Life Insurance for Trade Business Owners

by Team Tradify, September 22, 2024

As trade business owners or sole traders, life insurance plays a crucial role in protecting your family’s and employees' finances in case of an unexpected event. Organising coverage for yourself and your employees not only supports their families in times of crisis but also protects your business from potential liabilities.

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The importance of life insurance for tradespeople
What life insurance do trade businesses need?
How much life insurance coverage do trade business owners need?
How do you get covered?

1. The importance of life insurance for trade business owners

As a trade business owner, life insurance is essential because it ensures your family, and the families of your employees, would be protected from financial hardship if the worst should occur. It means that costs, such as childcare, medical bills, funeral costs, debts, mortgage payments, and children's education can be temporarily covered by the death or disability benefit from your insurance policy.

Reasons you need life insurance as a business owner:

You want your business to continue operating without you.
You have debt connected to your business that you don’t want others to be responsible for.
You wish to use insurance to fund a buy-sell agreement to allow a partner or beneficiary to purchase the business.
To prepare your family to sell the business if they are not prepared to run it.
You want to provide financial support to your family while they learn to manage the business.
To pay off any outstanding estate taxes, business loans, mortgages or equipment.
To protect personal and business assets from being liquidated to settle debts or taxes.

As a responsible business owner, providing a life insurance policy for your employees that covers a year's salary means you're fulfilling your moral and legal requirements.

Key benefits for offering life insurance to your employees include:

Usually, an employee can join a business' group life insurance without a health assessment, which means that no one is denied coverage due to medical conditions. Coverage can also increase during major life events such as marriage or the birth of a child.
Group life insurance policies are often cheaper than individual policies.
Offering life insurance can also protect the business by helping cover costs in the event of an employee's untimely death, especially for key employees (e.g., with key person insurance).

2. What life insurance do trade businesses need?

Whether or not you're on the tools yourself, all business owners need life insurance. However, as a trade business owner, you face higher physical risks compared with many other industries. Trades like plumbing, electrical, roofing, and construction involve unique hazards, such as increased physical danger, the use of heavy machinery, and the financial impact of seasonal work. Each of these factors needs to be carefully considered when selecting the right life insurance policy for your trade business.

Whole life / permanent life insurance

A whole life insurance policy ensures that your family will receive a payout, no matter when the time of death or injury takes place. It provides lifelong coverage as long as premiums are paid and will accumulate a cash value over time. A permanent policy can become a valuable asset for business owners as you may be able to borrow against the policy for business needs, such as funding, managing unexpected expenses, or dealing with cash flow shortages. It can also serve as an emergency fund in case of an unexpected slow period.

Benefits:

Lifetime protection: Your coverage does not expire as long as premiums are maintained.
Cash value accumulation: Builds a cash value that grows over time, which can be borrowed against or used as collateral for personal or business needs.
Tax advantages: Cash value grows tax-deferred, providing potential savings and growth without immediate tax liability.
Fixed premiums: Whole-life policies have consistent premiums, making them easier to budget for.

Term life insurance

Term life insurance is typically set up to provide coverage for a fixed period (typically 10-30 years) and pays a death benefit if the policyholder dies within that time frame. It's ideal for business owners who want financial security for their businesses and families without high premiums, allowing them to allocate more resources toward other business assets such as expansion, equipment, or payroll.

Benefits:

Cost-effective: A fixed-term life insurance policy has lower premiums compared to permanent life insurance.
Covers specific needs: It's ideal for ensuring specific debts, such as a business loan or mortgage, will be paid off in a set timeframe.
Flexible duration: Allows you to choose to align the term to match your business needs, such as until your retirement.

Group term life insurance

Typically, an employer will sponsor a policy to provide cover to all their employees. Not only is this a great way. to improve employee morale and help them feel more secure, it can also lead to increased loyalty and job satisfaction. Coverage usually lasts for as long as the individual is employed with the company. Once their employment ends, the policy either ends or, in some cases, allows for the employee to covert it into an individual policy.

Affordability: Group life insurance is more affordable than individual policies because the employer typically covers a portion or all of the premium costs. Even if employees contribute, the rates are generally lower due to the pooled risk among the group.
Guaranteed Coverage: Group life insurance typically doesn't require a medical exam or detailed underwriting, making it easier for employees to qualify, especially those who might otherwise find it difficult to get individual life insurance due to pre-existing health conditions.
Convenience: Employees are automatically enrolled in group life insurance through their employer, simplifying the process of obtaining coverage.

Key person life insurance

A key person insurance policy provides coverage for the business in case a key individual passes away. This could include The business owner or founder who is deeply involved in daily operations, especially if they’ve built strong client relationships or possess specialised industry knowledge. Similarly, losing a key tradesperson with unique expertise, such as a master plumber or electrician, may lead to a breakdown in business and be difficult to replace. Whether it's a sales manager, project manager, or co-owner, the death of these individuals can result in lost revenue, uncompleted projects, and financial strain on the business, which is where key person insurance provides crucial support.

Benefits:

Business continuity: Helps cover the costs of recruiting and training a replacement for the key person.
Financial protection: Provides funds to cover revenue losses and ensure the business can survive the transition period.
Safeguards reputation: Helps maintain customer and investor confidence by ensuring the business remains stable after the loss of a critical team member.

Buy-sell agreement life insurance

This agreement stipulates what will happen to an owner's share of the business if they pass away, retire, or become incapacitated.

Benefits:

Ensures business ownership stability: Allows the surviving partners to buy the deceased owner’s share, preventing outside parties from gaining control of the business.
Provides liquidity: Ensures that funds are immediately available to complete the buyout without having to liquidate business assets or take on debt.
Fair compensation: Guarantees that the deceased owner’s family receives fair value for their share of the business.

Family income benefit rider

A family income benefit rider is an add-on to a life insurance policy that provides a steady income stream to the policyholder’s family in the event of their death. Instead of receiving a lump sum payout, the family gets regular payments (usually monthly) for a predetermined period, such as 10, 20, or 30 years.

Benefits:

Ongoing financial support: Provides a steady income stream for the family, helping them cover day-to-day living expenses over a set period.
Helps family transition: Allows family members to gradually adjust to the loss of income while they make long-term financial plans.
Reduces financial pressure: Ensures the family doesn’t have to manage a large lump sum but receives manageable, regular payments instead.

Health-related riders (disability & critical illness)

Additional features (riders) can be added to a life insurance policy, providing financial benefits if the policyholder becomes critically ill or disabled. A trade business owner can use the payout to maintain the business’s day-to-day operations while they recover. This might include paying for temporary workers, covering operational costs, or even repaying business loans. If the business owner cannot return to work, these riders provide funds to assist in transitioning the business to a new owner, selling it, or closing it without financial strain.

Benefits:

Income protection during illness: Pays a portion of the death benefit early if the policyholder is diagnosed with a serious illness or becomes disabled, ensuring income for medical treatment and the household.
Covers medical expenses: Helps pay for expensive treatments or long-term care, allowing the policyholder to focus on recovery without worrying about their business finances.
Business continuity: Provides financial support to ensure the business can continue operating or hire a temporary replacement while the owner recovers.

3. How much life insurance coverage do trade business owners need?

As a business owner, it's important to set aside enough insurance to protect your family and business. Insurance premiums can be high, but your coverage should ideally be 5-10 times your annual income to cover living costs and debts. Be sure to include business expenses, like loans or hiring costs, when calculating the right coverage.

The DIME formula helps you estimate how much life insurance coverage you need:

Debt: Include both personal and business debts that would need to be paid off in the event of your death.
Income: Calculate the amount of income your family would need to replace to maintain their standard of living for a certain period.
Mortgage: Account for any outstanding mortgage balances that would need to be paid off.
Education: Factor in the future education costs for your children.

Once you’ve added these together, subtract any existing assets (such as savings or investments) to determine the life insurance coverage needed to meet your obligations.

4. How do you get covered?

As a trade business owner, you can purchase life insurance directly from an insurer, through a comparison site, or via a broker or financial advisor. It may also come bundled with other services like a business bank account. The key is to ensure your policy is tailored to your business and personal needs, so you only pay for what’s necessary. Many providers also offer flexible options to update your coverage as your business grows, making policy management easier.

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Disclaimer: The information provided in this article is for general informational purposes only and is not intended to be a substitute for professional insurance or legal advice. Tradify recommends consulting with a qualified insurance broker or legal professional to discuss any specific matters related to your business or trade.

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