Sole Proprietorship Insurance

If you are or plan to be the sole proprietor of a business, one thing you may not have considered in your business planning is life insurance. Getting sole proprietorship insurance is not usually among the top items on a business owner's to-do list, because most people do not want to consider what will happen to their business when they die. However, there are many reasons to look into life insurance that covers your business, no matter what your age and current health situation.


1. Why Get Life Insurance?

Anyone who owns a business should consider getting sole proprietorship insurance, and this is even more important for business owners who have families to take care of. Having a personal life insurance policy is good, but you should also have a sole proprietorship insurance policy that specifically states what should happen with your business in the event that something should happen to you. A personal life insurance policy will provide your family with much-needed funds, but it will not cover your business or any physical property associated with your business.

Therefore, having sole proprietorship insurance will make sure that your family, and any employees you may have, will be taken care of in a potential situation that is already difficult to handle. It will be one less thing they will have to worry about, if the unforeseeable should happen.

2. What Happens To The Business?

When a sole proprietor dies, there are a lot of things that have to be decided on concerning the business. All the assets of the business are considered in the deposition of the business accounts, including property, equipment, inventory, and accounts both payable and receivable. If the sole proprietor of the business did not have life insurance, it is generally the family that is responsible for all the debts of the business. This can often mean a scramble to sell the business and all associated assets quickly in order to cover any debts left behind. Selling the business and assets off to pay business debts is referred to as a forced liquidation, and it does not result in receiving the true worth of the business in return for the sales.

An investment in sole proprietorship insurance will ensure that there are no questions regarding what should be done with the business. Because a sole proprietorship is considered the property of the business owner, there must be provisions in place to take care of everything in the event something should happen.

3. Insurance Benefits: Cash And Beyond

Of course, life insurance for a sole proprietor is going to pay out a cash benefit to the beneficiary of the policy. However, there are extra benefits associated with having sole proprietorship insurance that you may not consider when you think of life insurance policies.

One of the most important benefits for sole proprietorship insurance is the business continuation agreement, also known as the buy-sell agreement. This provides funds for the business to continue operating following the death of the owner. Life insurance for business can also provide funds that will enable a key employee or family member to buy the business, rather than selling or liquidating. Without the benefit of sole proprietorship insurance payouts, it may not be possible for someone who is familiar with the business to purchase it and continue running the business.

4. Choosing A Beneficiary

In most cases, the beneficiary of a life insurance policy is a member of the family of the business owner. This may be a spouse, a relative who has worked for and contributed to the business, or even a child. In the case of leaving the business to a child through sole proprietorship insurance, the usual goal is to ensure that the child's future is secured through a proper sale of the business, rather than a forced liquidation. A spouse or other adult relative may have plans in place to continue the business, which will have been previously discussed with the sole proprietor.

Some business owners designate a key or trusted employee as the beneficiary of sole proprietorship insurance. This is most often in cases where an employee is actually a silent partner, the sole employee, or has otherwise proven capable of running the business by him or herself. Business owners with no families, or with families that are not involved in the business, may choose to make an employee the beneficiary of the life insurance policy.

5. The Buy-Sell Agreement

A buy-sell agreement, also known as a business continuation agreement, is a condition common to sole proprietorship insurance policies that provides funds for the continuation of a business after the death of the owner. This agreement may be made with a key employee who intends to buy the business. It may also be made in order to allow employees funds to continue running the business until it can be sold at a fair market value, and the money from the sale given to the family that has been designated the beneficiary of the policy.

The buy-sell agreement spells out the values that will be used to determine the worth of the business, in addition to any other conditions of the sale, such as whether the business should be sold as a whole entity or broken down and sold separately. This agreement gives sole proprietors control over what happens to a business and ensures that things are taken care of properly according to their wishes. It also guards against forced liquidation.

6. Choosing A Policy

Just as with other types of insurance, there are a few different types of policies to choose from when it comes to sole proprietorship insurance. Different policies cover different areas of the business, require varying premium payment scales, and provide different benefits for the beneficiary and the business. Choosing the type of policy you will invest in depends on the needs of your business and the needs of your family, as well as what you want done with the business.

There are two basic types of sole proprietorship insurance policies available for businesses. Policies may be classified as either term life insurance or whole life insurance. It is a good idea to familiarize yourself with how each type of policy works before you decide what type of coverage you are looking for in regards to your business. Though many people believe that it is impossible to navigate the world of life insurance, it is actually easy to understand and decide on your business needs, once you have become familiar with a few of the most common life insurance terms you will run across.

7. Term Life

Term life insurance policies are fairly simple to understand. Basically, the policies are purchased on a term basis - usually annual, semi annual, quarterly, or monthly. The policy is in force only during the term you purchase. You can purchase sole proprietorship insurance for a minimal premium per thousand dollars of coverage. If the owner of the policy dies during the term that the policy is in force, the beneficiary is paid the face value of the policy. Term life insurance can be cancelled at any time with no penalties. There are two different types of term life insurance: level term life insurance and decreasing term life insurance.

For a level term life insurance policy, the death benefit is fixed at a certain amount and remains the same throughout the term of the policy. This means that you will have X dollars of life insurance for X amount of years, depending on how much coverage you have purchased and the length of your term. Insurance premiums for level term sole proprietorship insurance vary from company to company, but usually will remain the same for the length of the policy. An increasing premium term life insurance policy is considered a level term life policy, but the premiums increase over the duration of the policy. This type of policy starts out very inexpensive, but becomes more expensive toward the end of the term.

A decreasing term life insurance policy is typically inexpensive, and is usually purchased to cover the balance on a mortgage, such as that of a business property. With a decreasing term life policy, the amount of the death benefit gradually decreases over the term length of the policy in conjunction with the balance that is remaining on the mortgage or other long-term loan it was used to cover. This type of life insurance policy is best for business owners who have a high likelihood of a long business life.

While they are in force, term life insurance policies can be converted to permanent life insurance. This is especially helpful if you have purchased a long term insurance policy and are still paying premiums on it after ten or fifteen years. Conversion allows you to roll over everything you have paid on a term policy into a more permanent policy that will give you stable rates, and often a higher death benefit. There are also many additional investment opportunities found in some types of permanent life insurance policies.

8. Permanent Life

There are many different types of permanent life insurance policies. They are whole life insurance, including modified whole life insurance, universal life insurance, variable life insurance, and variable universal life insurance.

Just as it sounds, a whole life insurance policy is in effect for the length of your life. When the policy pays out, the death benefit will be for the amount of coverage you purchased. Often, a whole life insurance policy that has been in force for a long time pays out a death benefit that is more than the face amount of the policy due to the dividend option that is available. Modified whole life insurance policies are similar, but the premiums may begin at a low rate and increase annually, and eventually level out to a final premium level.

Universal life insurance policies are a combination of term insurance policies and savings plans. These types of sole proprietorship insurance policies are flexible, because you control the amount of the premium you pay and the amount of the death benefit. Therefore, you can pay extra into a universal life insurance policy when you have spare money, and you can afford to make lower payments when money is tight. This is a good option for typical small business owners.

Variable life insurance policies use whole life policies as a base, and combine investments such as stocks, bonds, and money market funds in order to build the amount invested in the policy and, ultimately, the death benefit. There are specialized insurance agents who handle variable life insurance policies, and they must have an NASD license in order to sell a variable policy. A variable universal life insurance policy combines the best benefits of universal and variable policies, and is sold by prospectus.

9. Shopping Around

A business owner can go about choosing a sole proprietorship insurance policy pretty much the same way car insurance is bought. There are many different insurance companies offering life insurance that is designed specifically for the needs of a business or small business. You can compare policies and prices for sole proprietorship insurance online, call companies directly for quotes, or consult an insurance agent who will help you find the right policy and a good deal on rates for your business life insurance.

If you are interested in investing and plan to get a comprehensive sole proprietorship insurance policy, such as a universal, variable, or variable universal, it is to your advantage to contact an NASD licensed insurance agent to help you purchase the policy and decide on premiums and investments. Many life insurance policies, especially straightforward term life and whole life policies, can be bought directly from an insurance company by the business owner and will sometimes be less expensive than paying an insurance agent's commission. It is easy to decide on which type of life insurance is best for your business, once you understand your needs and what sole proprietorship insurance can do for you.
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