Why Does a Small Company Need Life Insurance?

It’s becoming increasingly popular for a small company to take out life insurance policies on essential personnel, reports Inc. Magazine. Particularly for small businesses with few employees, the loss of a strong performer can be devastating to a businesses.

“Depending on the type of insurance you purchase, the ownership structure, and beneficiary of the insurance, life insurance can provide financial protection, risk management, and asset protection,” said founding principal of Stage 2 Planning Partners, Josh Patrick.

A life insurance policy can provide funds that can help keep a small business in operation while those left behind deal with the loss and restructure the company.

If you have a business partner, consider a buy/sell agreement. In this arrangement, you and your partner will own policies covering each other’s lives. If the first business partner passes away, the other receives a death benefit that can be used to buy the remaining half of the business. This results in a cash payment to your family as well as security for your business, according to Nationwide Insurance.

Many younger employees, often the majority of a small business workforce, have seen the recession and its aftermath weaken their personal finances and impact their work life. A MetLife study has found they would like to see their employers offer more assistance. One-half of Gen Y and Gen X workers employed in smaller businesses (less than 500 employees) said current economic conditions were making them look to employee benefits to achieve financial security – even if, in some cases, they have to fund 100% of the cost themselves. Among younger workers, stress from financial concerns could also impact productivity. One in four of this group reported taking extra time off or dealing with financial issues during working hours.

Policies can be used as supplemental retirement savings and estate tax funding as well as providing money to family members, says Inc. Life insurance policies may also be used as a key benefit when recruiting new employees.

While taking out a life insurance policy for employees may seem like a lavish expense, it may turn out to be one that small businesses can’t afford not to have.

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