If you, as a business owner, neglect to execute a business plan using life insurance, your family could be left with a lot less than the true value of your business interest while you were alive. But it could be equally bad if you fund a business plan with life insurance, but never go back to review and update the plan, says John Blatt, CLU, ChFC, CFBS, CLTC, a financial advisor with Skylight Financial Group.
“Any number of events should trigger a review of life insurance, such as a business being sold, a new owner coming in, a change in health status, the business borrowing money or the death of one of the owners,” says Blatt. “Policies can also become obsolete, and failing to review them could result in diminished policy value or, in some instances, complete loss of coverage.”
Smart Business spoke with Blatt about how to identify your insurance needs and the consequences of failing to periodically review policies.
Why plan with life insurance?
In many small to mid-sized businesses, the owners should have life insurance on themselves and other key people. It’s advisable to have a binding buy-sell agreement that obligates the surviving owner(s) to buy the deceased owner’s share with the payout from the life insurance. This business arrangement guarantees that when an owner dies his or her family receives the deceased’s value of the business in one lump sum. The surviving owners are free to carry on the business without the involvement of or interference from the deceased’s family members.
If you are a sole proprietor and there’s no market to sell your business, when you die, the business dies with you and your family gets nothing. For some small business owners, life insurance may be the only way to guarantee that your family will receive the value of your business at your death.
What other events should trigger a review of your life insurance policy?
There are different reasons to review coverage. One example is an improvement in health. If you were initially diagnosed with Type 2 diabetes, you may be charged more for your life insurance because of that condition. However, with a change in diet and lifestyle it’s possible your health could improve and then it would make sense to go back and see if you can get a lower price on your policy. Another might be due to a change in the form of business entity, such as a regular C Corp. becoming an S Corp.
Coverage type is another reason. For instance, with some term insurance, coverage is temporary and premiums are level for a predetermined number of years. Oftentimes people buy these term policies, and when they get toward the end of the level premium, they decide they want the coverage to continue for a longer period of time. In that event, they have to apply and qualify for a new term policy. If their health has changed for the worse, this may be a problem.
Fortunately, good term policies may have a conversion feature that allows you to exchange a fixed premium term policy to a permanent policy. This conversion feature allows the insured to make that change without answering medical questions. In the event that your health has declined since the time that you bought the term policy, the conversion guaranteed can still extend the policy for a longer period of time.
As mentioned before, the death or disability of an owner should trigger a review. But even if none of these major events has occurred, it’s still a good idea to review the policy annually because of constant product improvements and innovations.
