Why Life Insurance Is a Necessity for Small Business Owners
Published 4th February, 2022
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Many small business owners think about other types of insurance ahead of life insurance. Some don’t even consider life insurance at all. But with the greater risks and financial responsibilities business owners carry, life insurance is arguably even more important for them than anything else.
If you take out a life insurance policy as an individual, you will secure a financial pay out for your loved ones upon your death. This is reassuring for many families, as they know they will be able to continue paying the mortgage, bills and child education costs. As long as you have a sufficient policy, you know your family will not face financial hardship, which is particularly important if they rely on your salary or income.
Taking out life insurance as a small business owner is a little different. Life insurance in this scenario can ensure that your business partner and employees do not face financial hardship if you pass away. Ultimately, it means that your business should be able to continue running. Life insurance policies for this scenario often enable a business partner to buy out your share of the business if you pass away. As well as protecting your business and the livelihoods of your business partners and employees, this is another way of protecting your family and loved ones. They will not have to deal with any debt your business has, and they can may benefit from continuing income from the business, depending on how your business operations are set up.
It is important to remember that there are many different types of life insurance that small business owners could take out. It is vital to know the difference between the options and to understand which one is right for your circumstances. Small business owners should also make sure the policy is watertight. Sometimes disputes or disagreements come up when a life insurance claim is made, which can necessitate the involvement of an attorney – more information here.
Here’s a little more information about the types of life insurance that small business owners tend to go for.
Individual Life Insurance
A common approach for many small business owners is for business partners to take out a life insurance policy on each other. You could also do this with a key employee if you don’t have a business partner. The idea of this is that if one of you dies, the policy pay-out will go to the surviving business partner. This should enable them to continue running the business without facing financial hardship, and avoid the prospect of losing the business totally. It also means that your family members will not have to try to take on the running of the business in your place. If small business owners decide on this type of policy, they will usually have a personal life insurance policy too, which is specifically to protect their loved ones financially.
Key Person Life Insurance
Naming yourself as the key person in a life insurance policy like this means that the insurance company will make a pay-out directly to the business in the event of your death. You could take out additional policies for other individuals who are essential to the business too. This is a way to ensure that whoever is left running the business is able to gain direct access to the funds they need to keep the business running. Doing it this way can buy the next person in charge a little time to plan the next steps for the business.
Buy-Sell Agreement
This is not strictly a life insurance policy in itself, but it is an add-on contract that is often wise to have in addition to a life insurance policy. If you and your business partners have individual life insurance policies on each other, the additional buy-sell agreement will explicitly allow the surviving partner to buy out the other share of the business. Often this will be by using the funds generated from the life insurance pay-out.
Group Life Insurance
Another type of life insurance that small business owners should consider seriously is group life insurance. This is when they take out a group policy as a business, in order to offer life insurance as a benefit to all employees. Benefits like this can help you recruit a higher caliber of employee, and also helps to secure their loyalty, because not all businesses offer life insurance as a benefit. When you purchase group life insurance as a company, you will often get competitive rates, so the cost to you as a business does not have to be very high. Some companies offer their employees a basic level of life insurance coverage, while employees can pay for add-ons to the coverage if they wish. They will usually get better than average rates for any extras they select too.