Stuart Gentle Publisher at Onrec

What Business Owners Need to Know About Life Insurance

Business owners may need life insurance for several reasons, whether that’s to insure someone key to the future of the company or to use as collateral to get a loan.

Regardless of your reasons to get a policy, you’ll likely need to provide a financial history of your company to get approved. That can help the company to determine how much coverage you can purchase. It also offers assurance that you are financially stable enough to pay the premiums.

Knowing Your Options

If you get a policy and later find that you no longer want it, you have options. For example, it’s a good idea to know how a viatical settlement works. This offers money to those facing chronic illnesses that might result in shorter lifespans. But viatical settlements aren't limited to those suffering from chronic illnesses. A third party can purchase the policy for less than the face value but more than the cash surrender value. The policy owner no longer pays premiums since the third party takes over them. When the original owner passes away, the third party receives the face value.

Taking Out a Loan

A bank won’t give out money unless they know you can pay it off at some point. Startup owners often don’t have enough to get the company off the ground, so they might need to apply for a business loan. Life insurance is beneficial to getting approved by a bank. You might take out a policy on yourself to be collateral for a loan. If you passed away, the bank would know they would still get their money. That would make them more likely to approve the loan.

Securing Venture Capital

If you want to get venture capital (VC), your potential investors want to know that their investment won’t be lost if you pass away. Getting insurance on yourself allows you to show the investors why they should fund your ideas. While investing in startups comes with some risk, life insurance can mitigate the risk.

Getting Coverage for Employees or Other Members

In the early stages of a startup, the other employees and owners are critical to the success of the company. If someone passed away, the company might suffer. Getting life insurance for key individuals gives you funds to cover expenses until you can get a replacement and determine the next steps. Or if the business closes as a result of the death of the key person, the death benefit from the policy can be used for severance pay or to pay off debt. If you have the startup with others, you might enter a buy-sell agreement. This means you’ll agree ahead of time how much each person’s share is worth. Then each owner can take out a life insurance policy in that amount or more. The company may own the policies, or the owners may have each other’s policies. If one of the business owners passes away, the proceeds can be used to buy the deceased person’s company share. Without life insurance, the survival of the business might be at risk.