Why Is Life Insurance Essential for Business Owners?
Life insurance for small business owners may offer financial protection for their family and business. Having life insurance ensures that in your absence, the financial stability of your family and business is not severely affected.
Here are some benefits a life insurance plan offers to business owners:
Protection for Family Dependents
A life insurance plan can be a financial asset to protect your loved ones in your absence. Family members financially dependent on you might find themselves helpless in your absence. The situation may be even worse if you are the sole breadwinner in your family. One of the preferred ways to stay protected against such scenarios might be via the purchase of a life insurance plan with a sufficient sum assured. A life insurance policy can ensure that if you lose your life someday, your family has a financial backup they can rely on in your absence. It may allow you to sleep peacefully, knowing that you have financial protection for your family.
Safeguards against Business Liabilities
Every business might require capital to grow and expand. And, borrowing money from the bank or other financial institutions to grow businesses may sound like a convenient option. You should ensure that you repay your liabilities on time. However, if you were to unfortunately lose your life, your family or co-founders, if any, may be burdened with paying off the debts. The financial pressure could be enormous for them to sustain themselves and pay off any debts the business may have. Life insurance may help in managing the risks in such unforeseen situations.
Prevents Business Bankruptcy
In the case of your premature demise, if your business has legal obligations, your savings might drain out meeting them. This might lead to bankruptcy. Having a life insurance policy can help prevent bankruptcy. The death benefit from the policy can be used to meet your business debt so that you can avoid a financial strain.
Protects and Preserves Your Brand’s Legacy
If your brand is doing good, your sudden demise might cause a financial void, which might hamper business continuity. Life insurance plans, with their death benefit, can help you avoid such financial strains in your absence. Plus, with savings-oriented life insurance plans, you can also create a corpus to build your brand’s legacy.
Secures Your Employees’ Future
Your employees are essential to your business, and with group life insurance plans, you can secure their futures. You can choose a group term plan for your employees so that, in the case of their demise, their families get financial assistance.
Access to Liquidity When Needed
With unit-linked life insurance plans, you get the benefit of partial withdrawals after the lock-in period of 5 years. Partial withdrawals can help you get easy liquidity whenever needed.
Tax Benefits
A primary reason to buy a life insurance plan may be to provide financial protection to your dependents. Additionally, a life insurance plan can also offer several tax benefits. The premiums that you pay for your life insurance are eligible for deductions from taxable income under Section 80C of the Income Tax Act, 1961, subject to the provisions stated therein. Under this section, you can claim a maximum deduction of Rs. 1,50,000 annually on the premiums paid. These additional tax benefits may also potentially make life insurance for business owners more advantageous. Deduction under Section 80C will be applicable if you choose the old tax regime, since the new tax regime does not offer any deductions under Section 80C of the Income Tax Act, 1961.
Apart from the tax benefits on the premium you pay, the sum assured that your nominee receives in your absence is also exempt from taxes, as per Section 10 (10D) of the Income Tax Act, 1961, subject to provisions stated therein.
In the Union Budget of 2023$, it was announced that any income from life insurance policies (other than ULIP) where the aggregate annual premium is over Rs 5 lakhs will not be exempt from taxes. Death benefits received under such life insurance policies will continue to be tax-exempt in the hands of the recipient.
Types of Life Insurance Suitable for Business Owners
There are different types of life insurance plans available for business owners. Some of the suitable types of life insurance for business owners are as follows –
Term Life Insurance
A term life insurance plan is a protection-oriented plan that aims to cover the risk of death during the policy tenure. The plan allows you to choose adequate coverage based on your needs and provides financial security in your absence.
Whole Life Insurance
Whole life insurance plans cover you till 99 or 100 years of age. If you pass away during the term, a death benefit is paid. However, if you survive the term, a maturity benefit is paid.
Group Life Insurance for Employees
You can choose group life insurance solutions for your employees. Common plans include term insurance plans, ULIPs, etc. These plans cover your employees and provide a benefit on their premature demise.
How to Calculate the Right Coverage Amount?
When buying life insurance for entrepreneurs, it is imperative to choose the right coverage amount for adequate protection. Some of the factors that determine the coverage are as follows –
Covering Business Debts and Liabilities
If you have existing debts, the coverage of the life insurance policy should be optimal to cover them and also leave behind some money for your daily running expenses.
Funding Buy-Sell Agreements
If you intend to buy a new business when expanding, you would need optimal financial resources. The coverage of your life insurance policy should be adequate to fund the new purchase.
Providing Income Replacement for Family
Your life insurance policy should not only support your business but also your family. So, choose a coverage that takes care of your business’s financial needs and also helps your family meet their lifestyle needs in your absence.
Considering Future Expansion Plans
If you intend to expand your business in the future, choose an adequate coverage amount so that the benefits received from the life insurance policy can help fund the expansion when needed.
Steps to Buy Life Insurance as a Business Owner
When buying life insurance for entrepreneurs, here are some factors that you can consider –
Assess business and personal financial obligations
Check the overall debts that you have in your name. These include loans and borrowings done for both personal and commercial reasons. In your absence, your life insurance plan should be optimal to cover all your outstanding liabilities.
Choose the right policy type
There are different types of policies available for business owners. Assess your financial goals, business needs and then choose the most relevant policy.
Compare quotes from multiple insurers
After selecting the type of life insurance needed, compare the premium rates across leading insurance companies. Compare the premium vis-à-vis the coverage so that you get the most comprehensive protection at the most competitive rates.
Review tax and legal implications with experts
Life insurance plans are tax-saving in nature as they provide tax benefits on the premiums paid. Moreover, the policy benefits might also be tax-exempt. Understand the tax implications of the life insurance plans that you buy so that you can maximise tax savings.
Key Takeaways
- Business owners need life insurance plans for financial security and to prevent possible financial strains on the business.
- Life insurance plans can cover entrepreneurs’ responsibilities towards their family and business.
- Life insurance plans can cover business and personal liabilities, too.
- The premiums paid for life insurance plans qualify for a deduction under Section 80C, and the policy proceeds also enjoy tax exemption.
- You can choose from term life insurance, whole life insurance, or group insurance plans for your business.
- Choose the right coverage amount depending on your goals, liabilities, needs, and expansion plans.
Conclusion
As an entrepreneur, you need to protect your personal and business responsibilities. Life insurance may help you do so in an affordable manner. You can choose from different life insurance plans available online or offline and opt for the one that fits your needs. Ensure that your family’s financial needs, business requirements, and liabilities are accounted for while estimating your coverage needs. Life insurance is a financial decision that affects your business and personal life. Read the fine print before buying a life insurance policy to ensure that you have made a well-informed decision.
FAQs
Which type of life insurance policy is most suitable for business owners?
The right life insurance policy depends on your financial needs. That being said, you can choose term insurance plans for financial security.
How do I determine the right life insurance coverage as an entrepreneur?
To determine the right coverage amount, assess your existing debts, expansion plans, business expenses, family obligations, etc. and then make a choice.
What extra riders or add-on covers should business owners consider?
The riders depend on your coverage needs and are subject to availability with the plan. You can choose an accidental death benefit rider or disability benefit rider, a critical illness rider, a term rider, etc. and enhance the scope of your life insurance policy, on payment of nominal additional premium.
Does life insurance offer tax advantages for entrepreneurs in India?
Yes, life insurance plans allow tax-saving benefits on the premiums paid as well as on the policy benefits received. Moreover, if you buy group insurance plans, the premiums paid qualify as a business expense subject to certain terms & conditions and may help lower your taxable income.
