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A Guide to Life Insurance for Small Business Owners

February 08, 2023
Our goal is to educate and advise on life insurance options, so you can feel confident in making the right choice, whether that’s through Quotacy or somewhere else. To ensure we provide accurate and trustworthy information, our writers follow strict editorial standards.

Life insurance is vital for a small business owner. Life insurance can help protect you, your family, and your business financially.

In this guide, we share what life insurance can do, your different options, and how much life insurance small business owners need.

Table of Contents

Are you in the early stages of funding your small business or looking for additional funds to help grow your venture? Learn more about using life insurance to fund an SBA loan

Why Is Life Insurance for Small Business Owners Necessary?

Reasons why business owners need life insurance:

  • To cover the lives of key persons
  • To fund buy-sell agreements
  • To keep your business running
  • To qualify for business loans
  • To equalize inheritances
  • To protect your loved ones

Life insurance provides a death benefit to protect the finances of survivors. These survivors include your business partners, family members, or even employees.

As a small business owner, you provide a living not only for yourself and your family but those who rely on the success of your business. Life insurance should be a part of every business owner’s business, financial, and estate plan.

Business Life Insurance vs Personal Life Insurance

Life insurance can be used for many purposes. Business owners have both personal and business needs that require life insurance.

  • Personal life insurance is primarily used to protect your loved ones after your death. It can replace the income you provide, cover funeral and end-of-life expenses or debt, and leave an inheritance to your children.
  • Business life insurance is a broad category that can include key person life insurance and funding buy-sell agreements with life insurance.

There are two types of life insurance: term life insurance and permanent life insurance. Business owners can use both kinds. Which one you choose depends on what the life insurance is being used for. Let’s review the most common ways small business owners use life insurance.

Not sure how much life insurance you need?

How Business Owners Use Life Insurance

As a business owner, you work hard to keep your business running successfully. Life insurance can help with many planning strategies to make sure your success continues whether you’re active in the business or not.

Mobile Life Insurance for Business Owners
Desktop Life Insurance for Business Owners

Key Person Life Insurance

Key person insurance is insurance a company buys on an employee. The company is both the policy owner and beneficiary.

A “key person” is essential to the success of your business. If this person died, your business would feel the impact.

With key person life insurance, if this person dies, the business receives a payout from the insurance company. The death benefit is often used to cover losses and to find and train a replacement.

Business owners may need key person life insurance for the following reasons:

  • If your business’s reputation is linked to the key employee’s name, standing, or unique skills.
  • If your business is a partnership and each partner wants to be able to buy out the other’s shares in case of an untimely death.
  • If your business is seeking investors or SBA loans, and lenders are only willing to sign contracts if life insurance is on the key people.
  • If the death of a key employee creates financial problems for the business.

Both term and permanent life insurance can be used as key person life insurance.

If you need key person insurance for a specific period, for example, if you only need it to last until that employee’s expected retirement year, term life insurance is ideal. Permanent life insurance may be the better choice if the key person is an owner or partner and you want to access cash value for future expenses.

Learn more: Key Person Life Insurance: What It Is & How It Works

Funding for Buy-Sell Agreements

A buy-sell agreement is a contract between a business owner and a person or entity who agrees to buy the owner’s interest if the business owner dies. The purchase price is agreed upon and stated in the buy-sell.

Life insurance is one of the primary methods used to fund this transaction.

The buyer in the buy-sell agreement buys life insurance on the seller (with the seller’s consent) in an amount equal to the pre-arranged purchase price. When the business owner (a.k.a. the seller) dies, the buyer purchases the deceased owner’s interest from their estate.

Business owners may need a buy-sell agreement funded with life insurance for the following reasons:

  • It protects the business owner’s heirs and ensures the business ends up in the hands of someone willing and capable of running it.
  • It establishes a fair and reasonable price for the business.
  • It helps fix the value of the deceased’s interest for federal estate tax purposes.
  • If applicable, the policy’s cash value can be accessed for business uses.
  • Cash is available for estate liquidity or other family needs.
  • It helps prevent legal battles and contestation.

Both term and permanent life insurance can be used to fund a buy-sell agreement.

Term life insurance is a good option if the agreement is expected to end by retirement age. Permanent life insurance is a good option if the seller is young and the agreement is expected to be in place for some time.

Learn more: Buy-Sell Agreements: What Are They & How Do They Work?

Inheritance Equalization

If you have children and run a small business, perhaps some children are interested in the business while others aren’t. If you’re concerned about leaving behind something for all of your heirs, life insurance can help.

For example, let’s say you have two children. One works in the family business, and one branched out. Using life insurance in your estate plan can ensure the child who wants to take over the family business can, and your other child receives an insurance payout.

Individual Life Insurance for Small Business Owners

Business owners often have at least two different life insurance policies: one that is business related, such as tied to a buy-sell agreement, and one that is primarily for their family.

An individual life insurance policy is one that you own. Business owners use life insurance to protect their loved ones’ financial futures.

If you have loved ones relying on your income, the death benefit from a life insurance policy can replace this income if you die unexpectedly.

For individual life insurance, the rule of thumb is that you should buy coverage equal to 10 times your income. But this amount isn’t right for everyone. For a better estimate, use our free life insurance calculator.

Benefits of an individual life insurance policy:

  • You own it outright, and it’s not tied to anyone else.
  • You choose the beneficiaries and how big of a payout they receive.
  • The policy’s death benefit is paid out income tax-free.
  • Life insurance will avoid probate, so your beneficiaries are paid faster.
  • Life insurance protects your family’s standard of living.

A disability can also significantly impact a business. Learn how disability insurance protects business owners.

See what you’d pay for life insurance

Comparison shop prices on custom coverage amounts from the nation’s top carriers with Quotacy.

How to Determine Which Policy Is Best for You

There are two types of life insurance: term and permanent. Term life insurance is designed to be an affordable coverage option that only lasts a specific period. Permanent life insurance is more expensive but lasts your lifetime and accumulates a cash value you can access while alive. The type you get depends on your needs, budget, and financial goals.

Term Life Insurance

Term is customizable and can fit into most budgets. How long the coverage lasts is determined by the term length you choose. They range from 10-40 years. Coverage amount options range from $50,000 to tens of millions.

The longer the term and higher the coverage, the higher the policy cost. However, term life insurance is the most affordable type of life insurance.

Term is ideal as income replacement since the term length can align with your earning years. You can also use it to protect your family’s big-ticket items, like the mortgage, raising kids, and helping with a college education.

Many term life insurance policies have a conversion rider. If you eventually decide you want permanent life insurance, you can convert your term policy (or a portion of it) into a permanent one. Better yet, you don’t need to undergo medical underwriting to do so.

Term life insurance can also be used as key person insurance, funding a buy-sell, and collateral for small business loans.

Term life insurance is simple protection without fancy extras. It’s also easy to get a quote. Our quoting tool provides instant term quotes with no contact information required. Try it out here: Term Life Insurance Quotes.

Permanent Life Insurance

Permanent life insurance offers lifelong coverage. Depending on the type of permanent life insurance you buy, your policy may also include cash value accumulation and earn dividends.

The lifelong coverage and extra features mean you’re paying expensive premiums, so permanent life insurance isn’t the right choice for everyone.

For families, permanent life insurance can help if you have dependents who will rely on you their entire life. It can also provide inheritance and cover end-of-life expenses.

For businesses, permanent life insurance can be used as key person insurance, funding a buy-sell, and SBA loan collateral. The cash value accumulated within most permanent policies can also be accessed through policy loans for business or personal expenses.

Permanent life insurance products like whole and universal life insurance are complex. If you want pricing information, complete this short form, and an agent will follow up with you to provide personalized quotes.

Term Life InsurancePermanent Life Insurance
How long does coverage last?10-40 yearsYour entire life
Cash value accumulation?NoYes
Earns dividends?NoYes, if a participating policy
Used for buy-sell agreements?YesYes
Used for key person insurance?YesYes
Used as loan collateral?YesYes
Used for inheritance equalization? No Yes
graphic showing term vs permanent life insurance for business comparison

Guaranteed universal life insurance is a simpler product that doesn’t have all the typical bells and whistles of other permanent products. Guaranteed universal is a good option if you need permanent life insurance but don’t want the high price tag of whole life. You can see quotes instantly through our term quoting tool by choosing “Forever” on the Length of Coverage slider.

How Much Life Insurance for a Business Do You Need?

As a small business owner, you may need life insurance for the following reasons:

  • Financial support for your family after your death
  • Succession planning for your business through a buy-sell agreement
  • Continuation planning for your business through key person life insurance
  • Life insurance for inheritance equalization
  • Collateral for small business administration loans

When deciding how much life insurance to buy, you must determine how much is needed to cover these obligations.

Ask yourself the following questions:

  • How much will my family need to maintain their standard of living and pay for my final expenses?
  • What is my share of the business worth?
  • How much money do I want to leave my children if they don’t inherit the business?
  • Do I need a business loan? How much?

The answers can help determine how much life insurance you need. For complex business strategies, work with a financial advisor.

Protect Your Small Business With Life Insurance Through Quotacy

Starting a small business and setting it up to be successful for generations to come is no small task. Getting life insurance to protect your business, your family, and yourself is a great place to start.

Do you have questions? Contact an agent at Quotacy. Are you ready to get a quote and apply for life insurance? Get started today.


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