5 Questions to ask when getting business life insurance
Business life insurance helps to protect you, your business and your family in the event of a death. Whether it’s a key member of your business or a business owner, having protection can help lessen the blow financially during an already difficult time.
The main thing to think about is what would happen to your business if you or another member of your team passes away. Would your business be able to stay open? Do you have the funds to recruit new key employees? Are you able to buy a share back that falls into a shareholder estate?
How you manage your business life insurance and what’s beneficial for you depends very much on the type of business that you run. Either way, it’s important to start the process being prepared. In order to get the best policy for you, you’ll want to make sure you cover all bases and ask the right questions.
1) How much do you really need?
In order for your insurance advisor to provide you with an accurate quote, they’ll need an idea of how much cover you would like. In order to work out how much cover you need, you’re going to need to know what you’re going to use the money for.
Key employee insurance
If your business life insurance is to help the business in the event of the death of a key employee, then it may be for recruitment, training, temporary replacements, overtime of other employees. In addition to this, have you lost customers due to the loss of that key person? If so, you’ll need to calculate the potential cost of lost profits. This may also include lost contracts, compensation for unfinished projects and anything else you feel may be caused by the loss of that employee.
If you’re looking at business life insurance from a shareholder perspective, will you need the finance to buy back a business share from the estate of a deceased shareholder? Is the business able to afford this without life insurance? If not, then calculate the worth of that share within your life insurance policy.
Similarly, for a partnership, what finances would you need to keep the business running or would you need to close the business down? Essentially when a partner passes away, the partnership automatically ends. Do you have the finances in place to either keep the business running on your own? If you do wish to close down the business, are you financially viable for debts, loans etc.?
Sole traders and self-employed
If you’re a sole trader, essentially the business falls into your estate when you pass away. However, there can be loose ends that need to be tied up and debts to be paid off. If you have employees, suppliers or clients that need compensation, this will all come out of the estate leaving less for your family.
In order to protect against this, your business life insurance can be calculated to cover all the costs of this.
Are you already covered?
Another thing to consider is whether you already have a life insurance policy. It may be that you don’t need as much as you think if you’re already covered either personally or through the business on another policy. There’s no need to over-insure yourself and you can save money by checking your other policies.
2) How long do you really need your life insurance for?
Business life insurance is a protection plan to help counteract any financial impact of the death of a key employee or business owner. Whether it’s to protect your family or your business, a key question to as is how long you really need your life insurance for.
Business life insurance tends to be on a term life basis, due to the fact that people will retire at some point in their lives. You can choose your term life insurance from for a set amount of years such as 5, 10, 20 or even 30 years. Typically, most business life insurance plans are taken out for around 25 years, but if you think you won’t need it for that long, you can actually save money. It all depends on your business plan and how you see your business performing in the future. It may be that you earn enough profits to protect your business without needing a policy.
Watch out for increased prices later on
The important thing to know is that life insurance becomes more expensive the older you are and if you have significant health conditions. The older you are, the higher risk you are of having a health condition. Therefore, make sure you’re covered for as long as you think you will need the policy in order to avoid high prices later on if your policy were to run out.
3) Do you need to get a medical exam?
Whether or not you need a medical health check will very much depend on the cover amount and the insurance provider you choose to go with. It can also be based on your age or any health disclosures you’ve made in the application or quote process.
It’s important to be honest about health declarations because insurance providers can request to see GP reports. Even if they don’t, you risk the chance of no payout if they find out in the event of a claim.
Are you fit and healthy?
If you’re relatively fit and healthy then the chances of you being required to have a health check is slim. It’s also less likely to be asked for if you are younger or taking out a smaller amount of cover.
Even if you have a health condition that isn’t necessarily serious, your insurance provider may still not require a medical exam. Instead, they may request a GP report on any health disclosures made.
When you may need a health check
Typically, health checks are required for older applicants who are asking for a substantial amount of cover. It’s likely that your insurance advisor will advise you on what you need whilst going through the application process. It’s also worth going through a broker so that you can compare insurance providers. This ensures that you don’t only get the best price, but you can also potentially find an easier process.
If you do think you will need a medical exam, it’s best to book it in quickly to ensure your life insurance policy is set up quickly and you’re covered straight away. Having a GP report requested is quite common, so there is no need to worry.
Why do you need a medical check?
The main reason that you need to get a health check or even disclose any health conditions is so that your insurance provider can examine the risk. When they can calculate the risk, they are able to work out the premium that you will pay each month.
Your medical exam is a simple health check testing blood pressure, cholesterol, BMI and other simple checks.
4) How can you save yourself some money?
The cost of your premium is based on your age, BMI, medical history, family medical history and lifestyle choices. In addition to this, the amount of cover and length of policy term can all affect the price.
The best way to save money on your life insurance is to stay fit and healthy and make sure that you don’t over insure yourself. Calculating the right amount of cover that you need can be the first step to making sure you’ve got the right amount for you. Cutting the term can also save you money but remember life insurance increases with age. Therefore, if you still need a policy in the future you’re better getting the right length of term you need in the first place.
Other ways you can save money is to opt for decreasing cover. For example, if you only needed to cover a commercial mortgage, you can decrease your cover in line with mortgage payments. Getting life insurance early on, staying healthy, avoiding smoking can all help cut costs. Furthermore, if you write the policy into a trust, you can counteract inheritance tax. Therefore, your beneficiaries receive more of the payout.
5) Do you need to pay tax on your business life insurance?
With business life insurance we get a lot of questions regarding tax and your life insurance policy. Tax can be a little complicated and often your financial advisor may not even know the answer.
We’re experts in tax when it comes to life insurance and tax efficient policies.
There are two types of tax efficient policies, these are relevant life insurance and key man insurance.
Relevant life insurance
Relevant life insurance is a tax-efficient policy provided for by the employer to your employees. In this instance, the payout goes to the beneficiaries of the individual insured. The premiums, however, are paid for by the business. This means that the premiums can be put through as a business expense and are offset against corporation tax. Both employee and employer are exempt from paying national insurance on the policy. In addition to this, the employee does not need to pay additional income tax on the policy.
Key man insurance
If you are a shareholder or owner of a business, unless you are a salaried employee, you cannot qualify for relevant life cover. Instead, you will be offered a key man insurance policy. However, key man insurance tax works differently for different people based on their stake in the business.
Sole traders and majority shareholders
For sole traders and majority shareholders, the premiums on a key man insurance policy are not eligible for tax relief. For the policy to be tax efficient it needs to be solely for the benefit of the business. Therefore, if you have a high stake in the business, it can be seen as more of a personal benefit. Particularly if you have added critical illness to the policy.
In some cases, if you have strong evidence that the policy will be used to benefit the business, you may be able to get tax relief on your premiums. However, this is normally rare, and you will need to check with the tax office beforehand.
Despite this, sole traders and shareholders can still benefit from opting for a key man insurance policy. This is due to the fact that the payout is not taxed instead. Therefore, you can opt for a lower amount of cover and save money. Alternatively, you can spend the same money and receive more of the overall payout.
Directors and minor shareholders
Directors and shareholders with a small stake in the business are able to get tax relief on the premiums. In this instance, the payout of your key man insurance is taxed instead. However, the premiums can be offset against corporation tax. They can be put through as a business expense, saving you money on the premiums.
In a nutshell: key man insurance is tax efficient if it’s for the purposes of the business. Meaning, you don’t want the money going to your family but back into the business. That’s why for directors with a higher share in the company the line can be a little unclear.
Essentially, if you’ve covered all these bases, then you’ll be on the right track. The best thing you can do is to compare prices and policies and ask for advice. Your insurance advisor will be able to help you find the right solution for you and your business.