As a business owner, you’ll likely need more life insurance than what you’d get from a personal policy. A personal life insurance policy will protect your family, but buying a separate policy to protect the financial needs of your business will protect your business as well.
Buying key person insurance or establishing a buy-sell agreement with life insurance are the best ways to protect your business financially in the event of your death.
Personal life insurance for business owners
You should have a personal term life or whole life insurance policy for the same reasons other people need one: income replacement and debt protection for your family. You’ll want to make sure that if you die, you have insurance to cover any financial loss that will occur.
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.
Income replacement
If your family relies on your income, they’ll need money to care for themselves after you’re gone. The death benefit from your life insurance policy can cover your salary and your other contributions to the household, like childcare.
When you’re trying to decide how much life insurance you need to replace your income, think of all of your debts and expenses:
Credit card debt
Dependents, including your children or aging parents
The future cost of college for your kids
Mortgage
Student loans
Your spouse’s retirement
Collateral coverage
Don’t leave out business debt when choosing how much coverage to buy. If you took out loans to grow your business, and especially if you used personal property like your home as collateral, a personal life insurance policy is vital.
Those loan payments could be due when you die, putting your family’s savings or home on the line.
Include your business debts in your personal life insurance plan in addition to personal debts and income replacement to give your family the most comprehensive coverage possible.
Key person life insurance for business owners
Key person 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.
“Business life insurance is just as vital for a business as individual life insurance is for a family," says Warren Robbins, senior sales associate at Policygenius.
The business pays the insurance premiums and is the beneficiary of the life insurance policy. The death benefit can go toward:
Business loans or losses
Buying back the deceased’s shares in the business
Covering cost of replacing the employee
Severance to staff if the business closes
Buy-sell agreements and life insurance for co-owners
Buy-sell agreements are a must-have if you share business ownership. A buy-sell agreement dictates what happens to each owner’s share of the company if they leave 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. This usually comes in the form of a cross-purchase agreement or entity purchase plan.
Cross-purchase agreements
Establishing a buy-sell agreement allows you to set up a cross-purchase agreement, which adds life insurance policies into the buy-sell contract.
Each partner purchases life insurance on the others. If one owner dies, the others use the death benefit to buy the deceased’s company shares.
This creates stability for the company. If one owner dies, the company will be able continue to function normally with limited financial impact. The remaining owner(s) will not be forced to sell the company or bring in new ownership.
Entity purchase plan
An alternative is to add an entity purchase plan to your buy-sell agreement. In this agreement, the business buys a life insurance policy on each owner, and uses the death benefit to purchase their shares if one dies.
Not all buy-sell agreements have to involve life insurance, but it’s recommended. If the surviving owners can’t buy back the company’s shares, it puts the business at risk.
How to buy life insurance as a business owner
The steps for buying life insurance as a business owner are the same as buying life insurance as a non-business owner:
Determine your coverage needs, including multiple policies
Comparison shop and get quotes
Choose an insurer and submit an application
Take a free medical exam
Wait for approval
Sign your policy
The difference is that for many business owners, you need multiple life insurance policies to adequately protect your business and your family. An insurance agent or broker can help you manage the application process.
→ Read our full guide on how to buy life insurance
Why do business owners need life insurance?
As a business owner, your family isn’t the only group of people depending on you financially. Your business partners and employees also rely on you for their livelihoods as well.
"If you’re involved in the day-to-day operations of the business, it can be very hard to replace the value of a business owner without any monetary compensation, should something occur," says Levi Sanchez, a financial planner and founder of Millennial Wealth, LLC. "In the instance of a partnership, the two owners can buy life insurance policies on one another to ensure the business would be able to replace the responsibilities of the deceased partner."
If you don’t have life insurance policies that account for your business and your family, you’re putting both at risk. Make sure you have the right policies to cover all of the people who depend on you.
More about finding your best life insurance policy
Frequently asked questions
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 if they pass away.
What is business life insurance used for?
Business insurance is used to make sure that if you die, your business can function. The death benefit can cover severance to employees if the company closes, expenses of hiring your replacement, business lost as a result of the death, or buying and redistributing the deceased owner’s share of the business.
Can a business own a life insurance policy?
A business can own life insurance on an employee that’s vital to business operations, with some restrictions. The payout goes toward replacing that employee if they die.
Who is a key employee for life insurance?
Someone must be key to the functioning of a business to be eligible for key person insurance, like a CEO, founder, or owner.
