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.
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.