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Life Insurance and the Business Owner

written by: •edited by: Michele McDonough•updated: 10/6/2009

Becoming an entreprenuer means understanding the importance of life insurance for the small business owner. Do you have enough life insurance to cover business expenses? Jean Scheid looks at reasons the small business owner needs to have life insurance.

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    Why You Need Life Insurance

    Life insurance may be the last thing on the mind of a new business owner, but it should be tops on your list of things to consider. Starting a business means expenses and while life insurance is an expense, it's still necessary for you to obtain some. Further, some business owner life insurance premiums can be paid from your business and used as a tax deduction expense.

    Make an appointment with your insurance broker and your accountant and talk about some of the following options:

    • Retirement Plans - If your company has a qualified retirement plan such as a 401(k), a pension plan, or a profit sharing plan, the contributions you make can be used to obtain life insurance. Each premium payment is tax deductible as a business expense.
    • Bonus Plans - This plans are good for you and your employees. For example, you can pay insurance premiums for yourself and key employees and use the expense as a tax deduction. Your employees will be happy with the benefit of a life insurance policy.
    • Split Dollar - These plans allow you and your employees to share in the cost of life insurance policies. Your portion can be used as a tax deduction and paid from your business account.
    • Business Partners - If you have a partner, the business can purchase life insurance policies for all partners, pay the premiums from the company, and use this expense as a tax deduction. Keep in mind that some corporations require if you do this, ALL of the partners must be guaranteed a policy.
    • Section 419 - These plans cover disability insurance, life insurance, medical benefits, and long-term care. These types of plans can be set up so you can pay the premiums from your business and reap the benefits at tax time. These plans are also attractive to employees as they are pre-tax plans meaning the employee's Federal and State taxes are applied after their premium is deducted. The portion you pay for the employee is also tax deductible.

    Beyond all of these possible plans, there are other reasons you may need life insurance.

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    Life Insurance as a Requirement

    Life Insurance Beyond reaping the benefits of paying for life insurance as a business expense and offering your employees a benefit, there are other reasons you may need life insurance:

    Franchise Business Owners - If you own and operate a franchise, you may be required to obtain a life insurance policy to cover what you would owe the franchisor if you died prematurely. Read your franchise agreement to find out if your franchisor requires this. If you own a franchise and are the sole owner, it's also a good idea to get a life insurance policy so your estate can pay off any expenses.

    Banks and Lenders - If you borrowed money to start your business, the bank or lender where you obtained the loan may request you get a life insurance policy and make them the beneficiary of that policy in the event of your premature death so the entire loan will be paid in full.

    Lease to Own Buildings - If you lease to own the premises where your business sits, the owner of the property may require you to get life insurance and again name them as a beneficiary so the lease to own agreement will be fulfilled in case you die prematurely.

    Partners - If you have a partner and that partner has been the silent investor, or the "money person" so to speak, he or she may require you to obtain a life insurance policy to cover that debt in the event you pass away.

    Large Equipment Expenses - Purchasing large equipment often requires a business owner to finance that equipment. Most equipment retailers have their own financing departments that may require you obtain a life insurance policy with the equipment financing department as the beneficiary in the event of your death.

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    Too Much Life Insurance

    Life Insurance is a necessity and an expense. Ask your insurance broker about different types of life insurance before before you buy every policy they recommend. Some banks, franchisors, and even business partners won't require a life insurance policy so it's best to find out first before you enter into any financial agreements for the business.

    As a business owner, you should also consider what would happen to your family if you died prematurely. Would they big stuck with large expenses owed by the business?

    Talk to your business accountant about tax saving insurance policies and which ones are best for your business. Talk to your finance investor, if you have one, to see about setting up a family trust to pay for business expenses; the beneficiary of your life insurance policy can be your family trust. Finally, talk to your insurance broker and be honest about what you can afford and what you need.