For the over 500,000 entrepreneurs in the United States who begin their own businesses every month, making informed decisions regarding insurance can determine whether their first year is a success or failure. Regardless of the number of employees, whether products or services are being sold, or whether the business is operated from a home or a separate location, small business owners must take into account insurance considerations that differ significantly from those of individual consumers.
This article is the second in a series. Learn the basics of business insurance here.
What type of life insurance should the business offer?
When it comes to life insurance, small business owners must consider both the team and the individual. Group life and key person insurance are designed to help employers protect their most valuable assets — people.
Many small business owners offer group life insurance to employees either as a benefit paid for by the employer or as a voluntary offering whereby the employee pays for the premiums.
For policies paid by the employer, the benefit often is equivalent to a full year’s salary, an amount not necessarily sufficient for most people. For this reason, employer-paid policies often are viewed as “supplemental” to coverage an employee is assumed to already possess. Employees interested in greater coverage amounts, i.e., double or triple annual salary, can purchase additional coverage through an individual plan.
What is group life insurance?
There are two basic types of group life insurance: term and permanent, or “cash value” life insurance.
- Term life insurance pays a death benefit if the policyholder passes away within a specified time period. Term insurance is typically less expensive than permanent life insurance, especially in the early years. Most group life insurance coverage paid by employers is sold on a term life basis. Group policies are typically guaranteed issue, meaning no medical examination is required for eligibility. An employee with a serious medical condition may still be a part of the group, as long as he or she is an active employee. Employees out on disability leave are not eligible for group life insurance until they return to work unless the leave began after the policy was issued.
- Permanent life insurance differs from term in several ways. There are four types of permanent life insurance — whole, universal, variable, and variable universal. As the name implies, permanent life insurance remains in effect as long as the premium is paid. These policies also typically feature a cash value that increases over time and allows the insured to borrow against that value. Before issuing a policy, permanent life insurers likely will require a medical exam to determine level of insurability based on health.
How does an insurance company determine the policy group rate?
To determine the group rate you will be charged to insure your small business, insurance companies weigh a variety of factors including:
- Number of employees within the group
- Average age of employees
- Female to male employee ratio as women tend to live longer than men
- Prevalence of smokers
- Geography, specifically mortality and life expectancy rates where your business is located
Insurers also take into account special business-related factors that make one type of business more physically “risky” than another, i.e., marketing firm vs. roofing company.
What is key person life insurance?
In a small business, a few key people often are critical to the organization’s success. These individuals may be limited to the business’ founders or partners, or unique subject matter experts such as the senior marketing or sales manager, or in the case of a technology company, the chief engineer or software developer.
The death of any of these key people would likely have a serious negative impact on the business’s bottom line. That’s why businesses may choose to purchase Key Person life insurance. Should a designated key person die, as the policy owner, the small business becomes the beneficiary and receives proceeds from the policy.
How do you purchase key person life insurance?
Key Person life insurance can be purchased as part of a company’s group term life or permanent life policies.
Because the coverage is for a specific individual, several personal factors can affect key person life insurance premiums including:
Age and overall health including general medical history, pre-existing and/or chronic health conditions such as diabetes, heart disease, cancer, etc.;
- Poor health habits such as smoking and excessive drinking within the past five years;
- Dangerous hobbies such as skydiving, skiing, or rock climbing; and
- Driving record, specifically number of accidents, DWI/DUI citations, auto insurance claims and traffic tickets.