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Life Insurance for Business Owners: 2024 Guide
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Updated:
May 5, 2024
Written by
Sarah Horvath
Sarah Horvath
Life insurance is a recommended precaution for almost everyone who supports a family, but business owners usually have a greater need for protection. Since employees count on business owners for job security, and businesses may have to manage debts and other finances, having adequate insurance coverage can help protect the owner’s family and the company.
Because of the specialized nature of certain businesses, insurance policies can be complex. Read on to learn everything you need to know about buying life insurance as a business owner.
Why Business Owners Need Life Insurance
If you’re an established business owner, you might feel prepared for future eventualities. Experienced owners have their company’s policies and procedures in place, have a trusted team of employees and might even have a succession plan in order. But without a policy from a reputable life insurance company, your loved ones and even your business could struggle if you pass away without warning.
The security of life insurance can give you peace of mind and provide a source of income for business partners or projects in place if you die unexpectedly.
There are multiple life insurance policies suitable for business owners, and you might be surprised to learn that a single policy’s death benefit may help your business and family. Let’s look at why securing life insurance as a business owner yields benefits.
To Protect Your Family
Business owners are often left on their own to protect their interests with 401(k) and other retirement contribution matches left to employee benefits schedules. Life insurance is a must for almost anyone who supports a family, but because business owners often carry more expenses and support more people, insurance can be more necessary.
The goal of life insurance is to cover expenses in case you die as an owner. Business owners should have legal protections from personal assets that, if lost, would affect their families. But a larger death benefit could cover some or many outstanding business debts while making up for a sudden loss of income. Surviving family members aren’t usually responsible for business debts, but the proper life insurance policy can help keep important business assets (like property) out of the hands of creditors.
To Keep Your Business Running
Some businesses have supplier contracts in place, employees to pay and daily operating expenses to cover. These expenses will still be there even if an owner dies. Even though personal assets can be protected because of the separation from a corporate entity, mounting expenses after the owner’s death could lead to the collapse of the business.
As a business owner, you can secure personal life insurance benefits, which will go toward protecting your family. You can also specify that a portion of the money from your death benefit be allocated to business expenses as the company recovers from your death.
To Equalize an Estate
“Equalizing an estate” isn’t a term you hear often. But it means that you’re assuring each of your heirs will receive an equal amount of money (or asset value) when you pass away.
This comes into play for business owners who have children or a spouse and some will inherit ownership in the business while others won’t. For those who won’t, they can collect money from a life insurance payout. Because others will inherit a share of the business, the death benefits “equalize” the payout for everyone. It’s worth consulting with a financial advisor on how this could play a role in minimizing estate taxes.
To Fund an Agreement
Smart business owners have a plan in place to ensure financial stability for the company after they pass away. The most common is a buy-sell agreement, or a buyout clause, among business partners. It stipulates a financial transaction be made by other surviving owners of the company to settle ownership in the business.
Other examples include option contracts to purchase a piece of land, facility or another business. Life insurance policies can be taken out so that your beneficiaries can perform on these agreements and ensure they keep an interest in what you have worked to build. A portion of the death benefit can be used to satisfy partners, a major benefit if you’re aiming to keep ownership of your business in your family.
Types of Life Insurance for Business Owners
The best type of life insurance for your needs might vary depending on the structure of your business and your budget. The insurance policies to consider as a business owner are term life, whole life, permanent life and key life.
Term Life Insurance
The most common type of life insurance product, term life policies are straightforward, and they make for an easy way to ensure a death benefit is paid for a set amount. Term life policies are made to be in place for a specific period, usually from 10 to 30 years. This is the policy’s “term,” and you decide how long you want it to be when you buy your policy.
If the policyholder dies within the term, an agreed-upon amount gets paid to beneficiaries. If the policyholder outlives the policy, the term policy expires without consequence and without a return of any monthly premiums that were paid. Term life policies don’t usually require medical exams, and they’re a smart choice for people who want the most affordable coverage.
Whole Life Insurance
As the name suggests, whole life insurance policies provide protection for the entirety of the policyholder’s life — as long as premiums get paid. This creates a type of permanent life insurance, and whole life is the most commonly purchased option in that category.
Business owners like whole life policies because of the peace of mind they offer. A benefit will get paid to beneficiaries regardless of when the policyholder dies. Premiums for whole life policies never change, and part of the premium gets set aside to build the cash value of the policy. The longer the policyholder pays for the policy, the more cash value it builds. And policyholders can take a policy loan against the police or withdraw cash value funds, depending on policy details. Because whole life policies guarantee a death benefit, they’re more expensive than term options.
Permanent Life Insurance
Whole life policies are one of three types of permanent life policies. The other two are universal and variable universal policies. Universal life insurance coverage lets you raise or lower your death benefit, and you can pay a variable premium amount. Variable universal policies are similar but allow you to invest the cash value of the policy in the stock market.
These two policies are a little more complex but offer tax advantages or tax-free earnings and diversification of investments. The investment component makes permanent policies more appealing for business owners with pass-through corporations or other entities that can hold assets.
Key Man Life Insurance
“Key man” or “key person” life insurance policies are designed to protect business assets rather than personal assets. While they may not be as applicable to small business owners, they make for a crucial backstop for larger operations.
Businesses usually pay for key employee policies because they’re put in place to keep the company afloat if a key employee’s death or disability threatens company revenue. For example, if you’re the chief financial officer of your company, you might have specialized knowledge that requires training and experience to master. In the event of your death, key person insurance would help pay for training or education required to bring a new employee up to speed in your past role.
Cost of Business Owner Life Insurance
The cost of life insurance for a business owner depends on a range of factors, including:
- The type of coverage selected: The kind of insurance you buy is the primary factor that determines your insurance rate. In almost every instance, whole life policies that guarantee a payout are more expensive than term life options.
- The nature of your business: The nature of some types of businesses makes them more prone to accidents and life-threatening injuries. If you work in a high-risk industry (like forestry or construction), expect to pay more for coverage.
- Your age: As you age, you’re more likely to pass away suddenly or sustain an injury that qualifies you for living benefits. Expect to pay more for your insurance each year you age.
We recommend exploring a list of the best life insurance companies here and getting a quote from at least three providers. Getting a free quote is easy, takes only a few minutes, and can help ensure you aren’t overpaying for coverage.
What Is the Process for Getting Life Insurance as a Business Owner?
The process for getting life insurance as a business owner will depend on the type of insurance and the amount of coverage you choose. Many insurance carriers and third-party websites offer quick online quotes to get you started. Some sites allow you to start or even complete the entire application online.
You can also contact insurance companies directly for more in-depth information about coverage options and costs. As a business owner, your life insurance requirements could be more complicated as you balance the needs of your family and your business. We recommend consulting with a financial advisor or licensed life insurance agent while you consider your options.
Our Conclusion on Life Insurance for Business Owners
Business owners face unique challenges when it comes to ensuring their families and the companies they have built are protected in the event of their death. Luckily, there are several different life insurance policies for business owners, and it’s likely that you can find a policy or build a collection of policies with the right coverage for your personal and business needs. If you own a high-value operation or you’re interested in key person insurance, it can be a good idea to consult with a financial professional or insurance agent before buying coverage.
Frequently Asked Questions About Business Owner Life Insurance
Yes, a business can pay for the owner to have life insurance. This is typically done through key person coverage, which benefits the business. Note that local tax laws may stipulate that the business must be the beneficiary of the policy to qualify for premium deductions.
An LLC can purchase life insurance for its owner. However, the Internal Revenue Service has rules regarding the tax treatment of life insurance policies purchased by an LLC. If the LLC pays the premiums and is the beneficiary of the policy, any death benefits received would be tax-free. However, if you as the owner of the LLC are the beneficiary, the death benefits may be subject to estate taxes.
A business owner’s life insurance policy can be a term or variable policy, and in the instance of a key man policy it will help the business operate if a vital person dies or becomes disabled. Life insurance policies pay a death benefit if the beneficiaries die during the active policy term.
While not required to own a business, key person life insurance protects your business by paying a benefit to the company if an owner, partner or other key employee dies. Business owners can choose between a term life or permanent life policy when considering life insurance policies.
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