Small Business Life Insurance: When Do You Need It?

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Creating a sound financial plan for your small business is a key part of achieving lasting success. According to a 2024 QuickBooks survey, nearly half of small business owners focus on stability rather than their company’s growth.  

Preparing for the unexpected is a major part of creating a stable business with steady revenue. Getting the right business life insurance policy can help keep the business afloat after the owner’s death.   

Insurance for business owners serves different goals compared to personal life insurance. These include covering losses after the death of an executive, arranging ownership priorities, and ensuring job security for employees.

Types of life insurance for small business owners 

Key person life insurance 

A key person policy is a type of small business life insurance that covers employees considered to be indispensable to the company. Losing them would have a major financial impact on the business, particularly if the individual plays a large role in sales or a specialized area. 

But key person life insurance isn’t personal insurance—it’s a policy owned by the business. That means the company pays the premiums and receives the death benefit funds. The goal is to keep the business running while navigating how to replace the key person’s contributions. It’s also possible to add a rider to cover disability in addition to death. 

When deciding on the appropriate insurance policy for a key person in your business, the Insurance Information Institute recommends taking into account the employee’s responsibilities, such as sales or revenue volume.

Also, consider the costs of hiring a new employee, including employment agency fees, relocation, and increased salary expenses.

Buy-sell agreement life insurance 

Another part of business financial planning is deciding what to do if an owner or partner passes away. A buy-sell agreement is a type of small business life insurance policy that provides a contractual agreement for how the deceased’s ownership interest will be handled.  

When the policy is triggered, one party must sell ownership to the other party involved in the contract. A buy-sell agreement life insurance policy is used to fund the purchase. 

There are two types of buy-sell agreements: 

Entity-purchase agreement: With this contract, the business gets to buy out the owner’s interest. The price is agreed on at the time of the contract and the business owns the policy and uses the death benefit to cover the buyout cost. 

Cross-purchase agreement: This type of policy is specifically designed for corporations with multiple stockholders. Each stockholder owns a life insurance policy on the others. If one stockholder passes away, the death benefit is used to purchase ownership from the deceased owner’s estate. 

Individual life insurance 

Getting personal life insurance for business owners is another option that can help provide extra finances for either the business or the people you care about in a couple of different scenarios.  

For starters, an individual life insurance policy with a cash value can be used if you have an economic downturn or an expansion opportunity that requires additional capital.

You can borrow up to 90% of the accumulated cash value in a whole life policy, which can be used in addition to or as an alternative to a business loan.  

One way business owners can utilize individual life insurance is to use the death benefit as an inheritance for family members not involved in the business, reducing tension and preventing disputes over ownership.

Group life insurance  

Instead of serving as a part of business continuity planning, group life insurance is an employee benefit used to attract and retain top talent. You can tailor an offering as you see fit and choose from term or whole life insurance options.  

With group term life, you can choose who pays the premium: the company, the employee, or both. Once an employee leaves the business, coverage typically ends. Whole life insurance is usually paid by the employee who owns the policy, even if they leave their job.  

Benefits of obtaining business life insurance 

Getting business life insurance has several advantages, all of which can help avoid money management mistakes in the long run. 

Financial protection for the company 

Various types of insurance policies can provide financial protection for small businesses.  

Key person life insurance helps a business manage the loss of a key employee, while whole life insurance for small business owners can act as a safety net if the company requires capital in the future. 

Business continuity and succession planning 

Make sure the legacy you’ve built continues to run regardless of the well-being of a single individual.  

A buy-sell agreement policy creates a clear ownership plan and financing opportunity, which is helpful in keeping the business running and ensuring the security of employees. 

Employee retention and satisfaction 

58% of workers in the U.S. say that an increase in income and benefits package are very important when considering a new job.  

Incorporating life insurance benefits could help attract better applicants and satisfy existing team members. 

How to get life insurance for your small business 

1. Consider the best policy types for your business structure: Whether you’re a solopreneur or in a partnership with multiple stakeholders, your needs will vary. Also think about your family’s involvement in the business and how ownership would transfer after your death. 

2. Determine coverage amounts: For each policy type, consider how much money the business or your family would need to move forward with ease. 

3. Compare quotes: Shop around at multiple insurance companies to compare both coverage and premium costs. Ask for recommendations from multiple insurance agents to see which truly works in your best interest.  

Keep your focus on the future 

It takes careful planning to ensure smooth business operations while preparing for potential setbacks in the future. A robust life insurance strategy protects you, your family, and your employees regardless of what happens in the years ahead.  

Frequently asked questions about getting business life insurance 

What is business life insurance, and how does it differ from personal life insurance? 

Many business life insurance policies are owned by the business rather than the individual. The company may pay the premium and use the death benefit when an owner passes away. This gives the company an influx of cash during a tumultuous period, whether it’s losing a key player or transferring ownership.  

Why do small businesses need life insurance? 

Just as you need to plan for your self-employment retirement, you must also prepare for a worst-case scenario in which a major stakeholder dies. 

How much life insurance does a business owner need? 

The amount of life insurance a business owner needs depends on the type of policy as well as the size and structure of the business. For key person life insurance, you may purchase a multiple of the individual’s revenue or salary. With a buy-sell agreement, you would need a pre-determined valuation of the business to assign an amount to each stakeholder’s ownership.

Written by Lauren Ward | Edited by Rose Wheeler

Lauren Ward is a personal finance writer who is passionate about helping people simplify their financial decisions. Her work has been featured in outlets such as USA Today Blueprint, CNN Underscored, and many more. She lives in Virginia with her husband and three children.

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