When you think of life insurance, what comes to mind first? It has got to be protecting your family, as this is what most of us associate it with. By family, it’s almost always your partner and the kids you two share, although other members can be listed as beneficiaries.
That’s all well and good, but have you ever thought of taking out a life insurance cover as a protection for your small business? You probably haven’t, but Business Insider gives you two reasons why you should consider it.
Collateral
According to Bestow’s CEO Melbourne O’Banion, you can use your insurance policy as collateral for small loans. You didn’t know about this, did you? With Bestow being a credible insurance company, O’Banion definitely knows what he’s talking about.
So, how does this work exactly? As the CEO explains it, there are lenders who provide borrowers with the option of putting up an insurance policy just in case they bite the dust before they’ve cleared the loan.
Once you’ve taken out the policy, you, your insurer, and the lender all have to agree and sign a document to the effect that in the event of your death, the outstanding debt has to be paid off first before any money is handed over to your beneficiaries.
It sounds simple enough, doesn’t it? It gets even better because this doesn’t just apply to existing businesses. If you intend to start a venture but are short on cash, you can use this collateral approach to get a loan that will serve as your initial startup capital.
Another reason as to why you should consider taking out an insurance policy is because it ensures the perpetual existence of your business, according to Tepsick Insurance’s owner Yvonne Tepsick, who says that the benefits can be used to pay salaries to the business’ key stakeholders, negating the need for them to seek employment elsewhere.
Such types of policies, Tepsick explains, are referred to as Key Person plans. They also go by the name Buy/Sell Agreement plans, and their main goal is to guard the business against losing key members of staff.
Important Considerations
Before taking out a plan, though, O’Banion says that there are a number of things that you must consider. For starters, you have to accurately define the purpose of this insurance – is the motivation solely business-related, or are you also looking to have your family protected in one swoop?
The CEO says that in his experience, he has noticed that most entrepreneurs take out two separate insurance plans: one for their family and one for business. Naturally, the one that covers their loved ones puts into consideration things like mortgage, college, and other vital expenses.
For a solely business-related plan, it is common knowledge that your coverage should be equal to the amount you intend to borrow. However, if the idea is to have both your family and business protected under a single cover, the general rule is for your coverage to fall anywhere between 5 to 10 times the income you earn in a year.
Additionally, while this should be pretty obvious, please remember not to go above your budget. Insurance policies require monthly premiums, so make sure to take out a plan that won’t strain you every month.
