There are more than 30 million small businesses in the United States. If you own one of these businesses, there’s a very good chance you need more life insurance than a standard personal policy provides. You might think of life insurance as a tool to protect your family, but if you own or operate a business, buying key person insurance and incorporating life insurance into your buy-sell agreements is equally important.

If you die, key person insurance ensures that your business and your employees have financial support, whereas a personal policy provides an income replacement for your loved ones. Having life insurance for both you and your business also protects your family from collateral damage related to your company, like business loans, if they come due when you're gone.

Why business owners need business life insurance

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. "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 in order to ensure the business would be able to hire to replace the responsibilities of the deceased partner."

Buying key person insurance — also referred to as key man insurance — and setting up buy-sell agreements that include life insurance can keep your business alive and provide financial assistance to your partners and employees after you’re gone.

Key person insurance

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 integral member of the team dies. (Such people are employees key to the company’s operation, hence the name.) The business pays the insurance premiums and is the beneficiary of the life insurance policy. If the owner dies, the insurance company pays the death benefit to the business.

The company can use the death benefit in a few ways. They can put it toward the cost of hiring a replacement for the employee or toward any loss-of-business costs resulting from the death. If the company closes down as a result of a key employee’s passing, the benefit can be used to pay off outstanding debts or severance for employees. Without key person insurance, these expenses come entirely out of the business’ budget and employees can lose their jobs — and income — if the company closes.

Buy-sell agreements and life insurance

Buy-sell agreements are a must-have if you share business ownership. A buy-sell agreement dictates what happens to one owner’s share of a company if they exit the business. It’s like a prenuptial agreement for business partners, setting the price and terms under which the remaining partners can buy the deceased (or exiting) partner’s share of the business.

You can then organize a cross-purchase agreement, which allows each partner to purchase life insurance on the other as part of the buy-sell agreement. If one owner dies, the others get the death benefit from the policy and use it to buy the deceased’s company shares.

It’s also possible to set up an entity purchase plan. This allows the business to buy a life insurance policy on each owner, and in the event of an owner’s death, use the death benefit to purchase their shares on behalf of the business.

Without a life insurance policy to put toward buying out the deceased’s shares, a buy-sell agreement may not be financially feasible for the surviving owners or the business. If the living owners are unable to buy back those shares, it puts the business’ ownership — and survival — at risk.

Why business owners need personal life insurance

Personal life insurance policies are designed to take care of your family and other dependents if you die. If you’re a business owner, a personal life insurance policy is even more important since you may not have the benefits that come with being an employee, like retirement accounts, employer-provided group life insurance, or disability insurance.

You should have personal life insurance for the same reasons other people need it: income replacement and debt protection for your beneficiaries. As a business owner, your needs in these two categories may even be greater than the usual life insurance applicant.

Income replacement

If your family relies on your income in any way, your loved ones will need money to care for themselves after you’re gone. The life insurance death benefit can provide enough money to account for your lost income and your other contributions to the household, like childcare and cleaning, while your family gets your affairs in order. When you’re trying to decide how much life insurance you need to replace your income, think of all of your personal 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

Collateral coverage

If you took out loans to grow your business, and especially if you used your personal assets, like your home, as collateral, a personal life insurance policy is vital. Those loans could become due when you die, putting your family’s savings or home on the line.

When calculating your life insurance needs, don’t forget business-related debts that would also affect your family if you die. Including your business debts in your personal life insurance plan in addition to personal debts and income replacement will provide the most comprehensive coverage for your beneficiaries when you’re gone.

Buying life insurance as a business owner

Buying life insurance as a business owner is similar to buying life insurance as a non-business owner. The steps are generally the same:

• Determine your coverage needs, including multiple policies
• Comparison shop and get quotes
• Choose an insurer and submit an application
• Take a free insurance medical exam
• Wait for underwriting approval
• Sign your policy

The difference is that for many business owners, you may need to apply for and buy multiple life insurance policies. You probably need at least two: one to protect your family and one to protect your business. An insurance agent or broker can help you manage the application process and ensure you get enough coverage to protect your business, your employees, your family, and any business partners you have.

You put a lot of effort into building your business and supporting your family. But if you don’t have life insurance that accounts for both, you’re putting each at risk. Make sure you have policies in place that cover both your family and your company: key person insurance and buy-sell agreements that include life insurance for the business and personal life insurance that accounts for your income, debts, childcare, and any business loans for your loved ones.