Use our interactive life insurance calculator to find out how much life insurance you need to give you and your family ultimate peace of mind.
As a business owner, you have people relying on you — business partners, hard-working employees, or family members and loved ones. And when your business grows, the responsibilities grow along with it — so it’s important to have something you know you can rely on in return.
One of the most important investments in your business is not a daily planner, a personal assistant, or an espresso machine in your office. (Though they sound like pretty good ideas.) It’s life insurance, which replaces your income in case the unexpected happens and you are no longer around to run your business or support your family.
If you don’t already have life insurance (or if you just have a plan that covers your personal expenses, for instance), it’s something to consider. Keep reading to learn why.
The importance of life insurance for business owners
People purchase life insurance policies for a myriad of reasons, depending on their goals, lifestyle, responsibilities, and more. Let's break down some of the most common reasons business owners would below.
Provide an income replacement for your family.
If you have a single-income household or your family relies on your income, they’ll most likely need that money to keep up their lifestyle, pay for college, or cover your debts (like a mortgage) after you’re gone — or at least provide a financial cushion for the short term.
This is why purchasing the right amount of term life insurance is crucial. Many times, people don’t get enough. (Curious how much you should get? Hang tight — we’ll help you find the right amount for your family below.)
Pay off personal and business debts.
If you have student loans or took out a loan to grow your business, you don’t want your loved ones to be left with the burden of these debts.
Help fund a buy-sell agreement.
If you have a business partner (or a few), buy-sell agreements aren’t just a nice-to-have when starting your own business — they’re a must-have. This agreement dictates what happens to each owner’s share of the company if they leave the business. (Think of it as a prenuptial agreement for business partners.) In this situation, life insurance can simplify the process and help avoid disputes and disagreements, holding money aside for a buyout if anything were to happen to you or a business partner.
Cover the loss of an employee.
While it’s unthinkable, if you’re a business owner, it might be a good idea to consider life insurance in the event a hard-to-replace employee passes away. For example, if you own a construction company and something happened to your one-and-only crane operator, your business can use the life insurance money to offset lost revenue.
Types of life insurance for business owners
Just like when you decided to put your dream of owning a business into action, there are a number of ways to go about purchasing a life insurance policy. You have options!
Term life insurance
Term life insurance policies are more flexible in length. Plus, they are usually pretty simple and low-cost. If something were to happen to you while your policy was active, your death benefit would be paid out to your beneficiaries, or the individual(s) you chose to receive the benefit.
Term life insurance policies can also:
Be purchased for a set time period, like 10, 20, or 30 years.
Be converted to whole life insurance.
Become more expensive as you age.
Have low monthly costs with an easy signup process.
Key person life insurance
Key person life insurance is a type of policy that lists the business (rather than a loved one or business partner) as the beneficiary. It can provide your business with funds if something happens to an essential employee (such as yourself, the business owner).
Key person life insurance can:
Replace lost revenue during the transition period.
Give your business partner (if you have one) time to sort out the future of the business.
Protect your family from taking on business-related financial obligations.
Whole life insurance
Whole life insurance, also called permanent life insurance, is more complex. It’s lifelong coverage that also has an investment component, which is known as the policy’s cash value. This cash value grows in a tax-deferred account, so you don’t pay taxes on these earnings while they accumulate. You can use this money in retirement if you’d like or pass it on to your dependents.
Whole life policies may also feature:
A set premium for as long as you live.
A guaranteed death benefit.
Eligibility for annual dividends.
Higher monthly costs, with a higher payout in the end.
Eligibility to pay for estate taxes.
Here’s a secret about life insurance policies: you can have more than one! For example, you can have a term life insurance plan for business partners (where your business partner is the beneficiary), plus a personal life insurance policy (where your spouse or loved one is the beneficiary). If you prefer to keep things separate, this is a great way to make sure everything and everyone is covered — without compromise.
How much life insurance coverage to get as a business owner
If you’re sensing a theme here, it’s that life insurance is deeply personal. The most valuable policies aren’t with seven figures — they’re the ones that are tailored to your unique needs and responsibilities. Let’s say you have a friend that also owns a business, and they purchase a $1 million life insurance policy. Just because you’re both business owners doesn’t mean you should be quick to purchase the same policy yourself. Chances are, you’re taking out too much — or worse, not enough.
If you’re getting serious about purchasing life insurance as a business owner, consider these business expenses and their typical amounts:
Rent or mortgage payments
Other daily or weekly business expenses
While it might feel taboo to think about, now imagine what your company’s future would look like if you’re not there. Do you have a business partner and a buy-sell agreement in place? Will your children or spouse take over responsibilities? Or will your business close, and you’d like to pay severance to your employees if the unthinkable occurs? Factor the costs of your ideal transition, too.
As a business owner, your goal should be to purchase enough protection for your business — this is key.
How to apply for life insurance as a business owner
The process for buying life insurance as a business owner is the same as if you were applying for your family, or to cover your expenses as a single person.
1. Calculate your needs.
When you’re applying for a life insurance policy as a business owner, consider the above list of business expenses (like rent, inventory, and payroll) and their typical amounts. Determine a number that brings both you and your fellow business partners peace of mind if something were to happen.
2. Get your quote.
Most life insurance quotes are free, and don’t come with strings attached. Be sure to get a few quotes from different life insurance providers, as prices can vary drastically.
3. Submit your application.
When you’re ready, it’s time to complete the application form. Typically, there will be a paper or online form that asks for more detailed information than what you’ve previously provided when you first got your quote. Be prepared to give your insurance company access to your medical, financial, and (potentially) business records to verify your identity and information. There may be a follow-up call with the provider to double-check that everything is correct and to confirm all your form answers.
4. Get a medical exam. (If you need one for your policy.)
Some providers may ask that you undergo a medical exam before getting approval for a personal life insurance policy, while some (like the policies we offer with Protective for personal life insurance) may not. If you need one for your policy of choice, this is when an appointment will be set up with a nurse or other healthcare provider to perform a physical. Your height, weight, and blood pressure will be checked, and you may be asked to draw blood and provide a urine sample. Keep this in mind too: if you have a pre-existing condition, additional testing could be required.
5. Sign your policy and start coverage.
If your application is accepted, your insurance provider will send you the finalized policy and contract. Make sure to take your time reading all the details. If you agree to the terms, sign the dotted line and begin to pay your monthly premium. (Tip: keep a copy of your policy in a safe place — and let your beneficiaries know where it is. You know, just in case.)
Protect your business with life insurance
As you make (or revisit) your business plans, consider adding life insurance to the list. Take the time to find how much life insurance you need, then shop around and get free quotes from several life insurance companies that offer policies for your business. Though it might not be a fun way to spend an afternoon, it’s something your business partners and family will surely thank you for.