How to Track Life Insurance Expenses as a Small Business Owner

As a small business owner, managing your finances is crucial for long-term success. One important aspect of your business finances is insurance, including life insurance. While life insurance is often seen as a personal expense, it can also play a critical role in your business, particularly if you have partners or dependents involved in the operation. Understanding how to track life insurance expenses and ensuring that they are properly categorized and accounted for is essential for maintaining a healthy financial record for your business.

In this article, we'll explore the steps involved in tracking life insurance expenses as a small business owner. We'll cover everything from the types of life insurance relevant to small businesses to the methods you can use to track these expenses efficiently. With this guide, you'll have the tools necessary to manage life insurance costs and understand the impact they have on your business's bottom line.

Understanding the Importance of Life Insurance for Small Businesses

Before diving into how to track life insurance expenses, it's essential to understand why life insurance is important for small businesses. There are several reasons why small business owners might choose to purchase life insurance:

1. Key Person Insurance: This type of life insurance is crucial for small businesses that rely on a key individual, such as the owner or a crucial team member. If something were to happen to that person, the business could face financial difficulties. Key person insurance helps the business survive during this period by providing a payout to cover any lost revenue and facilitate a smooth transition.
2. Buy-Sell Agreement: If you have business partners, a life insurance policy can help fund a buy-sell agreement. This agreement allows your business partners to buy your share of the company if you pass away, ensuring that your family receives fair compensation for your stake in the business.
3. Employee Benefits: Some small business owners provide life insurance as part of an employee benefits package. Group life insurance can offer peace of mind to your employees and help you retain top talent.
4. Personal Protection for the Owner: Life insurance can also provide personal financial protection for business owners, ensuring that their family is financially secure in the event of their death.

With these various uses in mind, it's crucial to track life insurance expenses as part of your business finances. Now, let's delve into the practical aspects of how to track these costs.

Step 1: Identify the Type of Life Insurance Policies You Have

Before you can effectively track life insurance expenses, you need to know which policies you hold. As a small business owner, you may have several types of life insurance:

• Term Life Insurance: This policy provides coverage for a specific period, usually 10, 20, or 30 years. It's generally less expensive than permanent insurance and is often used for key person insurance or for a buy-sell agreement.
• Whole Life Insurance: This is a permanent policy that provides lifetime coverage. In addition to death benefits, it also has a cash value component that can be used as a form of investment.
• Universal Life Insurance: A flexible permanent policy that allows you to adjust the death benefit and premiums. It also builds a cash value, which can be borrowed against.
• Group Life Insurance: Offered as an employee benefit, this coverage typically provides a smaller death benefit for each employee but can be a cost-effective way for businesses to offer life insurance.
• Variable Life Insurance: A type of permanent life insurance that allows you to invest the policy's cash value in a variety of securities, which means the value of the policy can fluctuate over time.

Each type of life insurance will have different costs and payment structures. By identifying which types of policies you have, you can better categorize your expenses and track them over time.

Step 2: Determine Whether the Life Insurance Is a Personal or Business Expense

Once you've identified the types of life insurance policies you have, you need to determine whether they are considered a personal or business expense. Here's how to distinguish between the two:

• Personal Life Insurance: If the policy is intended solely to provide coverage for you or your family, it should be considered a personal expense. This is common for individual term life insurance policies purchased to protect your loved ones.
• Business Life Insurance: If the policy is tied to your business---such as key person insurance, a buy-sell agreement, or group life insurance for employees---it is considered a business expense. These expenses are usually deductible on your taxes and should be tracked as part of your business's operational costs.

For policies that provide both personal and business coverage (e.g., key person insurance), you will need to allocate the expenses appropriately. A portion of the premium may be considered a business expense, while the rest is personal. It's important to keep accurate records to avoid confusion.

Step 3: Categorize Life Insurance Expenses in Your Accounting System

Proper categorization is essential for tracking life insurance expenses. When setting up your accounting system, create clear categories for life insurance. For small businesses, accounting software like QuickBooks or Xero can help you track insurance expenses effectively. Here's how you can categorize them:

1. Insurance Expense Account: Create a dedicated insurance expense account in your chart of accounts. You can further break this down into subcategories:

   • Key Person Insurance
   • Buy-Sell Agreement Insurance
   • Employee Life Insurance
   • Owner's Life Insurance

2. Premium Payments: Life insurance premiums are usually paid on a monthly or annual basis. Track these payments under the appropriate insurance subcategory.

3. Tax Considerations: Some life insurance premiums, particularly for key person insurance or buy-sell agreements, may be tax-deductible. Keep this in mind when categorizing the expenses, as it will affect your tax filings at the end of the year.

4. Cash Value (for Permanent Insurance): If you have permanent insurance with a cash value component, track the accumulation of this value separately from your premiums. While you may not be able to deduct the cash value growth as a business expense, it's important to keep records in case you need to access it.

By categorizing your life insurance expenses correctly, you'll ensure that they are easy to track, allocate, and report during tax season.

Step 4: Keep Detailed Records of Payments and Policy Updates

To track life insurance expenses effectively, you need to keep detailed records of all payments made toward your life insurance policies. This includes:

• Payment Date: When each premium payment is made.
• Amount Paid: The total premium amount, including any taxes or fees.
• Type of Coverage: The specific policy or type of insurance (e.g., key person insurance, buy-sell agreement insurance).
• Policy Changes: Any updates to your life insurance policies, such as changes in coverage amounts, beneficiaries, or premium amounts.

Tracking these details helps ensure that you can accurately categorize and track your expenses, which is especially important if you ever need to make a claim or provide documentation for tax purposes.

Step 5: Review and Update Your Life Insurance Coverage Regularly

As your business grows, your life insurance needs may change. A policy that made sense when your business was small may no longer provide the level of protection you need as your business expands. Periodically review your life insurance coverage and update it as necessary. This could include:

• Increasing Coverage: If your business is growing and you have more employees or assets, you may need to increase the amount of coverage you have through key person insurance or other business policies.
• Adjusting Policies: If your business structure changes (e.g., you bring in new partners or change ownership), you may need to update your buy-sell agreement and related life insurance policies.
• Evaluating Employee Benefits: If you offer group life insurance as an employee benefit, you should periodically review the plan to ensure it's still competitive and meets the needs of your workforce.

Updating your life insurance policies will help you maintain the appropriate level of protection for both your business and personal needs.

Step 6: Set a Budget for Life Insurance Expenses

Tracking life insurance expenses is important, but it's equally important to set a budget for these costs. Life insurance premiums can vary greatly depending on the type of coverage and the size of your business, so setting a clear budget will help you manage your cash flow effectively.

Consider the following when budgeting for life insurance:

• Premium Amounts: How much are you paying in premiums each month or year? Ensure that these amounts are consistent and manageable within your business's financial plan.
• Tax Deductions: Factor in any tax deductions for business-related life insurance policies. This can help offset some of the costs and reduce the impact on your overall budget.
• Future Premium Increases: As your business grows or as you age, your premiums may increase. Plan for potential cost increases by building flexibility into your budget.

Setting a budget allows you to manage your life insurance expenses alongside other operational costs, ensuring that you don't overspend or neglect this crucial aspect of your financial planning.

Step 7: Work with a Financial Advisor or Accountant

Finally, it's always a good idea to work with a financial advisor or accountant who can help you navigate the complexities of life insurance for your small business. They can help you:

• Determine the appropriate types and amounts of coverage for your business.
• Ensure you're maximizing tax deductions related to life insurance.
• Guide you on how to handle changes in coverage or policy structures.

A financial professional can provide valuable insights into how life insurance fits into your overall financial plan and help you track expenses efficiently.

Conclusion

Tracking life insurance expenses as a small business owner is an essential part of managing your business's financial health. By understanding the different types of life insurance, categorizing your expenses, keeping detailed records, and working with financial professionals, you can ensure that you're making the most of your insurance coverage while protecting both your personal and business interests.

Life insurance is more than just a personal expense; it's a critical tool for securing the future of your business. By following the steps outlined in this article, you'll be better equipped to track and manage your life insurance expenses, allowing you to focus on growing your business with peace of mind.

View Product