Life Insurance Options for Business Owners

Jan 11, 2023

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min read

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s a business owner, you juggle multiple roles and responsibilities. But have you ever thought about what would happen to your company if anything happened to you or your partner? Who will look after your family and your employees? This is where life insurance comes in; think of it as a superhero cape for your business and loved ones that will shield it from financial catastrophe in case of the unexpected. But with so many options available, finding the best insurance might seem like wandering through a maze.

Don't worry. This article will explore the many life insurance plans available to business owners and provide the information you need to decide to protect your company and your loved ones in the event of your untimely demise. So, let's dig in!

Character With Insurance Umbrella — Source: Storyset

Why Do Business Owners Need Life Insurance?

As a business owner, you have responsibilities to your family, business partners, and employees who depend on you for their livelihoods. Thus, life insurance can be a valuable tool to protect them in case of an unexpected loss. Here are some reasons you should consider getting life insurance:

Protect the Business's Financial Interests.

Generally, when the business owner passes away, the company is at risk of shutting down. You wouldn't want that, right? After all, it's the company you opened with your blood and sweat, and you want it to keep running. Thus, it's essential to have a financial plan in place that will keep it running even in your absence. In this case, life insurance can provide the financial resources to maintain the business, pay off debts and ensure continued cash flow.

Protect the Financial Interest of Your Family.

If you are the sole breadwinner and backbone of your family, your passing could have significant financial consequences for your loved ones. Life insurance can provide them with the financial means to cover living expenses, pay off debts, and handle other financial responsibilities. It can also help cover the costs of your funeral and burial, taking off some of the financial burdens from your family while they are coping with your loss emotionally.

Cover Loss From the Death of the Key Employee.

What if your irreplaceable employee suddenly died? This will impact your business's daily operation and profitability. In this case, the death benefit from life insurance can be used to offset the loss and cover expenses such as recruiting and training a replacement.

Fund Buy-Sell Agreements.

If your business has multiple owners, a buy-sell agreement can outline what will happen to your own after the death of one owner. These agreements are used to ensure that the business's ownership is transferred smoothly and orderly in the event of one of the business partners. In layman's terms, you insure each other so that the proceeds can be used to buy out the deceased owner's share of the business from their family or estate, allowing the remaining owners to maintain control of the company.

Agreement Paperwork — Source: Vectorjuice (Freepik)

Qualify for the Business Loan.

In many cases, a life insurance policy is required to qualify for Small Business Administration (SBA) loans from private lenders. Life insurance is used as collateral to guarantee loan repayment in case of the borrower's death. Thus it serves as a financial safeguard for the lender. The proceeds from the insurance will be used to pay off any outstanding loan balance if the borrower dies before the loan is fully repaid.

Also read: What Is Life Insurance And How Does It Work?

Types of Life Insurance Policies for Business

Now that you know the importance of life insurance as a business owner, you might be thinking about the available options. Several types of life insurance policies may be suitable for business owners. Here are some of them:

Term Life Insurance

As the name suggests, term life insurance provides coverage for specific terms, such as 10, 20, or 30 years. It is generally the most affordable type of life insurance. It is a good choice for business owners who want to protect their business or family against the financial consequences of their death for a specific period.

Permanent Life Insurance

Permanent life insurance, also called whole life insurance, offers lifetime coverage for the insured person. It typically has higher premiums than term life insurance, but it also has a savings component that allows policyholders to accumulate cash value over time. It may be a good choice for business owners who want lifelong protection and the opportunity to build cash value. It also allows you to tap those funds to fuel tax-free business growth even when you are alive.

Key Man Insurance

Key man insurance is a life insurance policy that a business takes out on the life of a key employee or business owner. The company is the policy beneficiary and receives the death benefit if the insured key person dies. It can help a business continue operating and protect against the financial consequences of losing a key employee or business owner.

Buy-Sell Agreement

If you have business partners, the buy-sell agreement is crucial as it dictates what happens to the business if one of its owners dies, is disabled, or wants to sell off the business shares. These agreements are funded by a life insurance policy that helps minimize turmoil caused by a business partner's sudden departure.

There are several types of buy-sell agreement life insurance plans to consider, including

Cross-purchase Plans.

Under a cross-purchase plan, the business owners take out life insurance policies on each other, and the proceeds from the policy are used to fund the purchase of the deceased owner's share of the business.

For instance, if A and B are business owners of AB company, they will take insurance policies for each other. In this case, A is B's life insurance beneficiary and vice versa. Both will pay insurance premiums on their own, and in case of the death of A, B will receive the proceeds, which can be used to buy the shares of A in the company.

Entity Redemption Plan

Under an entity redemption plan, the business takes out a life insurance policy on each owner and becomes the policy's beneficiary. If the business owner passes away, the company can use the death benefit from the policy to acquire the deceased owner's share of the company.

For instance, if A and B are business owners of AB company, the company will take insurance policies for both of them and pays for the insurance premium. In case of A's death, the company receives the net proceeds, which can be used to buy a share of A in the company.

How Much Life Insurance Should a Business Owner Have?

There is no specific answer to how much life insurance a business owner should have. The appropriate amount of coverage will depend on your particular needs and circumstances of the business and personal situation. Some factors to consider when determining how much life insurance to get are as follows:

The Financial Needs of the Business

When considering how much coverage you will need, it's essential to consider a range of potential expenses the business may incur in the event of the owner's death. These expenses might include the following:

Rent or mortgage payments.
Inventory costs for goods or products.
Business loans
Vendor payments
Payroll for the business's employees
Utilities such as electricity, water, and internet
Other daily expenses.

Thus, calculate all the business's financial needs and take out the policy that covers the need so your business can run smoothly even in your absence.

Calculating Financial Needs — Source: Freepik

The Financial Needs of Your Family

If you are your family's primary source of income, your death could have significant financial consequences for your loved ones. To ensure they are financially secure after your passing, it's essential to determine the funds needed to cover expenses. Some important things to consider when calculating this amount include the following:

Rent or mortgage payments for your family's home
Child education expenses, such as tuition and school supplies
Living expenses, such as groceries, utilities, and transportation
Any outstanding debts or loans that you have
Future expenses, such as your children's college education
Any potential medical costs that your family might incur in the event of your death

Thus, calculate how much your family would need to care for themselves after you are gone. The proceeds should cover your rent, your child's education, and living expenses. This way, you can know that your loved ones will be taken care of in your absence.

The Value of the Business

If a business has significant value, it may be essential to have a more comprehensive life insurance policy to protect the financial interests of the business and its partners. This can be especially important in cases where the company has multiple partners, and the death of one partner could significantly impact the business's financial stability. To determine the appropriate amount of coverage, it's common practice to calculate multiple times the salary of the business partner when taking out the life insurance policy.

For example, if a business has a partner who earns $100,000 annually, it would be recommended to consider getting a life insurance policy with a death benefit of at least $500,000 (5 times the salary of the partner) to protect the financial interest of the business and its partners in the event of his death. This would ensure that the remaining partners have the financial resources needed to continue running the business and protect their financial interests.

It's worth noting that this is just a general rule of thumb, and the amount of coverage may vary depending on each business's unique needs and circumstances. Other factors to consider when determining how much life insurance coverage is appropriate to include the size of the business, its level of debt, and the value of any company assets.

The Amount of Outstanding Debts

If you have significant debts, such as a mortgage or business loans, it may be necessary to have a more comprehensive life insurance policy to help pay off these debts in the event of your death. Furthermore, if your purchase life insurance to qualify for the business loan, then the coverage amount must be equal to the loan amount. For instance, if you are borrowing a $100,000 loan, your insurance should have at least $100,000 worth of coverage.

In general, it is a good idea for business owners to speak with a financial advisor or insurance professional to determine the appropriate amount of life insurance coverage for their specific needs and circumstances.

How to Get Life Insurance for Business Owners?

The process of purchasing life insurance as a business owner is the same as buying insurance as a non-business owner. Here's an overview of what the process would look like:

Determine your coverage needs.
Shop for insurance products and get several quotes
Choose an insurer and submit an application
Take a free medical exam.
Wait for approval
Sign your policy

Read this article to know in detail

Tips for Choosing Life Insurance for Business Owners

There are several things to be aware of as you shop around for life insurance coverage:

Compare Quotes From Multiple Insurers.

Getting quotes from several different insurers to compare the coverage and premiums offered is a good idea. This will help ensure you get the most appropriate coverage at the best price.

Understand the Terms of the Policy.

Make sure to understand the terms of the policy. This includes reading the fine print and paying attention to any exclusions or limitations that may apply. Knowing the terms of the policy will help you ensure that the coverage meets your needs and that you are comfortable with the terms.

Consider the Financial Stability of the Insurer.

Choosing a financially stable insurer with a strong track record of paying claims is essential. You can check the financial stability of an insurer by looking at their ratings from independent rating agencies such as A.M. Best or Standard & Poors. This will give you a sense of the insurer's ability to pay claims and their overall financial health.

Do Not Conceal Facts From Your Life Insurance Provider.

Concealing facts from your life insurance provider can have severe consequences and may void your policy. The insurer uses the information provided to determine your risk profile and the premium. Thus, any fraudulent information can void your policy. If that happens, your beneficiaries will not be able to collect the death benefit. Therefore, informing your insurance company of any changes that may affect your risk profile, such as a new health condition, is important. Thus, honesty and transparency are essential to ensure your policy is valid and your beneficiaries are protected.

Review the Policy Periodically.

It is a good idea to review your life insurance policy periodically to ensure that it still meets your needs and that you have the appropriate coverage. If it does not, you can adjust the coverage accordingly.

Work With a Financial Advisor or Insurance Professional.

A financial advisor or insurance professional can help you assess your coverage needs and recommend policies suitable for your specific needs and circumstances. Thus, working with them will help a lot.

Where to Shop for Life Insurance?

Shopping for life insurance can seem overwhelming, but it doesn't have to be. Think of it as an adventure to find the perfect policy to protect your business and loved ones. You can use websites like Policyadvisor and Policy Genius as your trusty map, guiding you through different options and helping you find the best rates. For your convenience, here are some of our top picks. Happy shopping!

Mutual of Omaha

Mutual of Omaha is a well-established and reputable company offering business owners a wide range of life insurance products. They offer traditional coverage, such as term and whole life insurance, and more complex coverage, such as key man insurance and buy-sell agreements. If you are looking for an insurance company with sound financial stability, high-quality customer service, and a strong reputation, then Mutual of Omaha is the best fit for you.

Transamerica

Transamerica is a well-known name in the life insurance landscape. It has a wide range of insurance products for business owners, including term and whole life insurance and universal policies. It also offers options such as a "living benefit" rider. The company has been in the business for 100 years, ensuring your level of experience and stability. Their financial advisors can help you navigate their product offerings and develop a personalized financial plan to help you reach your goals.

Nationwide

Known for its discounts and rewards programs, Nationwide is an excellent option for those who want to save money while getting life insurance coverage. With coverage options like term, whole, and universal life insurance policies, as well as specialized coverage like key man insurance, business overhead expense, and buy-sell agreements, you're sure to find something that fits your needs.

MetLife

MetLife has a variety of life insurance products for business owners, including term, whole, and universal life insurance policies and group life insurance for employees. They also have key man insurance options, buy-sell agreements, and group benefit plans. Strong financial ratings, flexibility, digital tool, services, and top-notch customer service make Metlife one of the top choices.

Fidelity Life

Fidelity Life offers a wide range of insurance products, including term life, permanent life, and accidental death insurance with low monthly premiums. Fidelity is an excellent choice, with an A rating for financial stability and over 100 years in the insurance business. Plus, they will help you find the best policy that meets your specific needs.

Farmers Insurance

Farmers Insurance is a well-known insurance company that offers a variety of life insurance products for business owners, including access to online resources such as risk management tools, safety resources, and business continuity plans as an add-on service. And, with customized solutions, financial stability, and personalized service, Farmers is definitely a top choice.

Lincoln Financial Group

One of the largest life insurance companies established in 1905, Lincoln Financial Group has a full menu of life insurance products needed for business owners. They offer term life, permanent life, universal life, and variable universal life insurance policies that can be written as key person insurance. With robust coverage options, high coverage limits, and excellent financial strength, Lincoln Financial Group is great for those seeking comprehensive coverage.

Conclusion

Business owners must have a comprehensive life insurance plan to protect themselves and their businesses. Not only does it provide security for loved ones, but it also serves as a valuable asset for the company. It can be used as collateral, provide for key employees, and ensure continuity in case of the untimely passing of a key person. It is vital to have the right coverage in place and keep it updated as your business and personal situation change. Don't wait for the rainy day, be proactive and safeguard your future and that of your loved ones.