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.
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.
Rebecca Shoenthal is a licensed life, disability, and health insurance expert and a former editor at Policygenius. Her insights about life insurance and finance have appeared in The Wall Street Journal, Fox Business, The Balance, HerMoney, SBLI, and John Hancock.
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This article has been reviewed by a licensed Policygenius expert to ensure that sources, statistics, and claims meet our standard for accurate and unbiased advice.
As a business owner, you need more life insurance than you’ll get from a personal policy. Your own life insurance protects your family. But, buying key person insurance is equally important for their protection if you own a business.
Key takeaways
You should have multiple life insurance plans to cover your family and your business
Key person insurance and buy-sell agreements that include life insurance protect your business, partners, and employees
Personal life insurance replaces your income and protects your family from any debts you have
If your family relies on your income, they’ll need money to care for themselves after you’re gone. The death benefitcan 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
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 beneficiaryof 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.
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.
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 to ensure the business would be able to replace the responsibilities of the deceased partner."
If you don’t have life insurance that accounts 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.
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?
The death benefit can cover severance to employees if the company closes, expenses of hiring a 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.
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.
Rebecca Shoenthal is a licensed life, disability, and health insurance expert and a former editor at Policygenius. Her insights about life insurance and finance have appeared in The Wall Street Journal, Fox Business, The Balance, HerMoney, SBLI, and John Hancock.
