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Life insurance for business owners

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Life insurance provides a way to financially support the people who rely on you after you pass away. This is often your family members and loved ones, but if you own a business you might be a provider for people beyond your family. And you need to consider not just your household’s financial longevity, but also your business’s.

Ultimately, life insurance for business owners is more complex than it is for others, but it is an important financial consideration. Having an understanding of the best types of life insurance for business owners may help you feel more confident as you select policies to purchase.

Life insurance for business owners

If you are a business owner, your life insurance decision might have a few more factors than it does for others. You may need to protect your family from loss of income if your business could not function without you, and you might need to make sure they would not be burdened by any of your business’s debts should you pass away.

You may also want to protect people beyond your family. Your employees might benefit from being included in your life insurance decisions, and you may even consider buying a policy on a person who is integral to your business operations to protect yourself and your business should they pass away.

Types of life insurance for business owners

The life insurance policies you might choose as a business owner depend on what your goal is for the policy. There are several types of life insurance that can assist business owners, and you may choose multiple types of policies to cover different needs.

Personal life insurance

A personal policy will cover you and provide a death benefit to your beneficiary in the event of your death. Typically, these policies are used to provide financial support to family members or loved ones who depend on your income. There are a variety of personal life insurance policy types to choose from, including term life insurance, whole life insurance and universal life insurance.

To help you find out how much you might need for your personal policy, you can use Bankrate’s life insurance calculator. And to help with your budgeting, we have broken down the cost of life insurance and how it changes with age and other factors.

Key person insurance

Key person insurance is a critical component of any business owner’s life insurance portfolio. As its name suggests, key person insurance pays out a death benefit if someone integral to the business passes away. You could purchase a key person policy on yourself, as the business owner, or you could purchase a policy for an integral employee.

The business usually pays the premiums for these types of policies and is typically listed as the beneficiary. Upon the death of a key person who is covered by key person insurance, the business itself receives the death benefit amount. The death benefit can then be used to cover the costs of recruiting and training a new employee, or it could be used to pay off debts if the company can no longer operate.

Life insurance to fund a buy-sell agreement

If you own your business with other people, establishing a buy-sell agreement can protect your organization and your family. With this agreement in place, you set a price at which your co-owners can buy your shares when you die or leave the business. This protects your loved ones from a potentially stressful negotiation process and ensures your business can keep running smoothly.

If you pass away, your co-owners will need to buy your shares of your business to keep it running. If they have purchased a life insurance policy on you with themselves as the beneficiary, they will receive a death benefit when you pass away that can be used to purchase your shares.

How to apply for life insurance as a business owner

Although deciding what life insurance policies you need as a business owner is a bit more complicated than it is for others, the application process is not too complicated. Below is a step-by-step guide to applying for life insurance as a business owner.

  • Decide which policies you need. If your family or loved ones rely on your income as a business owner, you may want to consider personal life insurance. Key person insurance is important if you or another employee is integral to the wellbeing of your business. You might use life insurance to fund a buy-sell agreement if you and your business partners would need extra funding to cover the cost of buying each other’s shares in the event of a death.
  • Decide who will buy which policy. Generally, as the business owner, you will be the one purchasing these insurance policies. However, in the event that you use life insurance to fund a buy-sell agreement, each owner will need to purchase a policy on the other owners.
  • Determine the death benefit level for each policy. The death benefit of your policies will depend on your individual situation. If you are purchasing a personal policy with your family members as beneficiaries, you may want to provide a death benefit that is just enough to cover your funeral costs, or you may want to provide them with enough to replace your income for several years. Similarly, if you purchase key person insurance, you may decide you just need enough to allow the business to continue operating until you can hire a replacement, or you may want enough coverage to help cover the costs of paying off debts if you cannot keep the business open.
  • Collect and compare quotes. Once you know which types of policies you need and you have the details in mind, you can start reaching out to the life insurance providers to obtain quotes. We have a list of some of the best life insurance to help you get started. And if you already have a personal policy in place, you may want to shop around and switch if you find a policy that better meets your needs.
  • Go through the underwriting process. Life insurance generally requires a fairly involved underwriting process and you may need to get a medical exam. If you are buying multiple policies from different providers, you may need to undergo a medical exam for each.
  • Select your beneficiaries. You likely had beneficiaries in mind as you were planning to apply for life insurance, but as you officially apply you will designate your beneficiaries for each policy. Beneficiaries could be your family members, employees, business partners or the business itself.
  • Sign the policy to begin coverage. Once you have underwriting approval, the policy owner will need to sign the policy to make it effective. Your insurance provider will let you know whose signature they need and where to sign.

If you have any questions or concerns about the application and underwriting processes, you can reach out to your agent or insurance company for clarification.

Frequently asked questions

What is the best life insurance company?

Bankrate has established the best life insurance companies of 2022 to help you find coverage. However, it is still a good practice to get multiple quotes and compare them. The right policy for you depends on your unique needs, budget, health and more.

Why do business owners need life insurance?

Business life insurance is important for several reasons. By putting the proper policies in place, you can help to protect your family from having to deal with your company’s debt or having to negotiate the sale of your shares if you pass away. Life insurance can also protect your business if you or another key person passes away. Although business owners may need to consider more factors than others when purchasing life insurance, it is an important piece of your financial planning.

Do all business owners need life insurance?

Life insurance needs are diverse. You might want to consider how your family will be affected by your death and what business needs they may have to handle if you pass away. You may want to think about your employees or co-owners as well. Talking with a financial advisor or licensed life insurance agent may help you determine how much life insurance you need as a business owner and what kind of policies you should consider.

Written by
Kacie Goff
Personal Finance Contributor
Kacie Goff is a personal finance and insurance writer with over seven years of experience covering personal and commercial coverage options. She writes for Bankrate, The Simple Dollar, NextAdvisor, Varo Money, Coverage, Best Credit Cards and more. She's covered a broad range of policy types — including less-talked-about coverages like wrap insurance and E&O — and she specializes in auto, homeowners and life insurance.
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