As a small business owner, you’re likely familiar with the various types of business insurance you need to protect your company, inventory, and more. But what about protecting those who rely on you most?
In the unfortunate event that you pass away unexpectedly, your business partners, employees, and family may suffer. That’s where life insurance for business owners comes in. Life insurance can help you protect your small business, as well as all of the individuals who benefit from it, in the event of your death.
Keep reading to learn why life insurance for business owners is so important, as well as the types of coverage you can obtain, how to apply, and more.
Types of Life Insurance for Business Owners
You may need to invest in a few different types of business owner life insurance policies to completely safeguard your business—and protect those closest to you—from an unexpected death. These policies include:
Personal Life Insurance
With a personal life insurance policy, you can help your family pay off any business debt you may have and cover their day-to-day living expenses if you pass away. Personal life insurance would also give your family some time to determine what they’d like to do with your business.
This type of policy can act as an “income replacement” for your spouse and kids in the tragic event you lose your life. Keep in mind, though, a personal life insurance policy doesn’t protect your business—it protects your family.
If your business has more than one owner, a buy-sell agreement is a necessity. A buy-sell agreement can give your partners the right to buy out your shares of the business at a rate you previously agreed on. The reason for this buyout could be death or disability, as well as one owner’s desire to leave the business at any time.
In the case of death, the goal of a buy-sell agreement is to ensure that the surviving partners have the funds they need to pay for the deceased partner’s shares. These funds are obtained through the life insurance death benefit payout. This provides peace of mind for all owners of a business that there is a set plan in place if the unexpected happens.
If you opt for a buy-sell agreement, you can incorporate a cross-purchase clause. In a cross-purchase clause, each of your business partners buys coverage on the other. In the event one passes away, the others receive the death benefit and use it to purchase company shares.
An entity purchase plan is another option in a buy-sell agreement. It occurs when your business buys coverage and pays insurance premiums on each other. If a death arises, the death benefit covers the shares that will go back to your organization.
Key Person Insurance
Another option for business owners is key person insurance, which can protect your business in the event that a key employee dies. Here’s how it works: You pay insurance premiums and serve as the beneficiary of the policy. If an integral member of your team passes away, the insurance provider would pay a death benefit to your business.
Your business can then use the death benefit to cover the costs of finding a replacement and training them. The benefit could also be put toward any lost business expenses that resulted from the death. If your business shuts down, you can use the benefit to pay off any remaining debts or take care of severance packages.
Group Life Insurance
With group life insurance, you can offer life insurance to your employees. Its main benefit is that it can give your employees coverage at a lower rate than they’d be able to receive if they purchased an individual policy.
You can incorporate group life insurance into your employee benefit package. If you decide to pay for it entirely on your own, your employees will receive automatic coverage. On the other hand, the coverage will be optional to your employees if you expect for them to pay for part of or all of it on their own. Although group life insurance will not benefit your business or family in the event of your death, it will provide your employees’ families with a financial safety net in the event of their death. This type of fringe benefit can help attract and retain quality employees.
How to Buy Life Insurance for Your Small Business
The process of buying business owner life insurance is a lot like buying life insurance as an individual. You’ll have to go through the following steps.
Determine Your Coverage Needs
What type of life insurance does your business need? Personal life insurance? Key person life insurance? Life insurance to fund a buy-sell agreement? Group life insurance? Consider the structure of your business, its debts and expenses, and your future goals to help you figure out your particular coverage needs. You may want to work with a financial advisor to help you with this step.
It may be tempting to go with the first life insurance provider you find. By shopping around, however, you can get an idea of what’s available and at what cost, which could save you significant money on premiums. Make sure you get at least three different quotes so that you can make an informed decision.
Select a Provider and Apply
Once you’ve found the right life insurance provider and policies for your needs, it’ll be time to submit an application. Fortunately, many providers will allow you to complete an application online from the comfort of your own home.
Take a Medical Exam
Depending on the life insurance provider you select, you may be required to undergo a medical exam. As is the case with most life insurance policies, there will be certain criteria you need to meet in order to receive coverage—or your premiums may be higher depending on certain factors.
In most cases, the exam will be performed by a nurse at your place of business or a medical facility. During the exam, you’ll likely fill out a questionnaire about your health and provide a sample of your urine and blood.
Wait for Approval
After you’ve completed the application and participated in the medical exam, the waiting game will begin. Underwriters will look over your information and determine whether or not to approve you for a life insurance policy.
On average, the approval process takes anywhere between three to four weeks. Keep in mind, however, that if you are applying for multiple life insurance policies, the process may take a bit longer.
Sign Your Policies
As soon as you receive approval, the provider will send you copies of your policies. It’ll be your responsibility to read through them thoroughly and ask for clarification on anything you don’t understand. If you approve your policies, you’ll sign the documents and be good to go.
Pay Your Premiums
A premium is the amount of money you’ll pay your life insurance provider in exchange for coverage. Depending on the provider you choose and your personal preferences, you may pay your premiums monthly or annually.
You may be able make your first payment via credit card but will have to transition to check or bank transfer payments going forward. Most business owners prefer to pay through bank transfer so they never have to worry about missing a payment.
Why Business Owner Life Insurance Is Important
Chances are you support your family with the income you generate through your small business. They depend on it to pay for all kinds of things, like the mortgage, car loans, and other essential bills. Your business income may also be important for their future expenses like college and retirement. In the event of your death, life insurance will provide them with the funds to continue paying for their current expenses while planning for the future.
Additionally, depending on the type of life insurance you purchase, your policy can also help protect your business and business partners. In this case, life insurance can play a vital role in your business continuity plan to ensure that operations don’t cease because of your death.
Business Succession Plan
A business succession plan can help you prepare your business for death, disability, or retirement. The first step to writing one is to identify the right individual to take over your business. Once you do, you’ll likely need a buy-sell agreement. If you have one, you can ensure a seamless transition of ownership and reduce the disruption of daily operations.
Unsure of how to write your business succession plan? An attorney, CPA, or life insurance broker can guide you through the process of writing a thorough business succession plan that provides you with some much needed peace of mind.
Small Business Loans
When most small business owners think of life insurance, they consider it a tool that will protect their business in the event of death. What many of them do not realize, however, is that life insurance can help them obtain financing.
If you’re a startup or a new business, you may be able to use your life insurance policy as collateral for a loan. Typically, you will sign the lender’s agreement and state that if you die before you’ve repaid your loan, the lender will receive your death benefit to recoup the unpaid amount of the loan. Any remaining proceeds will then be distributed to your beneficiaries.
The Bottom Line
Your small business is an important part of your life, and if you’re not here to run it, your business and family may be at risk. The good news is that business owner life insurance can protect both your loved ones and the organization you’ve worked so hard to build.
Consider life insurance as an essential part of estate planning for business owners. You, your business partners, and your family will all be grateful that you took the time to craft a plan for the unexpected.