5 Big Life Insurance Mistakes Business Owners Should Avoid

Life insurance is a powerful tool when used the right way. Unfortunately most business owners don't really know how it works so it is oddly both oversold by some agents and underutilized by consumers who really need it, but don't know all the details. 

As an attorney I don't sell insurance but I do routinely recommend that clients explore it with an expert to protect their family, fund their buy sell agreements, reduce estate tax exposure and for a variety of other business purposes. As such, when I saw this really good summary of mistakes to avoid by Scottsdale life insurance expert Ian Sachs, I asked if I could share it. Consider these issues and your own facts to determine if you have the right coverage, at the right amount and if you are holding it the right way.  - Ike Devji

Mistake #1 - Failing to Align Coverage with Business Needs

·     Many business owners underestimate or overestimate their insurance needs.

·     Coverage should be tied to realities like valuations, liabilities, and growth plans.

·     Mismatched coverage can lead to gaps or misspent money.

·     Takeaway: Perform a needs analysis and revisit your coverage as your business evolves.

Mistake #2 - Neglecting Buy-Sell Agreements

·     A buy-sell agreement ensures smooth ownership transitions when a partner exits due to death or other circumstances.

·     Life insurance can fund these agreements, providing the liquidity needed to buy out a departing partner's share.

·     Without a buy-sell agreement, disputes and/or cash shortages can destroy a business.

·     Takeaway: Collaborate with legal and insurance experts to create/fund your agreement.

Mistake #3 - Relying Solely on Personal Life Insurance

·     Personal policies don't address business-specific obligations, like debt repayment or payroll continuity.

·     Business-focused policies provide targeted solutions for business risks, like key-person insurance and stay bonus agreements.

·     Takeaway: Ensure you have separate coverage to protect both your personal and business responsibilities.

Mistake #4 - Failing to Review and Update Policies

·     Life insurance needs change as your business grows, partnerships shift, and family circumstances evolve.

·     Old policies may not cover new risks or could waste money on unnecessary premiums.

·     One annual review can save thousands and ensure that you're adequately protected.

·     Takeaway: Schedule annual reviews with your insurance advisor as part of your business's financial health checkups.

Mistake #5 - Ignoring Tax Implications

·     The tax treatment of life insurance payouts and ownership structures is crucial.

·     Misstructured policies can lead to unexpected tax burdens for heirs or the business.

·     Consider using tools like Irrevocable Life Insurance Trusts (ILITs) to minimize estate taxes.

·     Takeaway: Consult with a tax or estate planning expert when setting up your policies.

3 Ways Life Insurance Might Save Your Business

1. Ensure Smooth Ownership Transitions: Life insurance funds buy-sell agreements, ensuring continuity when a partner exits unexpectedly.

2. Protect Against the Loss of Key Employees: Key-person insurance covers recruitment, training, and other costs if a vital team member passes away.

3. Secure Business Loans: Lenders often require life insurance as collateral, especially for large loans.

Ian Sachs - President, Risk Resource

Life insurance isn't just protection; it's a strategic asset for long-term business security. The proper use of life insurance can strategically protect and grow your business.If you have additional questions, Ian Sachs and his team at Risk Resource can help review and restructure your life insurance policies and can implement new policies to make sure your business and personal objectives are being met.