Term Insurance for business owners: Why it’s crucial

Running your own business is stressful. There are numerous challenges that a business owner faces, starting with market volatility, dynamic customer preferences, competition, and limited resources. As per a report, around 90% of all new startups in India fail within 5 years of inception.

For an entrepreneur, it is critical to protect the interests of their family and the business in their absence. As their role is quite critical in both their home and organisation, they should consider how the sudden loss of their economic contribution could impact both. Having term insurance is important because it can not only protect your family’s future but also provide a protective net towards your business commitments.

If you are a business owner contemplating term insurance, do read along to know the crucial role it can play in your absence.

The need for term insurance among entrepreneurs

Compared with someone with a secure job, entrepreneurs face a lot of challenges. Business is all about risk exposure, and it is critical to use insurance wisely to protect your dependent’s financial interests in the future.

1. Term insurance is important to pay off any business debts you might have taken to start a business or meet any working capital requirements. This can be in bank loans, personal loans, or debt from family members/friends.

2. Business owners are often the primary earners in the family. In their absence, term insurance can be a tool to provide financial stability to the family, helping to maintain their standard of living.

3. Term insurance can also help business continuity by providing necessary financial assistance to the survivors in your absence. Hence, your business will be operational until a suitable replacement or new management is found.

4. If you have given any personal guarantees as part of your business transactions, term insurance helps protect your personal and family assets from liquidation in case of an unfortunate event.

5. If there are any critical situations, such as illnesses or disabilities, term insurance can offer financial support during challenging times, allowing business operations to continue smoothly.

Things to consider in term insurance for entrepreneurs

While selecting term insurance, it is important to take care of the following things:

1. You must ensure an adequate coverage amount in your policy. The amount should be enough to take care of your personal as well as business-related liabilities, at least for a short period.

2. The second thing is to take care of the policy term, which must coincide with your obligations. For a business owner, longer terms might be necessary for ongoing enterprises with extended operational horizons.

3. You should also consider multiple premium-paying options. For example, some policies offer flexible modes like single, regular, or limited pay options, which can be aligned with cash flow availability.

4. Always look for riders such as critical illness, disability, and accidental death riders that provide an extra layer of security for specific scenarios.

5. Choose an insurer with a proven track record and high CSR (Claim Settlement Ratio).

6. Always be aware of all the exclusions and reasons thereof in the policy. Understanding what is not covered is as important as knowing what is covered to avoid surprises during a claim.

Summing up

Entrepreneurs often assume a high risk when deciding to run a business. They might take large loans and debts to start an enterprise and keep it afloat. Since you are responsible for your family’s financial needs and business obligations, it is critical to have term insurance.

While selecting a term insurance plan, make sure you take account of the business-related liabilities before finalising the coverage amount. Due to their financial obligations, it is highly recommended for entrepreneurs to have a higher sum assured. Further, always opt for riders such as critical illness and disability to have an extra layer of security in case of unforeseen events.

FAQs

What is the primary benefit of term insurance for business owners?

The main benefit of term insurance for business owners is the security it provides their families and business operations. In the event of the policyholder's untimely death, term insurance ensures that the family is financially secure and the business can continue its operations, potentially covering critical business debts and providing funds for transition or operational continuity​.​

How much term insurance coverage should a business owner buy?

It is recommended that business owners secure a coverage amount that is at least 10-15 times their annual income. This should consider personal financial obligations, business debts, and operational funding needs. This ensures that in the event of their passing, the insurance coverage can adequately support both the family's and business's financial needs.

Can term insurance for a business owner be converted to a permanent policy?

Yes, many term insurance policies for business owners offer a conversion feature. This allows the policyholder to convert their term insurance into a permanent policy without undergoing further health assessments, thus extending the coverage continuity regardless of health changes​

What factors should be considered when choosing the term length for insurance?

Business owners should choose a term that covers them until their dependents are financially independent and ensure the business is stable and self-sustaining. Typically, terms can range from 10 to 30 years, but the specific term should align with the owner's long-term financial and business plans​

What happens if a business owner outlives their term insurance policy?

If the business owner outlives the insurance policy term, the coverage ends, and no death benefit is paid out. However, most term policies offer renewal options or conversion to a permanent policy, which can be beneficial for continuing coverage​