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Business owners understand the importance of life insurance. In fact, according to a recent LIMRA study, 91 percent of business owners responded: “I personally need life insurance.”1
Of course, there’s always a pundit or two saying permanent life insurance is too expensive or the cash value is a “weak investment tool” and won’t match the market or it’s only sold because the commission structure benefits the agent. These rote criticisms are well off the mark and don’t recognize the purpose of insurance in the first place.
But if you operate a business, you do. Indeed, the research shows more and more business owners recognize that the potential pros of life insurance far outweigh the perceived cons.
Make it personal
Let’s first consider how business owners can leverage life insurance on the personal side.
Ninety-six percent say that life insurance can both “protect their families” and “be a good investment.” Indeed, the death benefit of a life insurance policy can help a family cope with the untimely passing of a business owner.
Beyond that basic protection, the top two personal planning concerns of business owners is “having sufficient retirement income” and “being able to financially support my family if I am unable to work.” Business owners understand that life insurance can provide for their families if and when they are no longer running their business — today and in the future — and appreciate it as a key component of their longer-term personal protection and financial strategy.
Most business owners will significantly rely on the sale of their business to fund retirement. But what happens if you don’t receive full value for your business? The cash value in permanent life insurance can be a useful tool. Policyowners can access the cash value for retirement income during down market years. This strategy can help minimize the impact of negative returns on your investments, so you can preserve the growth potential early in retirement and continue withdrawing the same level of income in later retirement years.
Business owners should always be looking to diversify their sources of retirement income beyond just the business. Permanent life insurance can be a ready reserve of funds for inevitable market downturns, preserving the value of your investments to help ensure you can maintain your current lifestyle.
Of course, using cash value has ramifications for the death benefit and may mean tax bills should the insured pass on. Also, using cash value tends to increase the chances of the policy lapsing altogether.
Helping heirs
In addition, 89 percent of business owners state that life insurance is a good way to help ensure that “my wealth is transferred the way I desire.” Obviously, your business is your greatest source of wealth and life insurance can be an effective estate planning tool, particularly for family-owned businesses.
When you have multiple children and some work in the business and others don’t, you want to be both fair and equitable regarding how the assets in your estate are divided. While every situation is different, generally, the estate planning guidance is that those working in the business should receive the business, while those not working in the business should receive other assets of equal value. Since the business is often the largest asset in the estate, it can be difficult for families to cobble together enough other assets to equal the value of the business. That’s where life insurance can help.
By purchasing a life insurance policy equal to the value of the business, you can help ensure that those children not working in the business have the opportunity to receive a benefit commensurate to the value of the business. (Learn more: Estate equalization tactics for businesses)
Of course, this benefit won’t be received by your heirs until your passing, but it can help mitigate disagreements amongst family members regarding the division of your estate and help ensure the business is in the hands of only those committed to its success day in and day out.
Don’t forget about the business
Business owners don’t just view life insurance as a means to protect personal needs, they view it as a valuable tool for business needs as well. This includes using the policy death benefit as a funding mechanism for buy-sell agreements and key person protection plans.
Ninety percent say that life insurance can “protect the business if something happened to me.” (Related: Estate planning for business owners)
In addition, business owners understand the role life insurance can play when the business itself needs funding or ready cash during tough economic times.
Seventy-five percent of business owners in the LIMRA survey recognize that life insurance can be used as collateral for a business loan and that the cash value feature in a permanent life insurance policy can be used to “help my business stay afloat in tough financial times.” 2
Conclusion
As a business owner, you need to protect the four key risk pillars: your family, your business, your team, and your future. Whether it’s funding a buy-sell agreement, establishing key person protection, or providing a valuable benefit to a key employee, the versatility of life insurance can play a significant role in your business’s overall risk mitigation strategy.
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1 LIMRA, “2023 Small Business Owner Consortia Study, January 2024.
2 Be advised that an SBA 7(a) loan typically requires life insurance as collateral equivalent to the full amount of the loan. This requirement may be reduced if you’ve offered additional collateral toward your loan in the form of personal or business assets.