How to Use Term Life Insurance to Safeguard Your Business

By Compuquotes Team on March 26th, 2008

Do you run a single owner home business or a small business with only a few employees? Have you ever wondered how you'd manage if something happened to you or one of your key workers? Many larger businesses safeguard themselves from the possible loss of a key employee with life insurance that reimburses the company for the costs associated with the loss. Key employee insurance pays off if the insured person dies or is disabled and unable to continue working. The benefit covers the costs of recruiting and training a new employee to replace the insured, as well as any revenues that the company loses due to his or her loss.

Key person insurance is specialized, though, and can be expensive. An inexpensive term life policy can be a good alternative for a small business owner who is just starting up. A term life insurance on yourself can ensure that any debts or obligations outstanding on your company are met in the event of your death or permanent disability rather than becoming a burden on your family. A term life insurance taken out on each of your key employees naming your company as beneficiary will help fund the recruiting and training of a replacement for him or her under the same circumstances.

Term life insurance is a good choice for this particular use for a number of reasons. Because you're only paying for death benefits, term life is far less expensive than whole life insurance. Some agents may try to sell you on the idea of a whole life policy, arguing that you'll be able to borrow against the cash value of the policy, making it a potentially valuable investment vehicle. They'll tell you that in the event the employee leaves the company, you'll be able to get some cash back when you cancel the policy - the surrender value. The problem with that reasoning is that with most whole life policies, you won't even begin to see any cash back upon surrender before the twelfth to fifteenth year. In order for a whole life policy to make sense as a financial/investment vehicle, you'd have to hold it for at least twenty years.

To illustrate the point more clearly, consider what you actually need the insurance for: to fund replacement of your key worker if he should die or become permanently disabled and unable to work. Calculate the amount of coverage you'd need for that purpose. Let's be generous and say $100,000 will do it. A healthy person under the age of fifty can get $100,000 worth of coverage for about $350 a year. That same amount of coverage in a whole life policy will cost you about $3,000 a year - almost ten times as much. Even the argument that the premium on a term life policy is likely to increase as your worker ages is a relative one. Until your employee reaches 55 or so, the premiums will remain low. Just be sure to choose a policy with a guarantee of renewal at the end of the term so that you don't have to worry about being unable to renew without a medical exam.

You put a lot into your business. Why leave it unprotected from the unpredictability of life when term life coverage can help you protect it for such a small amount per year?

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