Entrepreneurs can use life insurance in different ways than, say, a C-Suite leader in a large
corporation. Rather than the typical application of life insurance, entrepreneurs can utilize it
more creatively to manage and protect their legacy, assets, and their business.
This can include estate planning, recruiting and retaining key employees, using their life
insurance as a way to fund agreements with business partners or securing loans. Let’s get into
some of the specifics, though – here are 5 strategic ways to grow your business with life
insurance as an entrepreneur.
Fund a Buy-Sell Agreement
If you are a co-owner of a business, a buy-sell insurance agreement may be helpful to you. This
is a strategy which involves creating a legal agreement between you and your business partner
that will protect the surviving partner in the event of unexpected death.
Typically, this type of agreement results in a death benefit equal to a portion of the company’s
value relative to the ownership stake (ie. if you are one of two co-owners, the death benefit would
be approximately 50% of the company value). Half goes to the surviving business owner, and the
other half goes to the beneficiaries of the deceased.
This is helpful to both parties, as it is not always ideal for the ownership of a business to fall into
the hands of the beneficiaries of the person who passes away. Not only can it cause undue
stress on the surviving family members, but it could create conflict inside the business as well. A
buy-sell agreement funded with life insurance helps to protect everyone involved.
Estate Equalization
Alternatively, if you are a business owner who does want to pass their business along to a family
member in the event of your death (like your child), an estate equalization plan may be for you.
Estate equalization ensures that all beneficiaries (not just the one inheriting the business) will still
be left with something when you pass.
It is a relatively simple process – essentially, the business owner takes out a life insurance policy
equivalent to the value of the business and names their additional dependent on the policy. So,
one dependent would inherit the business while the other would benefit from the life insurance
policy.
This is beneficial and generates more wealth for the succeeding generation as it multiplies the
value of the deceased’s estate.
Key Person Insurance
Otherwise often referred to as key employee insurance, key person insurance is a life insurance
policy that a business purchases for either an employee or owner who is essential to the
business.
So, for example, if you had a General Manager that oversaw the majority of your business
operations, the policy would help the business cover expenses in the period while a replacement
was found and trained.
Alternatively, a business can also purchase critical illness or disability insurance in a similar
manner. This would protect the business in the event that the key person ends up with an illness
or disability covered by the policy.
These policies will protect your business in the event that the key person is suddenly unable to
work. They can also be harnessed to secure or pay off a business loan (called a collateral
assignment) or buy out the key person (if it is a business partner) if one or the other exits the
business.
Recruit & Retain Key Employees With Life Insurance
When you build your business from the ground up – you want to keep your amazing team
members who have been with you from the beginning and attract the right people moving
forward.
Non-qualified deferred compensation plans can help supplement retirement income for key
employees. As the employer, you give the employee or employees the option to reallocate a
portion of their salary or bonus on a pre-tax basis.
That money is funnelled into a life insurance policy purchased by the employer, who has the
option to contribute additional funds at their discretion.
The appeal of these policies (from a recruiting and retention standpoint) is that employees have
the flexibility and freedom to name beneficiaries and choose their own investments.
Build Cash Value With Permanent Life Insurance
While term life insurance does not have a cash value component to it, most permanent policies
do. Essentially, whenever you pay your life insurance premium, you contribute a certain portion
toward funding the policy’s cash value.
That then earns interest over time, and eventually, you can access the funds to help grow your
business. How that portion earns interest is dependent on your particular policy.
Whole life insurance policies guarantee a fixed rate of return, while indexed universal policy
growth is tethered to a stock or bond index.
Talk to an Expert: Start Using Life Insurance to Grow Your
Business Today
As a fully digital life insurance provider, the experts at Easy Insured can compare quotes from
reputable insurers across Canada and help you select the right policy for you and your business.
Get a no-obligation quote today!