The short answer
This guide answers the most common questions about business life insurance through an independent agent.
Life insurance for a business loan is a common lender request. In most cases, a term policy with a collateral assignment meets it, and any benefit beyond the loan balance still goes to your family.
This guide explains how it works step by step.
Part of our complete guide: Key Person Insurance: The Complete Guide.
Quick answer
A collateral assignment pays the lender's balance first. The rest of the benefit goes to your beneficiaries. Match the term to the loan and release the assignment when paid.
MarketView Agency is an independent insurance agency (National Producer Number 18345705).
On this page
- Business life insurance through an independent agent: when a lender asks for life insurance
- Business life insurance online: how key person insurance is taxed
- Business life insurance quote: is key person coverage the same as a buy-sell policy?
- Key man insurance agent: what is key person insurance?
- A worked example
- What if you miss a payment?
- Why compare with an independent agent
- Why small businesses need it most
- Does your business need it?
- Frequently asked questions
Business life insurance through an independent agent: when a lender asks for life insurance
Some lenders, including on certain small business loans, ask the owner to carry life insurance and assign part of it to the lender. This is called a collateral assignment.
With a collateral assignment, the lender is paid the outstanding loan balance first if the owner passes away, and the rest goes to the beneficiaries. When the loan is paid off, the assignment is released.
Term life is often the most affordable way to meet this kind of requirement. Match the term to the loan.
Business life insurance online: how key person insurance is taxed
Key person coverage has two tax points to remember. Premiums are generally not deductible. Death benefits are generally income-tax-free to the business if the notice and consent rules for employer-owned policies are followed.
Tip: Get the insured's signed consent and notice before the policy is issued, and keep copies with your business records.
Compare rates from several carriers in about two minutes. Free, no obligation.
Business life insurance quote: is key person coverage the same as a buy-sell policy?
Key person insurance and buy-sell funding are often confused. Key person coverage protects the business's operations. Buy-sell funding pays for a change in ownership, according to a written agreement.
If you have partners, talk with an attorney about a buy-sell agreement and use life insurance to fund it.
Key man insurance agent: what is key person insurance?
Every small business has people it cannot easily replace: a founder with the client relationships, a partner with the technical skill, a top producer. Key person insurance gives the business cash to get through the loss of one of them.
- Owner: the business.
- Payer: the business.
- Beneficiary: the business.
- Insured: the key person, who must consent in writing.
A worked example
Say you're 34 with a $150,000 mortgage balance and 16 years left, $19,000 in other debts, and an income of $55,000. Here's one simple way to size coverage:
| Item | Amount |
|---|---|
| Mortgage balance | $150,000 |
| Other debts | $19,000 |
| 4 years of income | $220,000 |
| Total to consider | $389,000 |
In this example, a 20-year term would outlast the loan (it ends around age 54). Your own numbers will differ; use this as a starting point and adjust for savings, other coverage and future costs like school.
How to get covered in 3 steps
- Pick who to cover and how much. Use a clear valuation method for the person's role.
- Compare carriers. An independent agent quotes several insurers and handles notice and consent paperwork.
- Apply and set up ownership. The business owns the policy, pays the premium and is the beneficiary.
What if you miss a payment?
Missed payments are one of the most common reasons coverage ends early. A grace period gives you some time to catch up, but it is not unlimited.
If money is tight, call before you stop paying. On some policies you can lower the coverage amount, change the payment mode or use other options to keep at least some protection in place.
Why compare with an independent agent
We are an independent agency, which means we are not tied to one insurer. We compare plans from several carriers and help you pick the one that fits.
- More choices. Several carriers, not one.
- Help with health history. Some carriers view certain conditions more favorably than others.
- No added cost. Premiums are set by the carrier, not the agent.
- No pressure. If a policy is not a fit, we will say so.
Why small businesses need it most
Large companies can absorb the loss of a key person. Small businesses often cannot. Key person insurance buys time and options when the business needs them most.
Does your business need it?
Often a good fit
- a business that depends on one or a few people for revenue or operations.
- a business with loans an owner has personally signed for.
- Also consider: buy-sell funding if there are multiple owners.
Maybe not the right fit
- a business that could replace any role quickly without lost revenue.
