As a small business owner, life insurance is an essential tool that can help protect your business from a variety of risks. Not only does it provide funds to pay estate taxes and administration expenses, which could otherwise jeopardize the future of your company, it also allows you to set up a buy-sell agreement for the purchase of your business interests.
Why should business owners have life insurance?
Have you considered what would happen to your family and business if something were to happen to you? It's crucial to plan for the unexpected. That's where life insurance comes in.
Not only does life insurance provide financial protection for your loved ones, but it also ensures the continuity of your business. Life insurance for business succession guarantees that your family will have access to necessary funds, even if your assets are tied up in the business. Whether it's for yourself, your partner, or a key employee, life insurance can alleviate financial concerns and ensure a stable future for all involved.
Types of Life Insurance for Small Business Owners
Business owner life insurance can provide cash when it’s needed in the wake of a business partner’s death. There are a few ways to go about it, including:
A buy-sell agreement is a contract between you and your business partner, which you can use individual life insurance to fund. If either one of the partners should pass away, a buy-sell agreement allows the surviving partner to buy out the deceased business owner’s share of the business.
Individual Life Insurance
With individual life insurance, you and your business partner can take out a life insurance policy on each other in case either of you die. In the event of you or your business partner’s passing, the benefits of the policy are paid to the surviving business owner. This type of life insurance for small business owners lets the surviving business partner continue running the business with less financial hardship.
Key Person Life Insurance
Key person insurance is a type of individual life insurance where the business, rather than a business partner, is the beneficiary. Key person life insurance provides your business with funds if an essential employee, such as the business owner, happens to die.
How to Choose a Life Insurance Policy as a Business Owner
Depending on you and your business' needs, budget, and financial goals, there are two main types of coverage for you to consider as a business owner: term and permanent life insurance.
Term Life Insurance for Business Owners
Term life insurance is the most affordable (and flexible) type of insurance policy, making it a great option for most people, including small business owners. Term life insurance can provide cost-effective protection during the critical years of building your business or raising a family.
As a business owner, you can also purchase term life insurance policy where you list your business partner as the insured person. In the event of your business partner’s passing, you’ll have the financial stability to buy the remainder of the business.
Permanent Life Insurance for Business Owners
Permanent life insurance costs much more than term life insurance because your policy stays effective for your entire lifetime as long as premiums are paid. Upon your death, your beneficiary will receive the life insurance benefits you’ve invested in over the lifetime of the policy.
Permanent life insurance also builds cash value, which you're able to access while you’re still alive to cover any personal or business-related expenses. Although more expensive, the guaranteed payout can be useful to help your family or business partner cover expenses after your death.
How much life insurance do business owners need?
The life insurance policy you choose can cover your family, your business, or both. How much coverage you needdepends on what you need your life insurance to cover.
If you're looking to purchase life insurance to protect your business, consider these business expenses that will need to be paid in the event of your passing:
Rent or mortgage payments
Business owners should purchase a customized life insurance policy specific to your business assets. According to the National Association of Insurance Commissioners1, consider the potential financial impact that your death could have on your business. These scenarios include:
Buying multiple of the business partner’s salaries, such as five times their income
Covering the amount needed to buy out the deceased partner’s share of the business
Calculating the cost needed to hire and train a replacement (plus a little extra for downtime during the hiring process