3 Exceptional Benefits of Life Insurance Policies to Businesses
As such, life insurance is considered essential for the upkeep of family that survives the person insured. However, not many people, especially business owners, know that it’s beneficial for a business. Yes, the fact is that irrespective of the size of their business, all entrepreneurs need life insurance because it can help businesses earn tax advantages, benefit their employees and break free from traditional bank loans.
During the end of the last decade, many big businesses increased their life insurance holdings. As per the experts at Makes Cents, a leading life insurance comparison website in Australia, this clearly indicates that businesses have some prominent benefits from life insurance. What are they? Let’s see.
1. Much More Beneficial than Bank Loans
Whole life insurance has a great advantage for business owners and it’s that it earns cash value. This cash value goes on accumulating over time because of interest earned as well as dividends paid. Life insurance companies are responsible towards policyholders and issue dividends depending on profits earned over the course of a financial year. Although the amount of dividend may vary from year to year, insurance companies have easily paid them out for more than 200 years, even in the critical periods like the World Wars, the Great Recession and pandemics.
A business owner has the first rights to the accumulated cash value of the insurance policy as its contractual owner. When expenses arise in the business, the owner can make use of a policy loan, up to the sum of cash value in the policy, to cover the expenses. Capital is directed back to the life insurance company and thus funds will again be available to cover forthcoming business costs. Business owners can take life insurance policy loans multiple times year after year.
This is much more beneficial than paying high interest rates to a bank, because the business owner can finance their expenses in a way that enables them to recapture the amount of interest. Irrespective of the value of policy loan, insurance providers still pay the policyholder an interest on the policy’s full cash value. The policyholder has the right to decide the payback schedule. The rate of interest charged by the insurance provider is often very lower than that of a traditional bank loan.
Thus business owners should buy life insurance since it’s a perfect place to store their business capital.
2. Offers a Business Secession Plan
One of the major reasons of failure of businesses is the lack of a succession plan. In an event of the death of a partner, there are generally no funds in place to continue financing the business. Based on the estate planning of the deceased business partner and how they wish their assets to be distributed, the other partners may need to buy up the portion of the business owned by the late partner.
Here too a life insurance policy may give a helping hand to the business owners with a strategy known as “buy-sell agreement” which offers an ideal business exit strategy. In this agreement, each business partner should buy a life insurance policy. When one of them passes away, the surviving partners will use their death benefit proceeds of the insurance policy to purchase the deceased partner’s portion from their estate.
This kind of buy-sell agreements don’t only apply to the death of one of the partners, but also when one of them leaves the business due to disability, illness or retirement. In such an event, simply their life insurance policy contract is assigned to the remaining partners and they now get total access to the cash value, and can increase business cash flow. Since the life insurance policies are for the period of life, the company will gather the death benefit when the departing owner passes away, even though it’s several years after they’ve retired or otherwise left the business.
3. To Attract and Retain Employees
Insurance providers allot policies because they know that the owner of the policy will suffer a financial loss when the person insured dies. This is known as “insurable interest” in the insurance industry. Since a business owner may suffer a financial loss if an employee dies, insurance providers usually allow companies to have an insurable interest over their employees.
This offers entrepreneurs a very exceptional way to use life insurance for the benefit of their employees. Employers may buy life insurance for their employees instead of buying some employee plan that is inevitably subject to market risk. In this, the business owner gets a tax benefit for paying the insurance premium. They even get the right to use the policy’s cash value, thus increasing the cash flow for the business. They can declare the employee’s estate as the policy beneficiary or can list their company as the beneficiary.
In the situation of the insured employee leaving the organisation, the company owner has an option to transfer the policy ownership to that employee. This means that the employee would gain the cash value gathered in the policy. The employee can re-declare the beneficiary and possibly list their estate, a family member or a charity they like as the beneficiary. If the policy hasn’t been paid up, however, the employee would have the responsibility to pay the unpaid premiums.
All this can help company owners attract and retain employees.
Life insurance policy thus can benefit businesses in many ways and hence business owners should consider investing in them as much as possible.