Life Insurance For Business Owners

Check out how business owner life insurance can help financially protect your business, your business partner, and employees.

WRITTEN BY
Caitlin Wood
Updated January 14, 2021

Having a life insurance policy in place can help financially protect your loved ones, especially family members who rely on your income to pay the mortgage and other household bills. If you pass away early on in life, you could inadvertently leave your dependents with hefty bills that they may not be able to financially manage on their own. 

Luckily, a life insurance policy can provide them with the financial resources needed to cover these bills. 

But if you’re a business owner, you may also want to consider not just your family, but your company, business partners, and employees too. And a life insurance policy specifically for business owners can help. Plus, being covered can also help you get more out of your business’s assets and achieve your long-term financial goals. 

You may already have a personal life insurance policy in place, but as an entrepreneur, your business may require more coverage than a standard personal insurance policy can provide. 

In this article, we’ll go into more detail about what life insurance for business owners is, what it can cover, and how to shop around to secure the ideal policy with the best terms and rates. 

What is Life Insurance For Business Owners? 

Life insurance for business owners can financially protect your business, both today and in the future. Depending on the type of life insurance policy you take out, there are several perks that you and your company can benefit from, including tax deductions and the ability to purchase company shares from your surviving family’s estate. 

As the owner of a business, your life insurance policy can either be personally or corporately owned. If you choose the latter, you can take advantage of tax benefits. A corporately-owned policy provides a lump sum, tax-free payout for your company if you, a business partner, or a key employee passes away. 

If this happens, a life insurance policy can ensure that your business will keep running without a hitch and your cash flow will remain consistent. In the event that a key player dies, your business won’t be negatively affected. 

Your life insurance policy not only protects your business but also allows you to diversify your assets and access the cash value of the policy. This can help you save for retirement. And when set up properly, it can also help establish a plan to pass down your business when you pass away or exit the business.

Types of Life Insurance For Business Owners

Much like personal life insurance policies, there are 2 main types of life insurance for business owners: term and permanent life insurance. 

Term Life Insurance

This type of policy provides coverage for a specific amount of time. During the term — which could be 10 to 30 years, on average — your beneficiaries are guaranteed a payout as long as the policy remains in effect and the premiums are paid. 

If you so choose, you can convert your coverage to a permanent life insurance policy, even if there have been changes to your health, job, or lifestyle.

Permanent Life Insurance

This type of policy lasts your entire lifetime, no matter what age you reach before you pass away. When you do pass on, your beneficiaries will receive a tax-free death benefit payout as long as your premiums are paid on time. 

Permanent life insurance policies also often come with a cash value component to them, which can be used as a type of investment vehicle. The value increases over time and can be used to withdraw from. However, borrowing from the policy’s cash value will decrease the death benefit.

Term Life InsurancePermanent Life Insurance
DurationTemporary (usually from 10 to 30 years)For life
CostMore affordable than permanent life insuranceMore expensive than term life insurance
Benefits– Beneficiaries are guaranteed a tax-free payment when you pass away
– Loan coverage
– Protect business operations and cash flow after the death of a key player
– Beneficiaries are guaranteed a tax-free payment when you pass away
– Accumulate a cash value that can be accessed for loans while you’re still alive and the policy is active 
– Plan for passing down or selling the business
Cash Value ComponentNoYes

What Can Life Insurance For Business Owners Cover?

A life insurance policy that specifically includes provisions to help with business issues can cover the following:

Buy and sell agreement funding. If you share ownership of your business with other partners, having a buy-sell agreement in place is very important. This type of agreement will determine what will happen to another owner’s share of the business if they leave the company or pass away. If one owner dies, the others will receive the death benefit and can use it to buy the company shares of the deceased partner.

Income replacement. Most likely, your family depends on you to a certain degree for your income. Having a life insurance policy in place can ensure they won’t be left carrying the financial burden when you die. The death benefit paid out can make up for any lost income that you regularly contribute to the household. 

Debt and collateral coverage. If you borrowed money to start and grow your business and used valuable assets — such as your home — as collateral, a life insurance policy for business owners can protect these precious assets. 

When you pass away, the loans you took out may require full repayment. And if the loved ones left behind are unable to come up with the necessary funds, your assets — and your family — may be in jeopardy. It’s also important to consider business-related debts that could also negatively impact your family if you pass away when calculating your life insurance requirements. 

Key person life insurance. A “key” person in a business refers to someone who plays an important role in the successful operation of the company. Without that individual in place, the business would be compromised in some way. A business life insurance policy can be taken out on key players in a company who play a very important role in the business. That way, when that person dies or exits the business, the policy can cover any potential losses suffered as a result.

With this policy, the business would be considered the beneficiary. So, the death benefit would be paid out to the business in the event that the key person passes away. The payout can help cover lost sales and earnings, as well as the costs of finding a replacement and training the new individual.

Executive bonus plan life insurance. An executive bonus plan involves compensating specific employees. These plans benefit employers because no administrative requirements are needed and the taxes associated with the costs can be written off. 

Need help doing your taxes? Check out Turbotax.

Business estate planning. A life insurance policy for business owners can also help you organize your estate and transfer your assets to specific parties in a tax-efficient manner. 

Business succession planning. This process involves establishing how the business ownership will be transferred to another party when you pass away, step out of a management role, or exit the business altogether. This will help protect the business’ integrity, the remaining partners, and your personal financial security.

Do You Need Business Owners Life Insurance? 

A life insurance policy for business owners is a good idea for a number of reasons:

  • Life insurance is helpful if you have business partners and employees who rely on you as a key player in keeping business operations functioning optimally. In this case, there are other people besides your family members who depend on you for their own incomes, and an appropriate life insurance policy can adequately protect them.
  • A life insurance policy for business owners can also provide you with a business succession plan so that the business will still be sufficiently funded after a business partner passes away. This is a far better option than leaving other partners to have to come up with the money needed to buy the share of the business owned by the deceased partner.
  • There’s also a unique benefit in terms of tax advantages by having a life insurance policy in place. You can grow your wealth in the absence of taxation, take your distributions tax-free, offset expenses of carrying employees and afford your beneficiaries with tax-free death benefit proceeds. 

If you run a business, have employees who rely on you for their livelihoods, and have family members who depend on your income to pay the bills, then a business owner’s life insurance policy should be seriously considered. 

Process of Buying Business Owner Life Insurance

To buy a life insurance policy for business owners, the following steps should be taken:

  1. Understand your needs and what your business and its employees would benefit most from.
  2. Decide the type of policy or policies that you believe would benefit you and your business the most.
  3. Shop around with various insurers and get quotes.
  4. Select an insurance provider.
  5. Complete and submit an application for a life insurance policy.
  6. Undergo a medical exam, if necessary.
  7. Wait for approval of the policy and the coverage you’ve requested.
  8. Sign the policy to make it official.

If there are several business owners involved, each one may need to apply for a business owner insurance policy. Plus, you may want to consider having a corporate-owned policy that protects your business and a personal policy that protects your family. 

Speak with an insurance broker or agent to help you decide exactly what you need to make sure your family and business are adequately protected. These experts will also walk you through the application process so no loopholes are left unchecked. 

Final Thoughts

Building a business takes a lot of time, effort, and money. The last thing you want is for your company to falter as a result of the death of a major player in the business, including you. To protect your business partner, employees, and your loved ones, consider taking out a business owner insurance policy.