Life insurance is probably the last thing that you think about when you’re trying to put together a real estate business. Your financials can often be quickly changing and evolving over time. Your needs can change quickly. We often don’t realize the full impact our death will have on our family and business partners.
This is a one stop guide to help you understand the best way to protect those around you when you pass. We’ll discuss life insurance and disability insurance options that will protect your business and family. You’ll understand the types of situations that require coverage and the best coverage for each situation.
Intro To Types of Coverage
There are two types of life insurance. Permanent policies last your whole life (whole life or universal life). Permanent life insurance is is meant to last around the age of mortality (or the average age a person passes away). These policies can be optimized with or without cash value depending on your health and coverage goals.
The second type of policy is a term policy. Term coverage is the least expensive (and usually most applicable to business). Term coverage is insurance coverage without any savings component. They usually come in 10, 20, or 30-year increments. Some companies have started to leverage the structure of Universal Life insurance to mimic an account that only provides a death benefit until age 90-121.
What Is Better Permanent Or Term Coverage?
This depends on who you’re protecting and for what reasons. If you are an individual investor and are continually purchasing policies, it probably makes sense to get a permanent policy to protect your family. Same thing if you have a long term partner you’re looking to work with.
Traditional Term policies are designed to replace short term income. They will often last until just before the average person will start passing a way. Permanent policies are designed as part of an estate plan to outlive the insured.
Don’t worry if this all seems a little overwhelming. You’ll gain more clarity throughout this post.
Mindset Is The Starting Point
There is often some misunderstanding around the type of coverage needed for loans. Taking out a loan for personal or business reasons is often a reason clients reach out to me for coverage. To protect the loan.
Before asking how much coverage to get, the first question you need to ask is what will happen if you pass. If the plan is for your significant other to continue with the business as planned, you may not need enough coverage to pay off every loan, you may simply need enough coverage for business continuation.
#1 Mistake in Real Estate Life Insurance: planning on paying off loans instead of planning for business continuation, sale, or transfer of ownership.
The biggest mistake is not thinking through what happens when you pass. You want to fund the transition, not all liabilities are loans.
This is good advice for investors and non-investors alike. The trap is to only get enough money to pay off the loans and mortgage. people figure that’s enough and leave their significant other with direct instructions to simply pay off their mortgage. That’s terrible advice.
Of course you would like for your family to not have the expense of a mortgage, but what is your family going to use to buy groceries? If the interest on your mortgage is reasonable (and at this point, who’s isn’t?), it’s better for your family to live off the money you leave than rush to pay off loans if you can’t afford coverage for both lifestyle and loans. Remember, we’re replacing income.
The biggest fears people have about purchasing coverage come from misunderstanding of how to prepare for the future for your beneficiaries (the insurance term for the person(s) you plan to leave your estate or policy to).
When You Pass, 1 Of 3 Things Can Happen:
1) Your business continues with your beneficiaries.
If your plan is for your business to continue without you (and without transferring your ownership to a partner or other party – we’ll talk about that later) this is for you. If your immediate family will continue on with your business you’ll have to think about what kind of costs will they have to keep the business going.
Do you need to front load some salary capital? Do you need to pay for training a family member to step up? Do you need to pay for child care? Do you need to cover the cost of maintaining your personal house so your spouse is able to continue with the business with out the worry of that expense? Your family will need time to grieve. Do they need to hire help with the business while that happens? Will the income of the business suffer because you’ve past? Help with that expense!
One of the best things you can do starts before trying to purchase insurance. It is stopping to take a realistic assessment of what will be needed before you try to tie a dollar amount to your coverage.
If this business is staying in the family, you need a long term policy. The business may grow in value, but seriously consider the kinds of expenses that can come up. You can always stop paying on a life insurance policy, it’s harder to get a new one 30 years down the road if you misjudged the length of coverage you need.
2. Your beneficiaries sell the business or assets to an unknown party.
This is usually the case when you are the only owner of a business and your family wants nothing to do with it after your passing. Depending on the value of the business/assets, your family will probably need a normal amount of life insurance for their lifestyle plus the expense of the sale.
When considering the expense of the sale, make sure that you consider the time it will take your family to grieve. Will the business need money to continue while your family grieves, additional support hired? Secondly, who’s going to negotiate the sale? Are you going to line up costs for marketing or paying any forwards on sales costs? Will the business/ property take a hit on value if it must be sold quickly? Consider that in your numbers.
3. Sell to your business partners.
If you have business partners you should have a buy-sell agreement. A buy-sell agreement is an agreement before any of the business partners sell, they all agree how the death of a partner would be handled. Each member then takes out a policy on the others to fund the purchase if a partner passes.
Sometimes (especially if there are more than 2-3 partners) it makes sense for the company to purchase the policies to fund the buy-sell.
If you don’t have a buy-sell agreement and you want to schedule a meeting with an attorney for it, it can make sense to get an initial policy just to act as a stop-gap before you’re able to put the time into the buy-sell. Even if you don’t have a formal agreement, it would makes sense to have a policy on your business partner than to be exposed to their passing.
When considering a buy-sell agreement the questions to ask are: If I pass, does my family want to run my share of the business or do they want a pay out? What tasks do I do for the business that would need to be hired out?
When Should the Business Purchase Coverage?
If there is an informal, or loose partnership; the partners can individually purchase coverage on each other.
Larger companies are going to need coverage on owners and key employees. Often the buyout of a passed partner will be an expense of the company (if the company seeks to own the shares in place of an individual). Companies will often feel the impact of the death of a key player (this can be an owner, or even a key employee). Companies should prepare for more than just the cost of a buy-out, but also the ramifications of the passing of a key player on the profitability of a business.
Difficulties Getting Coverage
Sometimes there are certain things in the Real Estate game that make buying coverage difficult.
- Limited or no W2 income. Sometimes the business’ tax goals doesn’t help with getting coverage. Many insurance companies don’t consider rental income as insurable income as the rental property will continue making money even after you pass. I can help you navigate these concerns and help you find the company that will cover you.
- You have to qualify for the coverage. Life insurance is not like PMI. You do have to medically qualify. I have access to over 25 different companies. I can help you get the best company with the best policy based on your needs. My job is risk mitigation, if you can’t qualify for traditional coverage I can help you create a plan to protect those around you.
- Bad advice. You can schedule a call to get personalized advice. Many times clients delay reaching out to me because the things they believe about their life insurance are not true. Most people call for new coverage just before the old policy expires. That’s the worst time! Many people write off certain products because they’ve heard generalized financial advice from a radio show or a blog. Keep in mind everyone’s case is different and the right product depends on your personal situation. Come in with an open mind.
Keep your head in the game. Life Insurance is an absolute need for all businesses, but especially for real estate investors. We work with large amounts of money hanging over our heads, it’s important to make sure we protect our families, partners, and investments.
If you’d like to learn more reach out here. You can also run a quote on this page.
If you’d like to learn more about the insurance buying process, check out our guide to buying life insurance here.