80 ©2018 WASHINGTON DC ECONOMIC PARTNERSHIP BUSINESS INSURANCE
Purchasing additional coverage outside of what is offered
through the group policy may require that the employee
undergo a medical exam to determine the level of insurability
based on health. However, a voluntary life insurance policy can
provide significantly more coverage, depending on the amount
of money an employee wants to spend for that type of policy.
Group life insurance policies tend to be less expensive than
those purchased individually. Most group life insurance is
sold on a term basis. Term life insurance pays a death benefit
if the policy-holder passes away within a specified period.
To figure out a group rate, the insurance company will usually
consider the following factors about a business: the number
of employees within the group; average age of employees;
ratio of females to males (based on the statistic that women
tend to live longer than men); number of smokers; and risk
factors associated with the business.
Based on the business risk, for example, a marketing firm
would probably have a lower group rate than a roofing
company for equivalent coverage. Generally, group life
insurance policies are a guaranteed issue, meaning that
employees do not need to undergo a medical examination to
be eligible. An employee who has a serious medical condition
may still be a part of the group if he or she is an active worker.
However, employees out on disability leave are not eligible
for group life insurance until they return to work, unless they
went on leave after the policy had been issued.
KEY PERSON LIFE INSURANCE
Within a small company, there are typically key people who
are critical to the success of the business. These individuals
may be limited to the business’ founders or partners
or defined more broadly to include other employees
responsible for running a critical aspect of the business,
such as the senior marketing or sales manager, or chief
engineer or software developer.
The death of any of these key people would likely cause a
serious impact on the business’ bottom line. Therefore, many
small firms choose to purchase key person life insurance
policies on these employees. As the policy owner, the
company is the beneficiary and receives the proceeds upon
the death of the insured key employee. The payout can help
the company by providing:
• Funds to weather the loss and continue operations
until a new employee can be hired and trained to
carry out the functions of the deceased; and
• The funding to buy out the key person’s heirs if
ownership rights of the business are involved.
In some cases, a small business seeking a loan from a bank or
trying to raise capital from outside investors may be required,
by the lender or investor, to carry key person life insurance for
its partners. The bank may even require that the small business
provides a collateral assignment agreement; this agreement
would give the bank first rights to the policy proceeds to cover
outstanding loans if one of the partners dies.
TYPES OF KEY PERSON POLICIES
Like individual life insurance policies, key person life
insurance policies may be purchased as term life or
permanent life policies.
TERM LIFE INSURANCE covers the insured for a term of one
or more years. It pays a death benefit only if the insured dies
within that term. Term insurance generally offers the best
value for the premium dollar. However, it does not build up
cash value. It may not be renewable at the end of the term or
may cost considerably more to continue.
PERMANENT LIFE INSURANCE, which is also called whole life,
universal life or variable life insurance, typically includes a
death benefit and cash value.
Because of the cash value element, premiums for permanent
life insurance tend to be higher than for term life insurance.
HOME-BASED BUSINESS INSURANCE
Home-based businesses—those exclusively run from a home
and no other location—compose roughly half of all U.S.
businesses and generate a huge amount of economic activity,
according to the U.S. Small Business Administration.
While some home-based businesses grow into full-fledged
companies that employ substantial numbers of people, most
remain quite small:
• 90 percent are sole proprietorships;
• 7.2 percent have between two and four employees;
• Just over one percent have five–19 employees; and
• About 0.2 percent have 20 or more employees.
Regardless of size or type, home-based businesses, like
all businesses, should be properly insured to protect their
assets and owners against certain risks. Often, home-based
businesses are underinsured, a fact that their owners discover
after an incident occurs.