Term versus Life Insurance: What Business Owners Need to Know

Let’s face it: insurance is a boring topic to talk about. However, as an entrepreneur, being better informed about insurance is considered essential nowadays since insurance can greatly affect the lives of your survivors, including your business partner, and your own. As with everything, there are different types of insurance, each with its own function and advantages.

Today, I will help you shed some light on the world of insurance by explaining the differences between term and life insurance.

But before we jump in….

Let’s talk about why insurance should matter for entrepreneurs like us. Picture this: you’ve built your business from the ground up, pouring your heart, soul, and countless cups of coffee into it. It’s your baby. But what happens if something unexpected occurs? That’s where insurance comes in – it’s like a safety net for your financial tightrope walk.

As a wealth management advisor, I have seen firsthand how proper insurance coverage can make or break a business owner’s financial future. It’s not just about protecting your assets; it’s about ensuring your legacy and your family’s well-being. Not only that, insurance can also be an excellent tax savings and investment strategy.

Now, let’s break down the two main types of insurance that business owners should consider: life insurance and term insurance. Both types of policy can be personally or corporately owned.

(Permanent) Life Insurance: The Marathon Runner

Life insurance is like that friend who’s always there for you, no matter what. It’s designed to provide coverage for your entire life, hence the name. Think of it as the marathon runner of the insurance world – it’s in it for the long haul.

How Life Insurance Works

When you purchase a life insurance policy, you’re essentially making a deal with the insurance company. You agree to pay premiums (either monthly or annually), and in return, the insurance company promises to pay out a death benefit to your beneficiaries when you pass away.

But here’s where life insurance gets interesting. Many life insurance policies also accumulate cash value over time. This cash value grows tax-deferred and can be accessed during your lifetime through policy loans or withdrawals.

Pros of Life Insurance

1. Lifelong coverage: As long as you keep paying those premiums, you’re covered. No expiration date here!
2. Cash value growth: Your policy can become a valuable asset over time.
3. Tax advantages: The death benefit is generally tax-free for beneficiaries, and the cash value grows tax-deferred.
4. Flexibility: You can often adjust your coverage and premiums as your needs change.

Cons of Life Insurance

1. Higher premiums: All those benefits come at a cost – life insurance typically has higher premiums than term insurance.
2. Complexity: With different types of life insurance policies available (whole life, universal life, etc.), it can be confusing to choose the right one.

Among the most common types of permanent life insurance are whole life insurance, which offers fixed premiums and guaranteed cash value growth, and universal life insurance, which provides more flexibility in premium payments and death benefits.

When is life insurance a good option?

Permanent life insurance is ideal when you need lifetime coverage, want to build cash value as part of your financial strategy or have long-term financial obligations. As an entrepreneur, it can be an excellent tool for funding buy-sell arrangements and a tax-efficient way to build up cash value that can be used for business purposes. Whether owned by you or your company, permanent life insurance can offer valuable benefits and financial flexibility, which makes them attractive options for overall long-term financial planning.

Term Insurance: The Sprinter

Now, let’s talk about term insurance. If life insurance is a marathon runner, term insurance is like Usain Bolt – fast, focused, and with a clear finish line.

How Term Insurance Works

Term insurance provides coverage for a specific period, typically 10, 20, or 30 years. It’s straightforward: you pay premiums for the duration of the term, and if you pass away during that time, your beneficiaries receive the death benefit. If you outlive the term (which is the goal, right?), the coverage ends.

Pros of Term Insurance

1. Lower premiums: Term insurance is generally more affordable than life insurance, especially for younger, healthy individuals.
2. Simplicity: It’s easier to understand – you’re covered for a set period, end of story.
3. Flexibility: You can choose a term that aligns with your specific needs (e.g., until your kids are through college or your mortgage is paid off).

Cons of Term Insurance

1. No cash value: Unlike life insurance, term policies don’t accumulate cash value.
2. Coverage ends: Once the term is up, so is your coverage (unless you renew, but that often comes with higher premiums).
3. Potential for wasted premiums: If you outlive the term, you don’t get any money back.

There are three main types of term insurance:

• Level-term insurance, which maintains the same premium for the duration of the policy.
• Yearly renewable term insurance, which allows you to renew your contract each year, often with higher premiums (although this option is less and less popular).
• Decreasing term insurance, often used to cover mortgages, which reduces the death benefit as your financial obligations decrease.

Each type of insurance has its own advantages and can be adapted to suit different financial situations and objectives.

When is term life insurance useful?

Term insurance is particularly useful when you need coverage for a specific period or have temporary financial obligations. For example, it’s ideal for young families who need affordable protection while their children are growing up and for homeowners who want to make sure their mortgage can be repaid if something happens to them. This type of insurance is also useful for young entrepreneurs to ensure that start-up costs and ongoing business expenses are taken care of in the event of death.

Choosing the Right Insurance for Your Business

Now that we’ve covered the basics, you might be wondering, “Darren, which one should I choose?” Well, as much as I’d love to give you a one-size-fits-all answer, the truth is that it depends on your specific situation. In wealth management, each client should have their own insurance strategy based on their needs, goals and unique circumstances.

Here are some factors to consider when choosing between life and term insurance:

1. Your age and health: Generally, the younger and healthier you are, the lower your premiums will be for both types of insurance. But if you’re older or have health issues, term insurance might be more affordable.
2. Your financial goals: Are you looking for lifelong coverage and a potential investment component? Life insurance might be the way to go. But if you just need coverage for a specific period (like until your business is well-established), term insurance could be a better fit.
3. Your budget: Let’s face it – money matters. If you’re just starting out and cash flow is tight, term insurance might be more manageable. But if you can swing the higher premiums, life insurance offers additional benefits that might be worth considering.
4. Your business structure: Sole proprietor? Partnership? Corporation? Your business structure can impact your insurance needs. For example, if you have a business partner, you might consider a term policy to fund a buy-sell agreement.
5. Your family situation: Got kids? Planning to have them? Your family’s needs should play a big role in your insurance decision.

Real-World Examples

Let’s bring this down to earth with a couple of examples:

Meet Sarah: Sarah’s a 35-year-old dentist who just opened her own practice in Montreal. She’s married with two young kids and a mortgage. Sarah decides to go with a combination of term and life insurance. She gets a 30-year term policy to cover her mortgage and provide for her family until the kids are grown. She also gets a smaller whole life policy to provide lifelong coverage and build cash value that she can potentially use to fund her retirement or leave as a legacy.

Now, let’s look at Marc: Marc’s a 48-year-old successful entrepreneur in tech. His kids are grown, and his business is thriving. Marc opts for a permanent life insurance policy. The higher premiums aren’t an issue for him, and he likes the idea of using the cash value as a tax-advantaged investment vehicle. Plus, he wants to leave a substantial legacy for his grandkids.

Wrapping It Up

Choosing between life and term insurance doesn’t have to be complicated. It’s about understanding your needs, goals, and financial situation. There’s no one-size-fits-all solution; what works for your dentist friend might not be the best fit for you. That’s why working with experienced wealth management advisors such as those at the St-Georges Group is crucial.

We’re here to help you navigate these waters. We’ll work with you to create a customized insurance strategy that fits seamlessly into your overall wealth management plan. Because at the end of the day, it’s not just about choosing a policy – it’s about protecting your legacy, your loved ones, and the business you’ve worked so hard to build.

I leave you with a bit of wisdom from one of our great Canadian icons – Wayne Gretzky, who once said: “I skate to where the puck will be, not where it has been”. At The St-Georges Group, we take a similar approach. We don’t just look at where you are now; we also help you anticipate and prepare for your future.