Most people are familiar with life insurance, but the role this product plays for small-business owners often is more complex than for the typical individual. Of course, sufficient life insurance can help protect your family’s financial security if you were to pass away. A business owner, though, could have an extra liability: business loans. If you take out loans to support your business, using personal assets as collateral, and you pass away, your family members may be on the hook for that debt, which could jeopardize their financial standing. Life insurance provides a major layer of protection for your loved ones.
In an effort to save money, some small-business owners are underinsured or don’t carry any insurance at all.
What are the risks of being an underinsured business-owner?
Business owners who are underinsured are exposed to financial or legal risks on a daily basis. If a business is underinsured, their insurance claim payout might only cover a portion of the claim, with the business or owner having to cover the rest of the amount out of pocket. Having the right insurance coverage should be viewed as a business investment that ultimately brings peace of mind.
How much life insurance does a business owner need?
Your life insurance needs are as unique as you are. Contact your trusted financial advisor to assess your specific needs.
Here is an example to get you thinking about the amount of life insurance you may need. If you draw $200,000 a year from your small business, you should consider $5 million dollars of life insurance at a minimum, especially if you have children or a spouse you’d like taken care of if you were to pass away. If you pledged your home or retirement account to backstop business loans, you’ll want to add the amount of your business loan to that $5 million number. So, if you borrowed $500,000 on business lines of credit, then you should consider $5.5 million of life insurance.
Keep in mind that this article is for informational purposes only. It’s not a replacement for real-life advice, so make sure to consult your legal or tax professional before considering using personal assets as collateral.
Can I get life insurance?
It is important to determine whether you are insurable before implementing a strategy involving life insurance. Several factors will affect the cost and availability of life insurance, including age, health, and the type and amount of insurance purchased. Life insurance policies have expenses, including mortality and other charges. If a policy is surrendered prematurely, the policyholder also may pay surrender charges and have income tax implications.
Any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments. Your financial advisor can help you choose a company with a good credit rating.
What To Do Now
1. Analyze your current life insurance coverage. Do you have the right protection? Do you have unrecognized gaps?
2. Address your family’s life insurance needs. Calculate your total debts, loan guarantees, and expenses to find the amount your family would need if you were to pass away prematurely.
3. Uncover the opportunities life insurance may bring to your business. Work with a professional to determine how life insurance might be able to help support both your business needs and retirement goals.
If this seems overwhelming, consider asking your trusted financial advisor for help getting started.
Running a successful small business requires a number of skills—from delivering your product or service to managing employees and growth. Accustomed to shouldering a vast number of responsibilities, many business owners seem to forget they do not have to do it alone.
Embrace the benefit of outside professionals. Your financial advisor and other professionals are there to help support your needs with their guidance. Let them provide the insight you need and take the weight off your shoulders.
If you need help understanding your life insurance needs and options, the Peak Wealth Planning team can assist. Schedule a call to learn more today. Call today to discuss your specific needs.
Peak Wealth Planning specializes in helping high-net worth individuals and families plan for the future.
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About the Author
Peter Newman is a Chartered Financial Advisor (CFA) and president of Peak Wealth Planning. He works with individuals nationwide that have accumulated wealth through company stock, ESOP shares, real estate, or running a business. Peter applies his unique background to help clients achieve their specific goals and enjoy peace of mind.
Peak Wealth Planning provides concierge services to meet your wealth management needs. Services include: financial planning, investment management, esop diversification, retirement income, insurance, and estate planning advice. Peak Wealth Planning is a fee-based financial advisor based in Champaign, Illinois, and Fraser, Colorado.