You’ve invested a lot in your business – your money, your time, your enthusiasm. You probably have many different kinds of insurance to cover your business against different kinds of loss – fire insurance, theft insurance, insurance against damages, property insurance. One type of insurance that many small business owners don’t consider is term life insurance. Term life insurance taken out on key employees in your business can help your business get through difficult times by paying off in the case of death or permanent disability of one of your key employees.
The two most common uses for term life in small businesses is as an inexpensive form of partnership insurance, and to cover costs if one of your key employees should die or be unable to work due to permanent, catastrophic disability. In the first case, the company takes out a term life insurance policy for each partner, naming the company or the other partner as beneficiary.
If one of the partners should die during the term that the life insurance policy is in force, the death benefit is used to buy that partner’s share of the business from his or her heirs. This ensures that the remaining partners maintain control over the business rather than being forced to accept a new partner through inheritance. Term life used in this way can also help cover the financial losses that might be incurred because of the death of the owner of the business or one of its partners.
Term life insurance can also be used to insulate your family from business losses in case of your death. By taking out a term life policy on your life and naming the company as beneficiary, you can ensure that the company can meet its immediate financial obligations without placing that burden on your heirs and loved ones.
Insuring your key employees with a term life policy is another way to insulate your business from financial losses incurred by the loss of one of your key employees. If one of your key employees dies unexpectedly, your business faces the cost of replacing them, at the very least, and sometimes has to weather a few months without the income that that employee generates. By insuring them with an inexpensive term life policy and naming the company as beneficiary, you can ensure that the company will have the money they need to function in his or her absence, and undertake a job search to replace them.
The best way to determine how much insurance you need for each key employee is to figure out what it will cost the company to continue operations in the face of their death. Often, a good figure is half of the employee’s annual salary, which will cover the costs of a recruitment company and reimburse the company for anticipated losses while the position is unfilled.
Insuring yourself and your key employees makes sound financial sense. The premiums for term life insurance are generally low, and the policy is renewable for several terms. It’s a small investment for peace of mind.
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