Why Small-Business Owners Need Life Insurance

Insurance, Life Insurance

When you own a small business, your family members aren’t the only people depending on you. Your death could be a disaster for your employees and partners, and it could destroy the company you worked so hard to build.

That’s the short explanation of why you need life insurance. But there’s much more you need to know.

Why you need it

Your family depends on your business’ income to survive. Further, you may have taken out loans backed by your family’s assets to start or grow the business. But your family members might not be equipped to take over the business if you die. They might also be unable to sell it easily. This could leave them without income or even in a position to lose their home, if that’s collateral for a business loan.

Life Happens, an insurance industry group, explains it this way: “When the family is forced to sell the business quickly, they may have to sell at a discount or during market conditions that make the business less attractive. In other cases, the business may be worth very little without the proprietor or partner.”

If you have partners, your family might be unable to step into your role, and your partners might be unable to quickly buy out your share, Life Happens notes. In this case, your family might have to help run the business during a stressful time or be forced to sell off the company. Finally, your business may rely on key employees whose deaths would seriously dent earnings or operations.

What you need

In each of these scenarios, life insurance could save your small business or protect your family. Each involves a different sort of policy.

A personal life insurance policy would help your family pay off any business debt and cover living expenses after your death. Your family would then have time to figure out what to do with the business.

If your business has multiple owners, you can combine life insurance policies on each partner with a buy-sell agreement. The agreement stipulates that on the death of a partner, the remaining partners can buy out the surviving family’s share at a previously agreed price. The life insurance pays for the buyout.

Finally, key person insurance is life insurance that protects against the death of a critically important employee. In the event of death, the insurance pays the owner or owners of the business.

Small-business owners may need several different life insurance policies. NerdWallet’s term life insurance comparison tool is a good place to find personal coverage to protect your family.

Aubrey Cohen is a staff writer at NerdWallet, a personal finance website. Email: acohen@nerdwallet.com. Twitter: @aubreycohen.


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