Why Business Owners Need Life Insurance
Business owners need life insurance to protect their family, company, and employees from debts and unexpected costs if they pass away.
As a business owner, you should have both key person and personal life insurance to protect your company and your family. Co-owners should have buy-sell agreements that include life insurance. We will explain this in more detail below.
First, let’s look at some of the reasons why business owners need life insurance:
To keep business running
Business owner life insurance is a great way to keep your company afloat in good and bad times. It may be used to pay off your business debts, supplement cash flow, and cover expenses needed to find your replacement should you die.
Likewise, if your life insurance policy has a cash value component, you could tap into those funds to fuel tax-free business growth—even while you’re still alive.
To fund partnership agreements
If you have business partners, you most likely have a partnership agreement in place. This agreement typically stipulates that if one partner dies or becomes incapacitated, the surviving partners have the right to buy out their share of the business. Life insurance can help fund this buyout.
To equalize an estate
If you own a family business, you could also use life insurance to ensure your successors get an equal inheritance.
For business owners who have children who are active in the business and other children who are not, for example, a combination of life insurance and unequal distribution of non-business assets can be a practical way to help address a shortfall.
To protect family members
What would happen to your family’s finances if you were to die unexpectedly? They could be left with substantial debts, a lack of income, and potentially no way to move forward. Life insurance can replace your income so your loved ones can maintain the same standard of living.
How does life insurance for business owners work?
The primary purpose of life insurance for business owners is to provide financial protection for a company in the event of the owner’s death. The beneficiary(ies) can use the death benefit to pay off debts, support the family, or keep the business running—whatever the policyholder wishes.
For example, if you have business partners, business life insurance could be used to buy out your share (or their share) of the business should one of you die. That way, the business can continue running as planned, and your family doesn’t have to stress about what to do with it.
3 Types of Life Insurance for Business Owners
Personal life insurance – Protects your family and personal finances
Key man life insurance – Covers the financial hit your company would take if it lost a key owner, executive, or employee
Buy-sell agreements – Allows business partner(s) to buy out your share of the business should you die or become incapacitated
Personal life insurance
If you’re a business owner, a personal life insurance policy is especially important since you may not have employee benefits like a retirement account, group life insurance, or disability insurance. Personal life insurance is for your family and any personal debts. It can be used to replace your income, pay off personal debts, leave an inheritance to your kids and keep your family financially secure.
A general rule of thumb is to have a personal life insurance policy ten times larger than your annual income.
Key man life insurance
Key man life insurance, also known as key person life insurance, is a specific type of company-owned life insurance designed to help keep a business afloat even if the owner or another important employee dies
The final type of business owner insurance you should consider is a buy-sell agreement. This one is especially important if you have business partners.
A buy-sell agreement is a legally binding contract between business owners that dictates what will happen to the business if one of the owners dies, becomes disabled, or wants to sell their interest in the business. It’s like a prenuptial agreement for business partners: it sets the price and terms for the remaining partners to buy the deceased (or exiting) partner’s shares.
Adding life insurance to a buy-sell agreement simplifies the process by earmarking money for a buyout.
There are two main types of buy-sell agreements:
Cross-purchase buy-sell agreement
In a cross-purchase buy-sell agreement, the business owners each buy a life insurance policy on the other owners. The death benefit is paid to the surviving owners, who then use the money to buy out the deceased owner’s interest.
Entity purchase buy-sell agreement
In an entity purchase buy-sell agreement, the business buys a life insurance policy on each owner. The death benefit is paid to the business, which uses the money to buy out the deceased owner’s interest.
Term vs. Permanent Life Insurance: Which should you choose?
Term life and permanent life are the two main types of life insurance. Permanent life insurance includes products like whole life insurance and universal life insurance.
As a business owner, you should have a personal term life or whole life insurance policy for the same reasons anyone needs one: income replacement and debt protection for your family.
Read more here on term life insurance to determine whether it’s right for you.
Related: Whole life insurance explained
How much life insurance should a business owner have?
Here are some factors to consider when deciding how much life insurance you should have as a business owner:
- The size of your business
- Your overhead costs
- The number of employees
- The company’s financial stability
- Your personal financial situation
- The amount of debt the company has
- Whether you have a buy-sell agreement in place
Ultimately, the goal of business life insurance is to ensure your business (and family) can continue running smoothly without you.
Ready to shop for life insurance?
Life insurance for business owners is about financially protecting your company just as much as protecting your loved ones. You need to speak with an insurance agent to help you identify the right type of life insurance and coverage amount.
As a licensed independent agent, I can help you determine how much coverage you need and shop around for the best rates. Call me today at (912) 660-5236 for a no-cost, no-obligation appointment.