1. Business Life Insurance Benefits
2. Business Life Insurance Drawbacks
3. Life Insurance Basics
4. Life Insurance Riders
5. Key Person Insurance

Business life insurance definition is a life insurance policy a company purchases for its employees. Because this policy benefits the whole group, it's known as a group life insurance policy.

Business Life Insurance Benefits

In some cases, a partner's, an officer's, or a stockholder's life is insured so the surviving owners of the business can purchase his or her stock in the business after that individual's death. Insurance can be taken on a sole proprietor to allow an outside interest to finance the purchase of the business if he or she dies.

Group life insurance policies purchased in bulk protect members from paying expensive monthly premiums on individual policies. Typically, the employer pays a portion of the cost while the employee pays the rest. The employees are given insurance certificates and the master contract rests with the business.

High-risk individuals benefit from receiving the same premium cost as their healthier coworkers.

Business Life Insurance Drawbacks

The potential negatives to this type of insurance policy include:

  • Discontinuation of coverage if an employee leaves the business.
  • Limited control for employees over individual coverage and possibly having to pay more for sufficient coverage.
  • Low- and high-risk individuals pay the same amount, which is not advantageous for those who are healthy.

Life Insurance Basics

Life insurance is designed to protect dependents financially after an insured loved one or a family member dies. Life insurance applicants must consider the amount of money their family will need to maintain their current standard of living if they were to die.

A life insurance agent can help you assess these needs and recommend the best type of insurance for your individual situation. Common types of life insurance include:

  • Whole life
  • Universal life
  • Term life
  • Variable universal life.

Life insurance needs change with life events such as:

  • Buying a home
  • Getting married
  • Getting divorced
  • Having a child.

Therefore, you should re-evaluate your policy each year.

A life insurance policy includes three major components:

  • Death benefit, the amount the insurance company guarantees to the beneficiaries named in the policy. This is what the insured individual establishes based on his or her estimation of the financial needs of the heirs. The insurance company underwrites the desired amount to determine whether the insured qualifies for a death benefit of that amount.
  • Premium payments set by actuarial standards. The insurance company determines how much the insurance policy will cost and establishes administrative and policy maintenance fees. The age of the insured individual, occupational hazards, medical history, and the level of personal risk also affect these payments. If premiums are paid to date, the insurer must pay the death benefit to beneficiaries as agreed.
  • Cash value of universal or permanent life insurance. This also serves as a savings account the insured can use during his or her lifetime. Cash is invested on a tax-deferred basis. Restrictions on withdrawals may exist, depending on how the money will be used. The cash value is also used to offset the increased cost of insurance as the individual gets older.

Life Insurance Riders

Many life insurance policies can be customized with additional options referred to as riders. These allow policyholders to modify their plan. Availability depends on the insurer, but common riders include:

  • Accidental death benefit rider — provides additional coverage if an accidental death occurs.
  • Waiver of premium rider — waives premiums if the insured is no longer able to work because of disability.
  • Disability income rider —pays a monthly income if the insured is disabled.
  • Accelerated death benefit rider — allows the insured to collect some or all of the death benefit.

Key Person Insurance

This is a life insurance policy on a key person in the business, such as an owner, a founder, or an executive. The company pays the premium on the policy and acts as the beneficiary when the person dies unexpectedly. This preserves the life of the company when a key person is no longer living. The policy proceeds can be used to search for a replacement or to close the business by:

Otherwise, many companies would need to file bankruptcy.

The amount of key person insurance depends on the type of business. Term life insurance is more appropriate for this purpose than variable life. Consider how much money your business would need to survive after the death of the person in question. Many insurance companies will approve a policy of about five to 10 times that person's annual salary.

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