assumption that companies now want to protect their livelihood more than ever.
Many types of insurance fit the needs of businesses, but life insurance tends to be overlooked. Business owners must consider it as part of their business strategy for contingency measures. Below are some of the top reasons to consider life insurance policies for your business.
Life Insurance for Key People
Companies likely already have insurance for other aspects of their business and thus have a qualified, reputable supplier on their books. Still, for those who need more assistance with life insurance for key person, there are other avenues for gaining more information.
For example, project based risk coaching can provide more in-depth knowledge for each corporation to understand their individual needs and, as a result, choose the correct insurance option. It may significantly impact companies that must avoid liquidation when a key person passes away.
Insurance for key person provides peace of mind for the company and its employees, who may feel their job security is threatened when a crucial stakeholder is no longer there to guide them. With the invaluable expertise and experience of the key person, so finding a suitable replacement can take time.
With key person insurance in place, the business can protect its legacy and have a buffer of funds to use while making arrangements for the way forward. An excellent point to remember is that companies should estimate the loss of income, training, and recruitment of the new candidate and factor these costs into the size of the insurance policy so that they get the proper coverage.
Financing for Business Ventures
Businesses may need extra financial assistance for various reasons, like when they need to expand or tackle a new project. As business loans may be substantial depending on what they’ll be used for, some lenders require collateral to show that their investment is protected.
Smaller businesses may not have the assets they can list to cover the collateral and would have to devise another plan to acquire the funds they need. Because paying off other means of financing could take longer than other loans, there has to be a contingency in place when businesses cannot take care of these obligations.
Companies can request that the life insurance policy pays out to a collateral assignment after they secure their funds. According to this agreement, the insurer will ensure that the debt or balance of the loan is paid in full, while the excess will go to the other listed parties, like heirs or spouses.
Another smart move is to extend the life insurance policy to the length and precise amount of the business loan so none of the other partners or family members will have the burden of covering the costs. They may have additional expenses while they wait for the policy to reach maturity.
Assistance In Succession Planning
Many co-owners or management partners have a buy–sell agreement in place that can contribute to the succession planning of the business. Should one of the partners pass away, their shares and business interests can be passed on to another partner. However, this agreement involves payment of the number of shares to the family or heirs according to the partner’s final will.
When these shares are substantial, other partners may need a funding option to buy them, and a life insurance policy will give them this opportunity with the help of a stock redemption agreement. The partners can thus successfully obtain and distribute the shares without taking away from the business’s working capital or cash flow to finalize the deal.
Another way owners can use life insurance for succession planning is to name their heir but use the policy to pay the remaining children or beneficiaries if they aren’t involved with the company’s day-to-day operations. If no policy and agreement exist, businesses may suffer substantial losses or face closure when heirs must settle their disagreements about the company and their portion.
Businesses that neglect to consider insurance as part of their succession plan are adding one more item to the list of blind spots that may sabotage their future plans. Succession planning can be challenging, but life insurance may make it more manageable.
Life insurance can benefit an organization apart from covering essential costs. Because it can be equivalent to a tax-free investment, businesses can have a cash boost when one of their key members passes away.
One thing to remember about bargaining on these payouts is that the policy should name a team member or beneficiary of the business. If not, it may become tumultuous to sort out the finer details and can leave family members or business partners resenting one another.
Businesses considering using the insurance policy for this purpose should contact a financial advisor and consult an insurance broker to align the two. Getting the best advice will keep all the parties on the same page and prevent challenging situations from arising after one of the partners is no longer there.
Deloitte details in an article that there may be many hurdles for businesses to overcome from 2023 and beyond, including a threat of recession, rising inflation, interest rates, or geopolitical upheaval. These all seem good enough reasons to acquire life insurance and secure the future of the business.
Retention of Talented Company Workers
The business environment can sometimes be cutthroat, and talented or highly qualified individuals are always in high demand. Consequently, companies compete to keep these team members on their staff.
Although companies provide these staff members with a handsome remuneration, they sometimes require additional safety measures to gain the loyalty of their most valued talent. There are many ways of improving loyalty, but a proven method is to offer perks that the competition doesn’t include in their packages.
Group life insurance is usually an attraction that many employees can’t resist. With the life insurance policy, they can provide security for their families and thus have more reason to continue their employment.
These group insurance schemes can cover a multitude of essentials for these employees, and some of them are:
- Provide cover during chronic or terminal illnesses: Some policies will have a clause that allows company employees to gain access to their life insurance funds when they become chronically ill or are diagnosed with a terminal illness. In such circumstances, these employees become unable to perform their usual duties and would require additional financial assistance.
- Support their families with necessary costs: In the event of the passing of a breadwinner, families will have the financial security to put food on the table with the payout from the life insurance policy or cover the funeral costs for their loved one.
- Pay unpaid debt or outstanding bills: Some people could have unsettled accounts that need to be taken care of even when they are no longer there. With an insurance policy, their families can settle these without putting undue pressure on them.
- Supplement retirement: Fixed-term policies that coincide with a team member’s retirement may provide the peace of mind that they will have additional funds at their disposal to help with the cost of their retirement.
All these benefits of life insurance coverage can give team members second thoughts before they consider other employment options that don’t offer the same incentives. In addition to the competitor gaining a valuable asset, the current company where the team member works can suffer immeasurable losses should these staff members leave, so providing these advantages is crucial to continue reaping the rewards.
What makes these group options more appealing for team members is that they will cost them far less to maintain than getting a policy on their own. Companies will often ask for a minimal contribution from each member and cover the remainder of the costs, should there be any.
Moreover, with their company’s annual physical examination, these workers can bypass the strenuous medical exams or other checks that the insurance provider sometimes expect when individuals apply for coverage.
Getting life insurance for the company in addition to the group benefits can go a long way in protecting individuals and the business during challenging times. The financial stability that comes with this type of insurance can also provide peace of mind to the management and employees, so they can perform their duties without worrying about their future. Companies should ensure that the insurance coverage is enough to meet the needs of the business, the partners, and the employees. Consulting with experts is thus recommended so as to determine the correct type of policy to invest in. If you don’t have a life insurance yet, talk to a qualified, reputable insurance broker or provider sooner rather than later about putting a feasible plan to cover all the risks.