Why should business owners have life insurance?
As the owner of a business, you know that a lot of the day-to-day tasks depend on you. Would your spouse be able to support your family, and would your business partner know how to run the business, if you weren’t around anymore? A life insurance policy can financially protect your family, business, business partners, and employees in the event of your death.
Losing a loved one, especially unexpectedly, can already be a difficult time filled with shock and grief. Life insurance for business succession keeps the business running and gives your family access to necessary funds, even if your assets are tied up in the company.
Buying life insurance for yourself can ease financial concerns by helping both your family and your business partner. As a small business owner, taking out life insurance on a partner or other key employee can also help support long-term security for your company and family.
Here’s a quick guide on the types of life insurance available for business owners.
Types of life insurance for small business owners
Business owner life insurance can provide a cash infusion when it’s needed most in the wake of a business partner’s death. There are a few ways to go about it, including:
Individual Life Insurance for Small Business Owners
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 your or your business partner’s death, 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 without financial hardships, protecting them from worries about losing the business entirely.
It’s important to note that some business owners opt to have two different policies: a life insurance for business partners policy, where their business partner is the beneficiary, as well as a separate personal life insurance policy, where their spouse or family member is the beneficiary. This way, both your business partner and your family are covered financially.
Key Person Life Insurance
Key person insurance is a type of individual life insurance where the business, rather than a 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. According to LIMRA, “Approximately 20% of small firms pay for life insurance coverage through the business, for the benefit of either the company or the owner’s family.”
Setting up key person life insurance, where you’re listed as the key person, can help replace lost revenue and give your business partner time to sort out next steps for the business. In return, taking out key person life insurance on a partner can make sure you’re protected in the same way.
A buy-sell agreement is a contract between you and your business partner, which you can use individual life insurance to fund. If one of the partners dies, a buy-sell agreement allows the surviving partner to buy out the deceased business owner’s share of the business.
To make sure the partner has the money to purchase the share, some business partners take out life insurance policies on each other. For example, say your buy-sell agreement stated that the surviving partner could buy the other half of the business for $1 million. Your partner could take out a $1 million life insurance policy on you that lists them as the beneficiary. If you died, your partner would receive the $1 million they needed to buy out the company from your family or estate.
Choosing a life insurance policy as a business owner
There are a range of individual life insurance plans available based on your needs, budget, and financial goals. As you consider what makes sense for you and your business, take a closer look at the two main types of coverage: term and permanent life insurance.
Term Life Insurance
Term life insurance is the most flexible and affordable type of coverage, making it a good option for most people. With term life insurance, you’ll decide exactly how long you want the life insurance policy to last, with term lengths ranging from 10 to 30 years. Once you reach the end of the term, you may be able to extend it or just let it expire if you don’t need coverage anymore.
Term life can provide cost-effective protection during the critical years you’re building a business or raising a family. As a business owner, you can even purchase term life insurance for business partners that lists your business partner as the insured person. This way, in the event of your business partner’s death, you’ll have funds available to buy the remainder of the business.
Permanent Life Insurance
With permanent life insurance, your insurance is effective for a lifetime as long as you keep up with the premiums. Once you die, your beneficiary will receive the life insurance benefits you’ve invested in over the years. Permanent life insurance also builds cash value, which you can tap into while you’re living to cover personal or business-related expenses.
While permanent life insurance costs more than term life insurance, the guaranteed payout can be useful if you want money you can count on to help your family or business partner cover expenses after your death.
How much life insurance do business owners need?
How much life insurance you need depends on what you want your life insurance to cover. Your life insurance policy can cover your family, your business, or both.
Coverage for Your Family
When protecting your family, you’ll want a life insurance policy that can help replace your income and allow your family to cover upcoming expenses and debts, from college tuition to mortgage payments. One rule of thumb for an individual policy is to buy seven to 10 times your annual income in life insurance, but the right amount is different for everyone.
Coverage for Your Business
When protecting your business, you may want a life insurance policy that covers a variety of scenarios. As a small business owner, there’s often a long list of business expenses that need to be paid in the event of your death, including:
Rent or mortgage payments
Other daily expenses
For example, you may want business owner life insurance coverage to pay severance to your employees if the company closes or compensate for potential business losses.
To find the right coverage amount, think about the potential financial impact of your death on your business. According to the National Association of Insurance Commissioners, common strategies include:
Buying a multiple of the business partner’s salary, 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)
It’s important to work closely with your insurance agent to buy a customized life insurance policy tailored to your business assets.
Your goal as the business owner life insurance policyholder is to gain enough protection that your business as well as you and your family will be protected financially, while also ensuring that you’re not paying for more than you need. The best life insurance policy to consider is the one that safeguards the people you love and the business you’ve dedicated your life to building.
Have questions about life insurance for business owners?
Annagard's goal is to make life insurance simple, understandable, and affordable to help our customers protect their families financially. For a personalized estimate on the best policy for you, your business, and your family, call us at (908) 888-0120to speak to one of our agents.