A business owner life insurance policy can protect your business as well as your family financially if you should pass away. By consulting with an expert life insurance advisor, you can ensure you’re not overpaying and have the right coverage to safeguard the people you love and the business you’ve dedicated your life to building.
Why do small business owners need life insurance?
Business owners need life insurance to protect their family, company and employees from debts and unexpected costs when they’re no longer around.
As a business owner, your family isn’t the only group of people depending on you. Your business partners and employees also rely on you for their livelihoods. Would your spouse be able to support your family or your business partner know how to run the business without you? Your business operations and growth depend on you. A life insurance policy can financially protect your family, business, business partners and employees.
What is business life insurance used for?
The death benefit of a life insurance policy can cover many immediate expenses, including costs for hiring a replacement or providing a business partner with the funds to buy out the business and give your family access to necessary funds.
Can a business own a life insurance policy?
A business can place a “key person” (or “key employee”) policy on an employee who is vital to business operations (with some restrictions). The payout goes toward replacing that critical employee if they die. This is one of the smartest steps business owners can make as part of their overall business plan.
Who is a key employee for life insurance?
This individual must be key to the functioning of the business, such as a CEO, founder or owner. They may also have a name or reputation that reflects positively on the company or hold specialized skills unique to the company’s success.
What are the types of life insurance for small business owners?
Business owner life insurance can provide a cash infusion when it’s most needed in the aftermath of a business partner’s death. There are a few ways to go about it, including:
Individual
You and your business partner can take out an individual life insurance policy on each other. If one of you passes away, the benefits of the policy are paid to the surviving business owner. This type of life insurance lets the surviving 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 life insurance policies: a 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
Your business, rather than a partner, is the beneficiary of this policy. Key person life insurance provides your business with funds if an essential employee such as the business owner passes away. 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 and listing yourself as the key person can replace lost revenue and give your partner time to sort out next steps for the business. And taking out a similar policy on your partner can make sure you’re protected too.
Buy-Sell Agreements
A buy-sell agreement is a contract between you and your business partner, which you can fund with individual life insurance. If one of the partners dies, a buy-sell agreement lets the surviving partner buy out the deceased owner’s share of the business.
To make sure a partner has the money to purchase the share, some business partners take out life insurance policies on each other. For example, your buy-sell agreement may state that your surviving partner could buy the other half of the business for $1 million. Your partner could then take out a $1 million life insurance policy on you and list themselves as the beneficiary. If you passed away, your partner would receive the $1 million needed to buy out the company from your family or estate.
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 policy can cover your family, your business, or both.
Coverage for Your Family
To protect your family, you’ll want a life insurance policy that can help replace your income and allow your loved ones 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 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.
You may want a life insurance policy that covers a variety of scenarios. As a small business owner, you will likely have multiple business expenses that need to be paid in the event of your death, including:
- Rent or mortgage payments
- Inventory
- Loans
- Vendor payments
- Payroll
- Utilities
- Other daily expenses
For example, you may want business owner life insurance coverage to pay severance to your employees if your company closes or compensate your business for potential 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)
There’s a lot to consider when you’re planning for the future, but choosing the right life insurance doesn’t have to be complicated. A licensed Mylo advisor can consult with you on coverage that fits your budget and best protects your business and family. We even have individual life insurance policies available that can be purchased 100% online in minutes. We specialize in providing coverage to small business owners and offer a fast, easy way to find the expert coverage you need – so you can get back to building something great.
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Thanks to our exclusive insurance partner Mylo for this article.