No one can predict when they will pass away. Things are especially difficult for small business owners who don’t usually decide who will continue their business, pay their employees, and run the basic chores after them. You have started your business from scratch and have grown it. You will not want everything to close after you.
That’s why it’s important to choose the right type of life insurance, ensuring that your business continues no matter what. The insurance is for business owners who want to protect their business financially, just like they’d want to protect their families and loved ones after they are gone. Let’s take a look at the purpose of life insurance for small businesses and how they can help.
Why Do You Need Small Business Life Insurance?
The whole concept of life insurance for small businesses is to protect the business in case of the owner’s death. It takes care of the financial responsibilities that the owner was responsible for before their demise. Depending on the policy you purchase, you can choose to keep the business running, and support your loved ones after you, or pay your debts. Here are the reasons you need small business life insurance.
To Continue Your Business
You never know what’s going to happen to your business once you pass away. The business you have built for years can end quickly after your death. Having a small business life insurance will ensure that your business continues operating after you. The insurance provider will cover all business operations financially, as well as, the cost of finding a replacement.
Usually, in partnership firms, there’s a clause in the agreement that says if one of the partners dies, the remaining partners can buy their share.
Also read: What is Business Interruption Insurance?
Business life insurance can be used to simplify the process. With the insurance in place, your partners can easily buy your shares.
To Divide Inheritance
Life insurance also helps in ensuring equal division of the estate among your loved ones. Suppose you have two children and you want to distribute your property equally among them. With life insurance, you can offer business shares to one of the children and insurance payout to the other one.
Protect Your Family
If you have borrowed debt to continue your business, having life insurance in place is a must. Your family will already have a lot on their plate, like loss of income. You don’t want to add the burden of debt. Having a small business life insurance will protect your family from debt and income loss, as the policy can be used to pay off your existing debt, as well as, replace your source of income.
Now that you know the importance of life insurance for small businesses, the next big question is how you know which life insurance policy to choose. The policy comes in three different types. Let’s explore each.
Personal Life Insurance
The most popular one is personal life insurance, which is designed to protect your family after you. It covers your personal debts, your income, and your inheritance. Simply put, it helps keep your family secure after your death. Ideally, you should get a life insurance policy that’s 10x your annual income.
Key Person Life Insurance
As the name suggests, a key person’s life insurance helps when you lose an important member of your business. If you lose an employee or the owner or someone who was a crucial part of your organization, your key person’s life insurance will offer financial coverage for finding a replacement.
The insurance ensures that you won’t suffer from lost earnings or any financial issues because of the demise of an important member of your business.
The plan also covers the cost of training a new employee. To know whether or not you need key person life insurance, ask yourself what if you lose a key member of your business, how that will affect your business, and how you can replace them. Having a key person’s life insurance ensures that your organization, clients, and other employees won’t suffer in case of the sudden demise of a valued business member.
A buy-sell agreement is for partnership firms. As mentioned previously, your partners will buy your shares after your demise at a predetermined price. But how do they get enough to buy the co-owner’s share? Suppose you are the co-owner of the company and would like to buy your partner’s share after their death.
Having a buy-sell agreement will ensure that you are financially capable of securing their shares after their death. If you buy a life insurance policy for your co-owners, you will receive the benefit if they die. You can use this to buy their shares. Alternatively, you can consider an entity buy-sell agreement, in which your business buys a life insurance policy for each owner and distributes the benefit to each co-owner should one of you pass away.
What Life Insurance Should a Small Business Owner Get?
First things first, you must decide the type of insurance your business needs. If you are considering a buy-sell agreement, then the insurance value will be determined by the market value of your business. If you are considering other types of life insurance for your small business, here are some key factors to keep in mind.
- Your business’ worth and size
- Your financial stability
- Whether you have a debt. If yes, how much?
- The number of employees working for your company
- Your operational cost
- Your annual revenue
Eventually, your goal is to get insurance that can protect your business and your loved ones after you. If you are not sure about the best type of life insurance, reach out to a financial advisor.
Having life insurance for your small business ensures that you have sufficient cash to keep your business running smoothly without you. It’s important to keep your family financially secure and stable, as they can use the benefit to pay off your debts or find a new employee to keep the business afloat.