Self-employed people have a number of unique challenges when looking at a plan of life insurance. Besides the typical income replacement scenario in the event of premature death, let’s look at some additional considerations, in no particular order of importance:
1. Does the business owner have partners?
If so, consider funding the business buy-sell agreement with a life insurance policy. Most businesses. if partnerships, have an agreement that if one partner predeceases the other, the surviving partner can purchase the business at a predetermined price or scaled price. But often that agreement is not funded- which means the surviving partner would be forced to come up with a potentially large sum either through liquidation of assets or borrowing- neither of which may be viable if the bank sees that the death of the original partner would leave the surviving partner in a financially precarious position. A good quality life insurance policy funding that agreement may be essential.
2. Does the surviving family intend to run the business after death?
If not, how long will it take to sell the business off? What plans have been made to hire someone to run the business until that happens? Additional life insurance cover those expenses should be considered. Even if the family continues to run the business, have you planned what your value to the business is should you die prematurely? Are you replaceable? A good business owner should also consider a ‘key-man’ policy for themselves to replace the lost business in the event of death.
3. Are there estate taxation considerations?
Many times a probate court looks at the value of a business not only as the hard assets of value, but also the potential income from receipts. If that business is valued substantially, your estate could be taxed at death (a good accountant can do a business valuation for you). If so, look at a policy in trust to pay for those taxes, otherwise surviving family members may be forced to sell the business to pay the taxes- usually at a reduced value due to timing of the tax bill.
There are other considerations as well, such as loss of business due to closure from grieving, travel expenses (do you travel on the job- what would it cost to return a body if you pass away overseas?), lost replacement income etc etc. Typically many business owners are insured at 3-5 times the level of most individuals and you should hire a professional insurance consultant or consult with an agent to determine what your true needs may or may not be.