Life insurance for business owners: What you need to know

Business owners should have both key person and personal life insurance to protect their company and their family. Co-owners should have buy-sell agreements that include life insurance.

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Amanda ShihEditor & Licensed Life Insurance ExpertAmanda Shih is a licensed life, disability, and health insurance expert and a former editor at Policygenius, where she covered life insurance and disability insurance. Her expertise has appeared in Slate, Lifehacker, Little Spoon, and J.D. Power.&Tory CrowleyAssociate Editor & Licensed Life Insurance AgentTory Crowley is an associate editor and a former licensed insurance agent at Policygenius. Previously, she worked directly with clients at Policygenius, advising nearly 3,000 of them on life insurance options. She has also worked at the Daily News and various nonprofit organizations.

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Antonio Ruiz-CamachoAntonio Ruiz-CamachoAssociate Content DirectorAntonio helps lead our life insurance and disability insurance editorial team at Policygenius. Previously, he was a senior director of content at Bankrate and CreditCards.com, as well as a principal writer covering personal finance at CNET.
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Mike HoganMike HoganSenior Manager, Case Management Mike Hogan is a life insurance expert and Senior Manager of the life case management team at Policygenius.

Updated|4 min read

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As a business owner, youll likely need more life insurance than what youd 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.

Key takeaways

  • If youre a business owner, its best to have multiple insurance policies: at least one policy to protect your personal finances and at least one policy to protect your business

  • Personal life insurance replaces your income and protects your family from any debts you have

  • You can protect your business, partners, and employees with key person insurance and buy-sell agreements that include life insurance

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. Youll 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.

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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.

Authors

Amanda Shih is a licensed life, disability, and health insurance expert and a former editor at Policygenius, where she covered life insurance and disability insurance. Her expertise has appeared in Slate, Lifehacker, Little Spoon, and J.D. Power.

Tory Crowley is an associate editor and a former licensed insurance agent at Policygenius. Previously, she worked directly with clients at Policygenius, advising nearly 3,000 of them on life insurance options. She has also worked at the Daily News and various nonprofit organizations.

Editor

Antonio helps lead our life insurance and disability insurance editorial team at Policygenius. Previously, he was a senior director of content at Bankrate and CreditCards.com, as well as a principal writer covering personal finance at CNET.

Expert reviewer

Mike Hogan is a life insurance expert and Senior Manager of the life case management team at Policygenius.

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