Life Insurance for Business Owners: Do You Need It?

Life insurance can be a smart investment, as it protects your loved ones by keeping them financially secure when you're no longer here. As a business owner, however, you've got another family that depends on you for financial security—your employees and business partners. One way to protect them is to take out life insurance for business owners.

Business life insurance is different than the typical business insurance that offers general liability and property damage coverage—it protects the business in case the owner dies.

Benefits of business life insurance

The major benefit of business life insurance is that it mitigates the risk of your business closing in the event of your death. The money can be used to cover the monthly business expenses and salaries while the company transitions to new ownership.

The policy can also be used to pay off any outstanding debts held by the business, removing a potentially huge financial strain from your family. Business life insurance can help ensure your family's future financial well-being.

Other forms of life insurance for business owners

Another type of coverage to consider is called a key person policy, which covers the business if it loses an integral member of a company, enough to cause significant damage to the business. A key person policy will provide the funds to recruit and hire a successor, which can be costly if you haven't already put a succession plan in place. This is especially important, as nearly three-quarters of small businesses are heavily dependent on one or two key people for their success, according to a survey by the National Association of Insurance Commissioners. Yet in that same survey, less than a quarter of small businesses had key person life insurance in place.

If you have a business partner, you should also consider getting a buy-sell agreement. In this case, each partner takes out a life insurance policy on the other. If one partner dies, the remaining partner has enough money to buy out the deceased partner's share of the company. This avoids suddenly becoming business partners with the deceased partner's spouse or children. It also safeguards against the the risk of closure if the partner doesn't have enough funds to buy the share of the business.

How much insurance to take out

To determine the size of the policy you need, add up your current liabilities, such as accounts payable, taxes, and mortgages or leases. This will help determine how much debt your business has. Next, estimate a year's worth of operating expenses, including salaries. Add together these two numbers to determine a total term life insurance benefit that would fit your business.

For key person insurance, calculate how much money you'd need to recruit and hire someone to take your place, including agency fees or moving expenses. Also, calculate any lost revenue that could happen if you're no longer there, such as a certain volume of sales.

The last thing you want to do is burden your family with the need to run a business while they're grieving your loss. Business life insurance can provide them—and your business family—with peace of mind and a sense of security.