The Importance of Life Insurance for Small Business Owners 

Perhaps you already know how critical your life insurance policy can be in protecting the future of your loved ones when you are no longer there. But there’s even more to it if you own or co-own a small company. 

Read on and find out the importance of life insurance for small business owners, their partners, investors, and employees, as well as family members at home. 

Understanding Life Insurance for Business Owners 

As soon as you have loved ones to protect financially, you should get life insurance. In addition, as a business owner, you have a unique set of demands that suggest coverage as a good option. 

In some ways, you can think of your small company as a living thing. With your sudden departure, the withdrawal of your finances, experience, expertise, and leadership could cause it to wither and die. Your partners or investors know that. That’s why they will often insist you obtain a life insurance policy before they sign on or write a check. 

The idea is that if the skills you brought aboard were suddenly lost, the company could falter, and everyone would lose their jobs and investments. The company would need both time and financial resources to fill your shoes and get the company moving in the right direction again. Those financial resources could come from the death benefits of such a policy. 

Types of Policies to Consider 

Business owners need to consider how they are going to protect their interests across the board. If you have employees, you’ll need worker’s compensation, as determined by state and federal regulations. If you have any vehicles you use in the course of business, you’ll need to consider protecting your business with commercial auto insurance. There are many types of insurance to protect your company, and life insurance is an important one. 

There are several types of life insurance for business owners, each with a different package of benefits, but the most popular are whole life, term life and key person insurance.  

Whole Life Insurance 

Much as it sounds, permanent whole life covers as long as you live — or at least as long as you continue to pay your premiums. In other words, you will have a guaranteed payout. 

Another value to a growing startup is that this policy offers a cash value, a sum of money that builds over time and can be taken out of the policy as a loan. 

Term Life Insurance 

Term life offers a death benefit for a designated period. Many term life policies for business owners range from ten to 30 years, though the term can be as brief as a single year. 

One of the benefits of this life insurance is that coverage is cheaper than whole life because the death benefit isn’t guaranteed. If you’re 35 when you get a ten-year term policy, and you’re in good health, the underwriters assume good odds that you’ll still be alive at the end of that decade, so there will be no payout. However, it can keep investors and partners happy because they have a level of financial security during the first years of the growing business. By the time the term ends, the expectation is that the company will be in better financial health, and the policy will be unnecessary. 

Key Person Insurance 

Key person insurance protects the company against the sudden loss of an important person. This could be a financier, an owner or an especially valuable employee. The business owns the policy and any benefits go to the company. This type of life insurance is sometimes a requirement when seeking financing. 

How Life Insurance Protects Your Business Assets 

As the owner of a small company, your main asset is… you. There might also be key personnel on your staff with unique skills or talents, whether in technology, sales or business contacts, finances, or other areas. 

If you or any of your key personnel were lost, it could be financially damaging or even fatal for your company. Those are the assets that must be protected, and whole or term life insurance policies could provide that cushion. 

Eventually, you can find replacement personnel or figure workarounds that keep your company solvent, but the financial resources from your policies can help the company continue to make payroll as it works out the necessary solutions. 

The death benefit might also be used to protect physical assets, such as a building mortgage or inventory. 

Navigating Life Insurance Options: Guidance for Overwhelmed Business Owners 

Some small company owners might have two policies: One for the benefit of family members or other surviving loved ones and the other for partners, investors, or the company itself. 

However, it’s possible to carry one policy that serves both purposes. This strategy is called a buy-sell agreement. 

Here’s how it works: Let’s say you co-own a company with one equal partner, and you estimate that both shares are worth a half-million dollars each. Both you and your partner buy life insurance policies with a $500,000 face value (the death benefit), each listing the other as a beneficiary. 

If either partner dies while in business together, the beneficiary’s $500,000 will be used to buy out the inherited share of the deceased partner, making the surviving partner the sole owner. If you should die with this policy in force, your loved ones will be as financially protected as if they were the beneficiaries of your coverage. 

You have a few factors to consider. Just as you’ll meet with investors, lawyers, and accountants, you must make contact with at least one more professional advisor as you establish your company: your life insurance agent. This expert will help you figure out the best strategy for protecting your business and the financial security of your loved ones if anything should happen to you. 

Here are some of the questions you should ask yourself — and discuss with your agent. 

• What is your company worth at the startup stage? What might its value be in five years? In ten? 
• How long could your company go on without you or other key personnel? How unique are their talents? How quickly could those key people be replaced to get your business back on track? 

Don’t hesitate to meet with your agent and update your policy terms as economic conditions change for better or worse. 

You must also decide whether your loved ones have the skills or desire to take over the company if you die. If not, have you considered how the company might be sold or liquidated to provide them with an inheritance? What if something happens to you before you can cash out to their benefit? 

Those are hard questions with complicated answers. That’s why you need to chat with a trusted advisor. 

Partnering With the Right Insurer for Your Life Insurance Needs 

Starting your own small business might be the largest financial decision you ever make. Don’t do it without first meeting with a trusted life insurance agent. It might well be the best (or only) way of providing financial security to your loved ones and keeping the business going if you’re no longer around. 

In that regard, we suggest you reach out to an independent agent at Acceptance Insurance. Call us today at 877-405-7102, or get a quick quote online. You can also find an office near you to meet in person with one of our helpful and knowledgeable agents.