Life insurance might seem like a strictly morbid business designed to cover your funeral and debts but what if we told you that you could be putting it to use long before you pass? If you’re a small business owner, your life insurance policy could help you escape traditional bank loans, support your employees and earn better tax rates. You just have to know the best insurance policies.
Term and whole life insurance policies help small business owners recover lost income, retain employees, build and store capital, and establish succession plans for the future of their businesses. Depending on your goals, you can use insurance to liberate yourself from debt or pass on an empire to your children and employees.
Let’s examine in more detail which types of insurance policies best support small business owners and how they can grow your business. For more help with financial planning and insurance, contact Sim Gakhar, your go-to advisor for everything Canadian investment.
What is a Life Insurance Policy?
A life insurance policy is a legal contract between an individual and an insurance company. In exchange for regular premium payments, the insurance company agrees to provide a lump-sum payment once the policyholder dies. Policies are structured and determined based on the owner’s personal needs and can be set to either a term, whole-life, or universal period.
The best insurance policies for small business owners are term and whole-life policies. They are typically free from income tax and can guarantee the success of your business even after you’ve died.
What is Term Life Insurance?
A term life insurance policy provides coverage for a set period, usually from 20 to 40 years. If you die during that time, the insurance company will provide a lump-sum payment of the amount agreed upon at the start of the contract. Currently, the average coverage amount is around $250,000 and cost starts around $50/month.
With traditional term life insurance policies, your monthly premiums shouldn’t change over the course of the contract. However, if you outlive the policy, it becomes void and your premium payments will be returned tax-free in a single one-time payment. If you wish to extend the policy, you can continue paying into it, however normally at a higher premium.
Compared to other forms of life insurance, though, term life insurance is generally less expensive than whole life insurance. An average monthly premium will cost around $25. As a small business owner, you can use term life insurance policies in the following ways:
- If you outlive the policy, you can reap several thousand dollars worth of premium payments.
- Your family can use the policy to pay off business debts, meet the mortgage, or keep the business running in your absence.
- Term policies can replace lost income over the years and pay for your children’s college tuition.
Ideally, it’s best to continue your policy if you outlive it, though. This way your family and business can benefit long-term.
What is Whole Life Insurance?
Whereas term life insurance only provides coverage for the duration of the contract, whole life insurance never expires. As long as you continue to pay premiums, your life insurance will last until the day you die. Since it lasts a whole lifetime, though, your monthly premiums will likely be more expensive.
Nonetheless, whole life insurance policies typically have fixed premiums, meaning that your premiums will never go up. Additionally, whole life policies have cash value, meaning that you can treat them like a savings account that can accumulate tax over time.
As a small business owner, you can use a whole life insurance policy to extend wealth across generations and preserve your business into the future. They offer a few added bonuses as well.
Whole life insurance is within the umbrella of life insurance policies can attract employees. Many insurance companies allow you to name an “insurable interest”, i.e., a key employee who would cost you dearly if they perished. Essentially, you can extend your life insurance to a critical employee, such as your business partner. By covering the cost of their premiums, you can claim it as a tax write-off.
If your partner dies, you can use the funds to buy back their share of the business. However, if they ever leave the company, you can transfer the policy to them, making them responsible for paying the premiums. This helps your employees in the long run and encourages them to work for your small business.
What makes this type of insurance so special, though, is that many whole life insurance policies pay dividends. A whole life insurance carries a cash value and earns interest over time. Every year, you could earn a payout worth up to 5% of your total policy, compounded over the remaining years of your life.
Which is Better—Whole Life or Term Insurance?
Both term and whole life insurance are well worth the premiums. They can both help cover the cost of a funeral and debts or replace your income after you pass. Insurance can set your children up for university and continue your business in your absence.
However, they both have their pros and cons. Let’s take a look at why:
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Whether you own a small family restaurant or are looking to expand into an empire, you shouldn’t neglect your life insurance policy. When used correctly—and with the best policy—you could pass a small fortune onto your family while also earning cash dividends throughout your life.
For more information about insurance and investment, contact Sim Gakhar. Sim Gakhar can help you find the best policy in Canada and set your business up for success.
Essential Planning for Financial Security
Helping business owners and self-employed professionals grow retained earnings tax-free, pass more wealth to the next generation, and protect their biggest asset – themselves, the executive of the business by acquiring a key person life insurance policy.
Other FAQs Regarding Life Insurance as a Business Owner
- How Does Life Insurance Policy Work for Business Partners?
- How can I Protect a Business Loan with Life Insurance?
- What Are Some Myths Business Owners Believe About Life Insurance?
- How Can I Protect My Employees With Life Insurance?
- What Are The Benefits of Life Insurance For My Business?
- How Much Does Life Insurance Cost for Small Business Owners?
- Why Should I Choose Term Life Insurance As a Business Owner?
- Can My Business Pay for My Life Insurance?
- Does Whole Life Insurance Accumulate a Cash Value for My Business?
- What Are My Life Insurance Needs As a Business Owner?
- As a Business Owner, Why Should I Select Whole Life Insurance?
- How Does Key Person Life Insurance Work?
- Is Life Insurance Taxable in Canada For Small Businesses?
- How can Life Insurance can Help Me as a Small Business Owner?
- How can Whole Life Insurance Help my Small Business?
- How can my Business Benefit from a Universal Life Insurance Policy?
- Why is Life Insurance Important as a Business Owner?
- What Types of Life Insurance is Available to Me as a Business Owner?
- Can I Purchase a Group Life Insurance Policy for My Company?
- Are There Any Strategies That I Should Follow When Purchase Life Insurance for My Business?
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