Small Business Life Insurance: Protecting Your Small Business from the Unexpected Death of an Owner

When creating a small business, many business leaders and entrepreneurs tend to focus on planning for success. How will profits be divided? Who will make decisions that drive business growth? These are excellent questions, but they only account for half of the plan.

For small businesses to be truly protected, their owners must plan for losses as well as successes. It is likely that a business will never need many of the contingency plans owners create, but putting protections in place has many benefits, like giving owners peace of mind, making the business more appealing to prospective investors or purchasers, and making it an attractive place for key employees to work.

A Key Way to Plan for the Unexpected

Purchasing an appropriate small business life insurance policy is one of the ways that you can protect your business by planning for the unexpected. While personal life insurance policies are designed to support your family in the event of your death, small business life insurance policies are created to benefit the business. They help ensure that the business can continue in the event that you, one of your business partners or a key employee dies or becomes disabled.

There are generally two types of life insurance policies. They are term life insurance and permanent life insurance:

  • Term life insurance policies: In these insurance policies, business leaders choose the amount of the benefit and the amount of time (“the term”) during which protection is needed. The money paid for the policy belongs to the insurer, and the business receives the benefit of coverage in return.
  • Permanent life insurance policies: These insurance policies offer a death benefit and an investment component. The money paid into the plan is yours to keep, even if you choose to let the plan lapse.

Which Policy Type Is Right for Your Business?

There is no one right answer or right policy type for every business. Small businesses have to make the right decisions based on their unique needs and plans. Some may choose term life insurance. Others may find that permanent life insurance is a better fit.

For example, when a business leader personally guarantees a loan, term life insurance may be an option so that the business is protected if the person unexpectedly passes away before the loan is repaid. Term life insurance can also be a good, cost-effective option when a key employee has a specified retirement date. The business can choose to insure that person through retirement.

Permanent life insurance may be a good choice for businesses run by one person who is instrumental to the business and who does not intend to retire at any point. It can be a more costly option, but the money paid toward the policy belongs to the business.

Using Benefits to Settle Affairs

No matter which type of insurance is chosen, business owners often use the payout the same way: to settle affairs after the loss of a key business leader. Life insurance is commonly used to cover key expenses or repay loans. It can also be used to buy out other partners, shareholders or heirs after the unexpected death of an owner.

The coverage amount will also be unique to your business, depending on your needs and expenses. When choosing the specifics, it is best to talk with a local insurance agent, contact us, we can answer your questions and provide solid business guidance.

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