Top 5 Mistakes Business Owners Make with Life Insurance

February 2025 Newsletter | By: Ian Sachs, CFP®, CLU®, ChFC®, CEPA
View on LinkedIn

warehouse, Risk Resource

Life insurance isn’t just built for personal protection – it’s a strategic tool that can safeguard your business, your business partners, and your family. In this article, I will quickly walk you through the top mistakes business owners make with life insurance and how you can avoid them.

Mistake #1 – Failing to Align Coverage with Business Needs

  • Many business owners underestimate or overestimate their insurance needs.
  • Coverage should be tied to realities like valuations, liabilities, and growth plans.
  • Mismatched coverage can lead to gaps or misspent money.
  • Takeaway: Perform a needs analysis and revisit your coverage as your business evolves.

Mistake #2 – Neglecting Buy-Sell Agreements

  • A buy-sell agreement ensures smooth ownership transitions when a partner exits due to death or other circumstances.
  • Life insurance can fund these agreements, providing the liquidity needed to buy out a departing partner’s share.
  • Without a buy-sell agreement, disputes and/or cash shortages can destroy a business.
  • Takeaway: Collaborate with legal and insurance experts to create/fund your agreement.

Mistake #3 – Relying Solely on Personal Life Insurance

  • Personal policies don’t address business-specific obligations, like debt repayment or payroll continuity.
  • Business-focused policies provide targeted solutions for business risks, like key-person insurance and stay bonus agreements.
  • Takeaway: Ensure you have separate coverage to protect both your personal and business responsibilities.

Mistake #4 – Failing to Review and Update Policies

  • Life insurance needs change as your business grows, partnerships shift, and family circumstances evolve.
  • Old policies may not cover new risks or could waste money on unnecessary premiums.
  • One annual review can save thousands and ensure that you’re adequately protected.
  • Takeaway: Schedule annual reviews with your insurance advisor as part of your business’s financial health checkup.

Mistake #5 – Ignoring Tax Implications

  • The tax treatment of life insurance payouts and ownership structures is crucial.
  • Misstructured policies can lead to unexpected tax consequences for heirs or the business.
  • Consider using tools like Irrevocable Life Insurance Trusts (ILITs) to minimize estate taxes.
  • Takeaway: Consult with a tax or estate planning expert when setting up your policies.

3 Ways Life Insurance Might Save Your Business

  1. Ensure Smooth Ownership Transitions: Life insurance funds buy-sell agreements, ensuring continuity when a partner exits unexpectedly.
  2. Protect Against the Loss of Key Employees: Key-person insurance covers recruitment, training, and other costs if a vital team member passes away.
  3. Secure Business Loans: Lenders often require life insurance as collateral, especially for large loans.

Summary

Life insurance isn’t just protection; it’s a strategic asset for long-term business security. The proper use of life insurance can strategically protect and grow your business. Risk Resource can help review and restructure your current life insurance policies and can implement new policies to make sure your business and personal objectives are being met.

Make sure your life insurance is working as hard as you do. Your business, your business partners, and your family will thank you for it!