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The importance of life insurance for business owners
If you own a business, here’s what you should know about life insurance
When you hear the term “life insurance,” you might not think of it as something that fits into planning the future of your business. But in truth, getting insurance as a business owner is an important way to protect not just your family, but also your employees, your partners, and your business itself in the long term.
For business owners, there are three forms of business life insurance policies you should consider for safeguarding your business:
- Personal life insurance
- Key person life insurance (also known as “key man” life insurance)
- Buy-sell insurance
Each of these policy types works differently to help safeguard both your family and your business if you were to die. Keep reading to learn more about business owners and life insurance.
In this article:
The three types of business life insurance
As a business owner, you’re used to planning for every possible contingency — including, unfortunately, your own passing. Below, we’ll discuss how the three types of business life insurance policies can help your family, your company, and its stakeholders continue to thrive in case you pass away.
Personal life insurance
When you take out a personal life insurance policy, you can name your beneficiaries. Your beneficiaries will receive financial protection to help cover any financial challenges, including a loss of income, if you pass away, in the form of a tax-free lump sum death benefit that the insurer pays out to your beneficiaries.
Most commonly, people name their spouses as beneficiaries. This helps protect their families financially, no matter what happens. But business owners might also choose to have a personal life insurance policy in which a co-owner is their beneficiary. By naming your business partner as a beneficiary in a personal life insurance policy, you can help your company recover from any costs associated with your death.
Note that, with most policies, you can name multiple beneficiaries, stipulating that, say, your spouse will get 60% of the death benefit and your business partner gets 40%. You can also have a primary beneficiary and a secondary beneficiary, who will get the payout if your primary beneficiary dies prior to when the death benefit is paid.
There are two popular types of life insurance. Term life insurance refers to any life insurance policy that covers a specific period of time. For business owners, a term life insurance policy might be useful to cover the years you expect to stay in the business.
Term life insurance is typically the most affordable type of life insurance. (For example, a 30-year-old man in excellent health can get a 20-year Haven Term life insurance policy worth $250,000 for just $10.87 per month.) That’s because, unlike permanent life insurance, a policy usually only covers the years when you’re relatively young and healthy.
The policy also does not accrue cash value, which permanent life policies (including whole life insurance) often do. Permanent life insurance policies usually cost hundreds more per month than a term life insurance policy.
Key person life insurance
With a key person life insurance plan (or “key man” life insurance), the business itself is the beneficiary. This type of insurance pays the business if a “key person” dies.
The “key person” might refer to a business owner or partner. But it can also refer to any employee the company deems indispensable. If you have a specific programmer on your team with more knowledge than anyone else in the company, for example, it would be difficult and expensive to replace that employee. So, you might consider taking out a key person insurance policy on them to ensure that your company can survive in the event of your untimely passing.
Buy-sell agreements are designed to support a smooth transition after a business owner dies. These agreements lay out exactly how the owner’s shares should be divided among remaining board members or partners. This helps properly allocate the deceased owner’s shares and keeps undesirable shareholders from gaining additional stocks.
Although buy-sell agreements help provide stability and ensure the transition happens smoothly, they’re not technically an insurance policy on their own. Instead, a buy-sell agreement tends to be funded by a life insurance policy.
Determine the right amount of term life insurance coverage
The coverage amount for your business’s term life insurance policy will vary depending on your situation and how you want the funds to be used after your death. While personal life insurance policies should typically be five to 10 times your annual salary, determining the right amount for a business owner’s term life business policy can be a little more complicated. Depending on the type of policy and its purpose for your business, some of the expenses you will need to plan for might include:
- Rent and mortgage payments
- Severance pay for employees if the business goes under after your death
- Unpaid invoices
- Ongoing operational expenses such as payroll, utility bills, uniforms, and inventory procurement
In addition to these expenses, you’ll also want to consider the financial burden the company will incur while seeking a replacement to fill your position after your death. Some of the financial impacts you’ll want to consider might include:
- Revenue loss caused by your sudden departure from the company
- Time spent reconnecting with clients you once handled personally
- Reduced productivity due to bereavement in the office
- The cost of searching for, hiring, and training a replacement
Peace of mind
As a business owner, you have enough to worry about as it is. Haven Life aims to make life insurance less hard by offering a free online life insurance quote tool, and an application process that can mostly be completed online — even over your lunch break. Begin your journey toward peace of mind today.
About Robert ColeRead more by Robert Cole
Our editorial policy
Haven Life is a customer-centric life insurance agency that’s backed and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe navigating decisions about life insurance, your personal finances and overall wellness can be refreshingly simple.
Our editorial policy
Haven Life is a customer centric life insurance agency that’s backed and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe navigating decisions about life insurance, your personal finances and overall wellness can be refreshingly simple.
Our content is created for educational purposes only. Haven Life does not endorse the companies, products, services or strategies discussed here, but we hope they can make your life a little less hard if they are a fit for your situation.
Haven Life is not authorized to give tax, legal or investment advice. This material is not intended to provide, and should not be relied on for tax, legal, or investment advice. Individuals are encouraged to seed advice from their own tax or legal counsel.
Haven Term is a Term Life Insurance Policy (DTC and ICC17DTC in certain states, including NC) issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001 and offered exclusively through Haven Life Insurance Agency, LLC. In NY, Haven Term is DTC-NY 1017. In CA, Haven Term is DTC-CA 042017. Haven Term Simplified is a Simplified Issue Term Life Insurance Policy (ICC19PCM-SI 0819 in certain states, including NC) issued by the C.M. Life Insurance Company, Enfield, CT 06082. Policy and rider form numbers and features may vary by state and may not be available in all states. Our Agency license number in California is OK71922 and in Arkansas 100139527.
MassMutual is rated by A.M. Best Company as A++ (Superior; Top category of 15). The rating is as of Aril 1, 2020 and is subject to change. MassMutual has received different ratings from other rating agencies.
Haven Life Plus (Plus) is the marketing name for the Plus rider, which is included as part of the Haven Term policy and offers access to additional services and benefits at no cost or at a discount. The rider is not available in every state and is subject to change at any time. Neither Haven Life nor MassMutual are responsible for the provision of the benefits and services made accessible under the Plus Rider, which are provided by third party vendors (partners). For more information about Haven Life Plus, please visit: https://havenlife.com/plus
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