As an entrepreneur, our business is just like our “baby”.
While most people fuss over the need to have Life Insurance when they start a family, we entrepreneurs have more to protect – our family’s financial needs and the legacy of our business.
Why Life Insurance is Essential for Entrepreneurs
When we start a business, we begin with the end in mind – we set goals and accomplish them progressively to allow the business to thrive and become a sustainable source of income for the long run.
The same theory applies to life – we encounter various milestones in life that demand more of our commitment (financial or not) but we need to ensure that we are properly equipped to handle all the added liabilities for life.
As much as your family wholeheartedly supports you in your business as you grow, they too, rely on you in return. Moreover, if you have started your business with business partner(s), a life insurance payout can also help prevent them from losing their dream without you.
While we all know that it is impossible to replace a person who is gone, there is at least some relief in knowing that a life insurance benefit can aid in covering the critical financial support you would have otherwise been an essential part of.
Term Life Insurance VS Whole Life Insurance
Regardless of it being Term or Whole Life, a Life Insurance is an agreement between you and your insurance company. In the event that you pass away, the insurance company will pay a lump sum to the people that you have named as your beneficiaries.
Term Life Insurance
Term life insurance is a fixed term plan that covers you for a fixed period of time, usually until 75 years old. It is a very straightforward policy that provides your beneficiaries a death benefit if you were to pass away while the policy is still active or in-force.
However, if you outlive your plan, your term insurance plan will automatically end and you will not get any of your money back.
There are definitely still benefits to getting a term insurance too, such as:
| Lower Premiums | Compared to Whole Life Insurance plans, Term Life Insurance plans have lower premiums. This makes it suitable for young adults who may also have multiple financial burdens at the same time – house, wedding, children etc |
| Meet a Temporary Need | If you have just started a family, or have just pumped up the investments you made into your business (especially for sole proprietors), the life insurance coverage you need will also increase. Having a term plan will patch the gap in the short term (20 to 30 years) until your children becomes financially independent, or until you have stabilised the business. Thereafter, you would technically no longer need the enhanced coverage. |
Whole Life Insurance
Just like what its name suggests, a Whole Life insurance plan covers you for your life (age 99, 100 or death, depending on your insurance company). If you outlive your plan, you will be able to get both guaranteed and non-guaranteed cash returns.
There are also multipliers you can add to boost the amount of sum insured you have if premiums budget* is a concern.
*Generally, the premiums for a lower base sum insured with a higher multiplier will be lower than the premiums of a higher base sum insured with a lower multiplier. This is due to the accumulation of cash value that exists in the whole life plan.
Benefits of a whole life insurance:
| Lock-in Premiums for Life | Wealth Building Strategy |
|---|---|
| Usually, the premiums of whole life policies are “level”. This means that you pay the same yearly rate for the duration of the policy. When you start paying for the whole life policy, the premiums are higher than the cost of the insurance. However, as you get older, this reverses and the cost becomes less than that of a typical term policy of someone of the same age. This is known as “front-loading” of the policy. | Premiums for whole life policies are split into 2 components – the payment for insurance and the building of cash value over time. There are guaranteed and non-guaranteed (for participating policies) interest rates that can help to increase your total returns. Most people usually prefer to use this money as an inheritance for their children. At a later time in your life, you may also borrow or make a withdrawal from your cash value amount, which may serve to meet immediate family or business needs. This makes the plan a flexible financial tool as compared to the term life policy. |
Factors to Consider
Essentially, the choice between these 2 types of insurance are very personal and can be highly dependent on your own family and financial situations.
Here are some questions you might want to ask yourself before reaching out to your financial planners for advise:
- Your Current Age
- Your Current Stage in Life (Single, Married, Married with Kids etc)
- Dependents you have and their ages
- Your Current State of Health
- Your Financial Expenses
- Your mortgage loans or other debts that might add on to your liabilities
- Your Retirement Plan; do you plan to leave behind inheritance for your beneficiaries?