Most people know they need a life insurance policy to protect their family in case they unexpectedly die. But have you set up the same protection for your small business? Let's look at why small business life insurance is important and the different types that are available.
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Why do small businesses need life insurance?
If you unexpectedly die, it could throw your business into chaos. You likely play a key role in the day-to-day operations and decision-making, which would leave a significant void in the company. You've built relationships with your customers, employees, and vendors over the years, and your loss could hurt morale and reduce your profits.
Any business loans you've taken out will need to be repaid, creating potential cash flow problems. And without a clear succession plan, it's hard to know how the company continues to move forward. Plus, if the business is tied up in your personal estate, this can cause probate issues.
Life insurance won't eliminate these problems, but it can create a financial buffer. The proceeds from your policy can pay off outstanding debts, cover the cost of finding and training your replacement, and cover any gaps in revenue.
Small business insurance can also be a valuable succession planning tool since certain types of coverage can ensure the company's shares are distributed fairly. In summary, purchasing a small business life insurance policy helps ensure your business can carry on without you.
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Life insurance won't eliminate these problems, but it can create a financial buffer. The proceeds from your policy can pay off outstanding debts, cover the cost of finding and training your replacement, and cover any gaps in revenue.
Types of life insurance for small business owners
The different types of life insurance policies you can choose from include the following:
- An individual policy: Individual policies allow you and your business partners to take out policies in case one of you passes away. If one of you dies, the living partner will receive the proceeds from that person's policy. The surviving partner can get the business back on track without facing significant financial hardship.
- Key person life insurance: Key person insurance provides death benefits if the owner or someone who is crucial to the business dies. It's similar to an individual policy, but the death benefits are given to the business, not the individual.
- Buy-sell agreements: A buy-sell agreement is a contract between business owners outlining what happens if one of them dies. If one co-owner dies, the agreement states that the remaining partner can buy out that person's shares. Many people use life insurance policies to fund a buy-sell agreement.
- Whole life insurance: Unlike term policies, which last between 10 to 30 years, whole life insurance offers lifelong coverage and includes a cash value component. The premiums continue to build the cash value over time, which you can borrow against for business expenses.
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How to get life insurance as a small business owner
To find the right insurance policy, start by identifying your coverage needs. Work with a financial adviser to calculate your expenses, which could include things like
- Monthly payroll.
- Rent or mortgage payments.
- Outstanding business loans.
- How much it would cost the company to replace you.
If you have a family, consider what they would need if you died. As a general rule of thumb, it's a good idea to purchase a policy that's between five to 10 times your current salary.
From there, you can choose the type of insurance you want to buy. Term life insurance may be a good option if you want to purchase multiple policies to protect the business and your family. Key person insurance is the best choice if you want the business to receive the death benefits. And whole life insurance is a good option if you want to take advantage of the cash value component.
Finally, it's important to shop around and compare policies from different insurance providers. Look for insurers that have a history of providing good customer service and paying claims. If you work with a licensed insurance broker, they can shop around with different providers on your behalf to find the best policy and most competitive premiums.
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