Life insurance for business owners

Buying life insurance when you have a family and a business to protect.

Logan Sachon

Logan Sachon

Published August 24, 2018

There are over 5 million small businesses in the United States, and if you own one of them, there’s a very good chance you need life insurance.

You might think life insurance is just to protect your family, but life insurance can play a big role on the business side, too. In fact, life insurance for small business owners is an essential part of planning for the future of your company. If you own a business, it’s important for you to have life insurance for your family and life insurance for your business.

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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 may be 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.

Business owners need personal life insurance policies for two main reasons:

Income replacement

If you’re the breadwinner for your family, your loved ones will 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

Collateral coverage

Many business owners take out loans to grow their businesses, and sometimes they have to use their personal assets, like a home, as collateral. If you’ve funded your business with loans and used personal or family assets as collateral, those loans could become due when you die, putting your family’s home on the line.

When business owners are calculating their life insurance needs, they need to think of all of their debts and costs, including any business-related debt that would also affect their family if they were to die.

Policygenius’ life insurance calculator can help you figure out how much insurance you’ll need to purchase to make sure your family is protected.


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Why business owners need business life insurance

When you own a business, your family isn’t the only group of people depending on you. Your business partners and employees also depend on you for their livelihoods, and life insurance can be an important part of ensuring that if you die, their jobs don’t die with you.

Through key person insurance and buy-sell agreements, life insurance can protect your business when you aren’t there.

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 considered key employees, hence the name.)

The company pays the insurance premiums and is the beneficiary of the life insurance policy. If the owner dies, the insurance company pays out the death benefit to the company, and the company can use that death benefit in a few different ways, including using it to pay off the expense of looking for a replacement, covering any loss-of-business costs resulting from the death, or if the company closes down, the benefit can be used to pay debts or severance.

The role of life insurance in buy-sell agreements

Buy-sell agreements are a must-have when you own a business with someone. A buy-sell agreement is a part of a succession plan that 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 the remaining partners buying the deceased partner’s share.

The role of life insurance in buy-sell agreements is to provide funds for the remaining partners to pay the deceased’s estate for buy-out those shares. As part of the buy-sell agreement, the partners can use a cross-purchase agreement, meaning each partner purchases coverage on the other. If one dies, the other (or others) gets the death benefit from the policy on the deceased and uses it to buy the company shares.

It’s also possible to set up an entity purchase plan. This means the business buys coverage and pays insurance premiums on each owner, and in the event of a death, the death benefit pays for the shares to go back to the business.

Without a life insurance policy to buy out the deceased’s shares, a buy-sell agreement may not be financially feasible, putting the business’ ownership – and its survival – at risk.

How to buy 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 basically the same:

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

The difference is that for many business owners, you may need to apply for and buy multiple life insurance policies, one to protect your family, and one to protect your business, and that’s where it can get complicated, because sometimes buying multiple policies at the same time can slow the process down.

If you go through an independent broker like Policygenius, however, we can help you navigate the application process and even ensure that you only have to take one medical exam.

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. Policygenius can help you get affordable coverage.

Further reading

What does life insurance cover?

When will life insurance pay out, and when will it not? Learn what scenarios are covered by your policy.


What are life insurance premiums?

Premiums keep your policy in-force. Learn how they're determined and how you can lower them.


What are life insurance riders?

Customize your policy and get additional benefits and protection with must-have riders.


Why life insurance isn't an asset

Life insurance protects your family's financial future - but should you consider it an investment?