Best Life Insurance Policies for Small Business Owners

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 amount is around $250,000.

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. 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 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. They carry a cash value and earn 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:

Pros Cons
Term life insurance policies
  • Premiums are less expensive for higher payouts
  • It’s easier to be approved for a term life insurance policy
  • Policies are time-restricted and can run out
  • Your premiums are more open to variation depending on your current health
Whole life insurance policies
  • You’ll receive yearly dividends paid out in cash
  • You can extend your policy to employees
  • Whole life insurance policies help you grow wealth
  • Premiums are much higher, even for lower payouts
  • If your policy lapses within the first few years, you may have to surrender it entirely
  • Outstanding debts are automatically deducted from your death benefit

Conclusion

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.

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