Life Insurance for Business Owners

Financial professionals often suggest that business owners who have financially reliant dependents carry enough life insurance to protect their dependents from future economic risk. Owners, including independent entrepreneurs, should also consider insurance to protect their company and any partners, employees, suppliers and customers. Life insurance options can be affordable and flexible, adding stability and potential income for the business.

A 2022 study by LIMRA found that only 47% of adults without life insurance believe they would be financially secure if the household’s primary earner suddenly died. In contrast, 68% of household members where adults have life insurance expressed confidence in their ability to remain financially secure.

Like anyone who contributes to the financial well-being of someone else or to a family, business owners have people who rely on them. Those people can include employees, partners, contractors, vendors and other companies. If you built a successful company, you have a right to be proud of your accomplishments and a right to ensure that it remains stable, even if something happens to you.

Personal life insurance will help protect your family, but what about your company? A life insurance policy can cover business loans, mortgage payments, rent, ongoing operating expenses and other important expenses.

If your business were to need a loan from the Small Business Administration, you likely will need to show proof that the principal or owner of the company has life insurance. According to Alloy Development Company, a lender and development lab for startups, the SBA 504 loan program requires identifying a “key person” for the operation, if there is one. If a business has such a person, the SBA requires the company to carry insurance on that person as collateral for the loan.

Life insurance for a business owner is an investment for both the business and the owner. However, suppose the company pays the premium and is the policy beneficiary. In that case, premiums are not tax-deductible business expenses, but the proceeds are not taxable income to the business.

A business owner may also buy life insurance for the company’s employees or make it available through payroll deduction. These group insurance policies are a straightforward way for employees to access affordable term life insurance.

For that reason, worksite marketing of life insurance is more widespread than any other insurance product, according to the Insurance Information Institute. If the business pays the premiums for the workers, the cost is tax deductible for the company but adds to the worker’s taxable income.

A business-owned life insurance policy can help ensure the company’s continued operation if the principal (or one of the key members of management) dies. The life insurance policy proceeds could allow the partners to buy out the interests of the deceased owner’s heirs.

Probably the most significant factor in favor of buying life insurance as a business owner is peace of mind. Entrepreneurs put their heart into their business and don’t want the success to be derailed by accident or misfortune, including their own.

Suppose the owner chooses permanent life insurance products with the potential for savings. That may allow them to draw on the accumulated cash in the future.

Growing a business often requires hard decisions about expenses. Skipping life insurance may seem like an acceptable way to cut costs if the operation is struggling.

Besides the “key person” insurance policy intended to protect the business in case the principal passes away, business owners should also have a personal life insurance policy to protect their heirs. Either can be a term or permanent policy.

Term life policies typically cost less and are more straightforward than permanent policies. For example, if you buy a term policy, it will be effective for a specific number of years and pay a set amount. In contrast, a permanent policy, also called a whole life policy, accumulates more value as you pay the premiums.

With a buy-sell agreement, a company with several equal partners arranges for each one to have a life insurance policy that covers their peers. If one partner passes away, the survivors can use insurance proceeds to buy out the deceased partner’s share of the business. It’s a good idea to incorporate this agreement in the business plan or bylaws.

The reason to buy life insurance as a business owner is like that of any individual: to protect something important. Determining how much life insurance you need depends on how much money they will need if you aren’t around.

The standard calculation for most wage earners is to buy 10 times their annual income. (Someone with dependents who earns $200,000 annually would need $2,000,000 in insurance.) Some financial advisors recommend 20 times the annual income. There’s no harm in buying more if the price is affordable.

Business owners probably will need a higher multiplier. You can use one of the life insurance calculators to add factors to your formula. For example, include the cost of a potential buyout for partners, business debts, operating costs and employee payroll.

If you have insurance policies for your family dependents and for your business, that will simplify the calculations and help maintain a financial separation between your business and personal interests.

When buying life insurance, first consider which type is best for you and your business needs. A term life option will cost less and offer a straightforward payout if you die, but it doesn’t help with other financial goals.

A permanent life policy may help your business accumulate savings that you can draw on at a strategic point in the future if you need funds for expansion. You may also use that cash value as a collateral option for borrowing. Once you decide, do your research, decide how much you need and move forward.

Editor Samantha Connell contributed to this article.