There are over 5 million small businesses in the United States. If you’re an owner of one of them, you also might be one of the 53% of small business owners that don't have business life insurance.
Life insurance for business? That’s right. You might think it’s just to protect your family, but life insurance can play a big role on the business side, too. In fact, if you’re a small business owner, it’s important for you to have life insurance for your family and life insurance for your business.
In this article, we break down how having life insurance for both parties protects everyone if you’re no longer around.
Personal life insurance
When it comes to your personal life, life insurance has one main job for your family: income replacement so they can cover their expenses.
As a small business owner, this makes sense. Some people get life insurance through their work (even if it usually isn’t enough) but as the owner of a small business you might not have that luxury. That’s why you need to make sure you’re protecting your family – because no one else will.
Life insurance to cover personal expenses
If you’re the breadwinner for your family, they’ll need money to continue their lives after you’re gone. Life insurance will give them the money to do so. When you’re trying to decide how much life insurance you’ll need, think of all of your debts and expenses:
The future cost of college for your kids
Debts like your mortgage, auto loans, student loans, and credit cards
Your spouse’s retirement
Any dependents, including your children or elderly relatives
You can use a life insurance calculator to figure out what your expenses are, where your gaps are, and how much insurance you’ll need to purchase to make sure your family is protected.
Life insurance to cover collateral
You may have taken out a loan to grow your small business; if you did, you might have put up some of your personal assets, like your home, as collateral. If you die and your family can’t pay those debts, they’re at risk of losing their possessions.
That’s why, when they’re looking to protect their family, small business owners also need to think about their business. Remember, when you’re calculating your life insurance need, you need to think of all of your debts and costs; you might easily think about your mortgage, credit card debt, and college, but don’t forget about business-related debt that would also affect your family in your absence.
Business life insurance
But your family isn’t the only group of people depending on you if you’re a small business owner, right? You also have your "work family" – partners and employees to whom you mean a great deal. What happens to them if you die?
Luckily, life insurance can help in these situations, too. Through key person insurance and supporting buy-sell agreements, life insurance can protect your business when you aren’t there to.
Key person insurance
Key person insurance is a specific type of life insurance designed to help keep your business afloat when you’re gone.
Think about it: if you’re a small business owner, you’re not a one-in-a-million employee. You’re the face of the business. Clients know you, any employees you may have know you, and you’re calling a lot of the shots. If you’re gone, the business will suffer.
That’s where key person insurance comes in. The company pays for and is the beneficiary of the life insurance policy. If you die, the company can use that death benefit in a few different ways. They might use it to pay off the expense of looking for your replacement; if your death results in a loss of business, they can use the benefit to cover those losses; or if the company closes down, the benefit can be used to pay debts or severance.
For a full explanation on key person insurance, check out our article about it.
Buy-sell agreements are a must-have when you own a business with someone. A buy-sell agreement essentially says what happens to an owner’s share of a business when he or she is no longer around. It’s like a prenup for businesses, setting the price and terms of buying the share.
What does this have to do with life insurance? Well, when the co-owner of a business dies, their share of the business may revert to their family. Those families might not want to help run the business, and the remaining co-owner(s) will have to buy them out. Instead of forcing them to or getting into a dispute over how much to pay for the family’s share, a buy-sell agreement has already laid that out.
Of course, the surviving co-owner(s) still needs to pay for it. A life insurance policy that lists the co-owner(s) or business as the beneficiary instantly gives them the money needed to buy the family’s share.
There are three main ways life insurance can be used in a buy-sell agreement:
Cross-purchase – The owners purchase coverage on each other. If one dies, the other(s) gets the death benefit and uses it to buy the company shares.
Entity – The business owns coverage on each owner and is listed as the beneficiary.
Hybrid – A mix of the above.
Without a life insurance policy, a buy-sell agreement may not be financially feasible, putting your business’ ownership – and its survival – at risk.
You put a lot of effort into building your business and supporting your family. But if you don’t have life insurance, you’re putting both at risk. Make sure you have policies in place to cover both your family and your company and that you talk to a licensed agent or financial advisor so you’re getting enough coverage with each policy to provide some peace of mind.