Life Insurance Needs for Small Business Owners

With so many mandatory forms of insurance today, an important coverage many people neglect is life insurance. Not everyone needs a life insurance policy, but individuals with families (and other people) counting on him or her should strongly consider it. Small to medium sized business owners certainly fall into this category. For many entrepreneurs, the maintenance of their business (and the jobs/livelihoods of all those employed there) depends heavily on the survival of the business owner.

When examining life insurance needs for business owners, there are a few other things to consider above your personal needs such as lost family income and funding your children’s education. Here are some other factors entrepreneurs should use to decide how much coverage they will need:

Type of Policy: Business owners can choose to purchase either term or whole life insurance. Term insurance is available at a significantly lower premium and runs for a set “term”, or number of years until it expires. Whole (also known as permanent) life insurance is a policy with an investment component that accumulates cash value. If you lapse on the premium payment, you still retain the cash value portion of the policy. As long as the premiums are maintained, however, the life insurance can stay in force permanently.

In many instances, a term policy makes the most sense because you are only interested in providing insurance to protect the business while you (and often times one or multiple partners) are part of the organization. At some point, you are likely to retire or sell out so it is best to decide how long you are likely to need the coverage.

Maintaining Continuity: One of the major purposes for business life insurance is to protect the future of the company should the owner (or one of the owners) die. In the case of a partnership, all parties will usually want to ensure that the business can continue to operate smoothly if one of them passes away. This may mean providing enough coverage for the surviving partners to buy the deceased share from his/her heirs. The bottom line is to have enough coverage to carry the business through the difficult transitional period after one of the owners is gone.

Insuring Key Employees: In addition to business insurance to cover the lives of the company owners, many organizations have employees that are critical to their function. In these cases, it is also worth considering a life insurance policy to cover these key employees that may generate a lot of revenue for the company. The life insurance should be enough to compensate for that lost revenue over a set period of time, so the business is able to hire, train and bring a replacement up to a similar level of production as the deceased employee.

There are several other details that should be discussed when considering business life insurance. Speak to your business insurance agent about the specific dynamics of your organization including who needs to be insured and what level of coverage is necessary to protect the survival of the business.