Having a small business often means that it is the only income available to support a family. Fluctuations in business can result in money being tight at times. In the event of the business owner dies, the family can suddenly be put into dire straits financially, with the only way out being to sell the business quickly. One way to prevent that problem is by purchasing life insurance.
If you have life insurance, you can use it several ways to prevent an emergency financial situation. The primary way it can do this is because life insurance claims usually get paid quickly, providing quick cash for the survivors.
Here are several ways a life insurance policy can help prevent financial problems when a business owner or partner dies.
- Pays for Immediate Medical and Funeral Costs
Funeral costs can run thousands of dollars. According to
BankRate, the average cost of a funeral with viewing in 2021 was more than $7,800. If the business owner spent time in the hospital before death, life insurance could help cover those medical costs. It may also prevent you from maxing out your credit cards, or taking out a loan to cover your expenses.
- Enables the Family to Have Funds for Living Expenses
An advantage of having a life insurance policy naming the spouse as the beneficiary is that there are no taxes on a life insurance policy. A possible exception is when the proceeds are designated to go into the estate—or when no beneficiary is named.
Keeping a family living at the same level of lifestyle can be difficult after the business owner dies. There are all the monthly bills to pay—plus property taxes when they come due. If there are children in the family, there will be food and clothing costs, medical and dental expenses, school expenses, and more.
Forbes mentions that if the policy has a cash value, you could draw out some of it to meet daily expenses and keep the insurance portion in force.
In an estate settlement, payments for creditors and taxes get paid before distributing the balance. While the government will charge an estate tax, some states also charge an inheritance tax, and a few states will charge both.
A spouse may not be willing to continue the business after the primary breadwinner passes away. It can be temporarily closed while grieving—if there is life insurance money or savings. Without it, the spouse may need to return to work right away.
- Provides Income to Continue to Operate the Business
If the spouse or grown children decide to continue to operate the business, life insurance money could enable them to improve it or just to keep it going. Unless designated otherwise in a will, the insurance proceeds can be used any way the beneficiaries decide.
Beneficiaries can take life insurance proceeds several different ways. You can get it as a lump sum, as payments, or put it into an annuity.
- Buys Time to Prepare Business to Sell
Without insurance money, survivors may be forced to sell the business quickly just to make ends meet. Or, they may not want anything to do with it.
Trying to sell a business quickly often results in not getting what it is worth—or selling it at a time when the market will not give you its value. Insurance money can enable you to keep the business going and wait for a better time to sell when you can get more by finding a truly interested buyer.
- Provides Money to Buy a Partner’s Share
If more than one partner owns the small business, life insurance can provide money to buy the partner’s share. There are two ways to do this.
Kiplinger mentions that each owner can buy a life insurance policy on the other partner(s).
A second way is called an entity purchase agreement. The company buys the insurance policies on each partner. When one dies, the company receives the money, and then it buys out the deceased partner’s share. It often happens when the family is not interested in staying involved in the business.
InsuranceBusinessMag states that a buyout gives 50 percent of the insurance proceeds to the surviving family (when there are two partners) and then buys out their shares. An arrangement of this kind should be in the co-owners’ agreement.
Small businesses often depend on the skills or ingenuity of one person. That person is the key man and could not be replaced easily. Key man life insurance provides money for the business until a replacement can be found and trained.
PolicyGenius says that the company pays the premiums and is the beneficiary.
The Types of Life Insurance
Although there are many different names for life insurance, there are only two types. Everything else is a variation of one of these two types.
Term life insurance is sold for a period of years, which can range from one to 30 years. It is pure insurance and has no value unless the insured dies. It is much cheaper than other kinds.
Sometimes called permanent life insurance, a whole life policy covers you for your entire life. It builds cash value, which can be borrowed or withdrawn while you are still alive. It goes by many other names, often involved with investments: universal life, variable life insurance, and indexed universal life.
You can buy life insurance plans at any time from many insurance companies. Two factors will affect the cost: your health when you buy the policy and your age. Policies less than $50,000 usually do not require a health exam.
Guaranteed issue life insurance enables you to buy it without any health questions asked. This type of policy is more expensive, and the payout becomes reduced if you die within the first few years. It is available to those already rejected by other insurance companies.
Buying life insurance is much less expensive when you are young. You can also get a lot more coverage for less. Coverage of almost any amount is available, but you should compare life insurance plans and prices before you buy. Make sure you understand what you are buying before signing and ensure that you have guaranteed renewability, or can convert the policy to whole life if you buy term insurance.
The Epoch Times Copyright © 2022 The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
