What Are Business Uses of Life Insurance?

Many people overlook the potential benefits of business uses of life insurance. Aside from the most well-known life insurance options – like employer-paid group plans – there are a number of strategic ways to fold a policy into your business.   

Just as personal life insurance provides financial peace of mind after someone passes, business use of life insurance can mitigate risks and protect assets in the wake of someone’s death or disability. 

For instance, a business owner’s family may face having to perform a quick sale (or closure) if their loved one dies without sufficient life insurance to sustain business operations and cover debt alongside end-of-life expenses. This is one way that permanent life insurance policies, especially, can secure personal and business resources.

In this article, we’ll introduce you to three additional paths business owners may take to include life insurance in their financial planning:

1. Key Man Life Insurance
2. Lines of Credit/Loan Requirements
3. Employee Benefits/Executive Retirement Compensation

These avenues are the most common, or the options with the broadest potential applications. If you purchase whole or universal life insurance, there may be additional advantages to using the policy’s cash value for business purposes. 

As always, it’s best to discuss your goals with a financial advisor before taking action.  

Life Insurance Terminology Check

We’ll use some terminology in this article that you’ll need some familiarity with to understand how businesses can use life insurance. Here are some quick definitions/reminders:

• Permanent life insurance: Refers to a number of plans – like universal life insurance, whole life insurance, and more – that offer key tax and retirement benefits aside from paying loved ones when the insured dies. 

• Term life insurance: Pays a set amount to the insured’s beneficiary at death, but only for a set period of time, or term.

If you’ve wondered how businesses use life insurance or what are considered appropriate uses of life insurance for business purposes, we’ve got answers! Let’s start with one you may have heard of: Key Man Life Insurance.

#1. Key Man Coverage/Buy-Sell Agreements

This life insurance inclusion aims to shield businesses from the financial repercussions of losing a key individual. While every employee is important, there are some positions that could potentially force the business to close if that person weren’t there. This is what the policy refers to as the “key man” or “key person.” 

In a small or family-run business, this might be the owner or a long-time business partner. In a business of any size, this might be a key relationship manager with critical revenue responsibilities, such as a partner overseeing sales or investment accounts.

In its simplest use, the key man coverage death benefit that is paid out when an insured person dies is designed to cover the immediate financial needs of the business. Depending on the terms and conditions of the coverage, key man insurance may also provide financial support for the business if an irreplaceable person becomes disabled. 

Key man insurance policies can be purchased as term or permanent life insurance. The policy may also carry a cash value, accessible by taking a loan against the death benefit. 

In certain situations, key man coverage is combined with buy-sell agreements between multiple business owners. Buy-sell agreements are essential for maintaining business continuity in the event of an owner’s death or departure. If there’s life insurance in place, the death benefit provides remaining owners or partners with liquidity to buy the deceased owner/partner’s share(s). 

This is often the case when a partner dies and their surviving spouse or heir has no intention to participate in the business. Key man life insurance combined with a buy-sell agreement ensures continued control of the business and appropriate financial support to the insured’s loved ones. 

#2. Lines of Credit/Loan Requirements

For many small businesses, the first time the owner dives deeply into life insurance products is when a lender or loan officer mentions it.  

Lenders and creditors – including alternative financing sources and the Small Business Administration – often mandate the owner to have life insurance before closing on a loan. This is a protective measure for all parties. 

In the unfortunate event of the borrower or a business partner’s passing, the life insurance policy serves as a financial safeguard, ensuring the repayment of outstanding debts and protecting the interests of both the lender and the borrower’s family.

Life insurance in this case is essentially standing in for other collateral. If there’s enough collateral or alternative terms accepted by the lender, it may not be necessary to buy life insurance (or purchase more) to satisfy loan requirements. 

Outside of institution lending, permanent life insurance policies can offer the insured a cash value that can be utilized for various business purposes. In addition to tax benefits that come with careful investing and estate planning with life insurance, a permanent policy can be helpful if the business owner needs to borrow against the benefit payable upon death. 

As a reminder, be sure to consult with your financial advisor to ensure both your premiums as well as any lines of credit are structured strategically.

#3. Employee Benefits/Executive Retirement Compensation

As mentioned previously, group life insurance is often a key component of employee benefit packages. An employer pays the policy premium for supplemental term life insurance (with coverage often equal to one year’s salary) and the employee elects a spouse, child, or loved one as the beneficiary.

Employer-paid additions to this baseline coverage can enhance life insurance as a recruitment tool. For instance, an executive package might include a bonus opportunity combined with a permanent policy. In this scenario, a performance-based bonus is paid toward the premium of an eligible Section 162 life insurance plan. Not only does this additional executive compensation help retain employees and provide financial support for the employee’s family after his or her passing, but such a policy can be a critical tool in the executive’s retirement planning. 

As is the case for all permanent life insurance, there are many tax considerations around premium payments or refunds and policy loans. Employers should work with a qualified benefits manager and experienced financial advisor to ensure life insurance policies work as intended.  

Business Use of Life Insurance

There are additional life insurance options your business might like to explore, such as corporate philanthropy to list charitable groups as a policy beneficiary, or complex broker accounts for Corporate-Owned Life Insurance (COLI) taken out on key employees.

For most companies, paying group plan premiums for employees and additional life insurance costs for executives will offer a tax deduction. Additionally, if business partners purchase key man insurance with a buy-sell agreement in tow, this assures a business succession strategy with tax advantages. And whether you own a business or not, a permanent life insurance policy can net you and your family significant tax benefits when it comes to inheritance and retirement income.

With commercial and business insurance needs, life insurance often plays a critical part. Our team can help you evaluate your coverage, explore options, and find life insurance plans that meet your business needs. Call us today to discuss your future! At Independent Insurance Associates, we take a comprehensive approach to helping you secure your financial interests and protect what matters most.