Types of life insurance for small business owners

From general liability to personal property coverage, insurance is there to help your business recover financially from a serious claim. But what about life insurance? Life insurance is a type of coverage that small business owners may overlook or think they don't need.

You’ve worked hard to grow your business and to provide for the people you love, so don’t risk it all by not having the right life insurance in place. Read on to learn about the different types of life insurance for small business owners.

Types of life insurance for small business owners

Key person life insurance

Key person life insurance (also known as key man, key woman or business life insurance) is meant to provide your business with enough readily available cash if a critical employee or other person vital to the success of your business were to die. These policies are typically purchased by a company who is also the beneficiary in the event of the essential employee's death.

For example, does your business rely on an individual who has provided positive benefits to your company’s bottom line (their connections, experience, number of years with your company, etc.)? What would happen if they were suddenly gone? Life insurance can provide you with the money needed to help make up for the lost revenue, as well as buy you some time to find and train their replacement. So, ask yourself, if you were to lose a key employee, would your business experience a serious financial setback? If yes, then you may want to secure a key person life insurance policy.

Buy-sell agreements

A buy-sell agreement (also known as a buyout agreement) is a contract between the co-owners of a business. In the event of an owner’s death, the agreement allows the surviving co-owner to buy the deceased co-owner’s share of the business from the heirs or estate at a predetermined price. But how can you be sure that you’ll have enough money to buy that share of the business upon your co-owner’s death?

Life insurance policies are typically used to fund buy-sell agreements. For example, individual owners in your business buy a life insurance policy on the lives of each co-owner. Upon the death of a co-owner, the benefits are paid to the surviving owners. If ensuring the continuity of your business is important to you, talk to your financial representative or life insurance professional about setting up a buy-sell agreement that’s funded with a life insurance policy.

Individual life insurance for small business owners

Commercial businesses can carry a great deal of monthly overhead. From rent and inventory to loans and vendors, bills must be paid to keep the business operating. If you were to die tomorrow, would your loved ones be able to keep the business operating or be forced to liquidate and sell?

Buying an individual life insurance policy as a small business owner can help ensure that upon your death your loved ones will have the immediate cash to help keep the doors open. This is money that can be used to pay the bills, or even fund the salary of a new key employee to help run the business after you’re gone.

Why small businesses need life insurance

Incorporating small business life insurance into your business plan is an important step in preserving the company you’ve worked hard to build. It can help ensure business continuity and protect employees or loved ones in the event of your unexpected death. Small business life insurance is valuable in the following situations:

• Ensuring the future success and stability of a business
• Protecting the business from financial loss after a key employee dies
• Helping fund buy-sell agreements for business partners
• Providing income replacement for loved ones

Additional types of life insurance

Depending on your situation, needs and goals, you may benefit from more traditional life insurance for small business owners, such as term, whole or universal life insurance.

Term life insurance

Term life insurance provides protection for a set number of years, typically between 10 and 30. This type of insurance can be beneficial during the years you are building your business. Term life insurance can help pay off business loans or provide income for your family or business partner in case you pass away.

Whole life insurance

Whole life insurance is a type of permanent life insurance with set premium payments and a guaranteed death benefit. This insurance can accumulate cash value over time at a fixed interest rate. You may consider whole life insurance if you want an additional savings option that offers permanent coverage with the option to borrow against your policy’s cash value for business expenses.

Universal life insurance

Universal life insurance is a type of permanent life insurance that provides greater premium and death benefit flexibility. This insurance provides permanent coverage, but with more versatility and the ability to accumulate cash value above the set interest rate depending on market performance. You may consider universal life insurance if you predict your business’s financial situation may change frequently and you need an option with flexibility.

Frequently asked questions about small business life insurance

• Is life insurance tax deductible for small businesses? Depending on your type of small business, you may be able to deduct up to $50,000 of group term life insurance premiums if you are paying them on behalf of your employees. You typically won’t be able to deduct premiums if you or an insured individual have financial interest in the company or the company is the beneficiary of the policy.
• Are small business owners required to have life insurance? There is no state or federal law that requires you to have small business life insurance. However, life insurance for small business owners has many benefits that can help ensure your company can continue to operate normally after your death. You may also need to show proof of a business owner’s insurance policy before applying for a small business loan through the U.S. Small Business Administration.
• Can my small business offer life insurance? As a small business owner, you can provide life insurance for your employees by providing coverage such as key person, buy-sell or group life insurance. The type of insurance you choose depends on factors like your coverage needs, the size of your business and your business continuity plan.
• Do small business owners need life insurance? There is no law mandating you purchase small business owner life insurance. But if you pass away, it can help ensure business continuity while providing your loved ones with financial stability. Certain types of small business life insurance can also be used to help retain key employees by providing them with business-paid coverage for their families.
• Do you need group life insurance for small businesses? Offering group life insurance is not required, but it can be used to enhance the benefits package you offer your employees. Purchasing a group policy is generally cheaper than providing individual life insurance for each employee. Group term life insurance is the most common type of coverage, though you can also choose group whole life, group universal life or group variable life.

Considering small business owner life insurance

Life insurance may seem like just another bill, but as a small business owner, it's an essential part of ensuring that the business you've worked so hard to build has the chance to grow and thrive. For more information about getting started with life insurance, visit the Protective Learning Center.

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