If you’re a small business owner, your life insurance matters. While you probably don’t want to think about what would happen to your business if you should pass away or become disabled, it’s a smart idea to make sure you’ve taken steps to protect both your family and your business.
This is where insurance plays a big role. In fact, life insurance offers an instrumental layer of financial protection for your loved ones as well as your employees and your business. To get a better sense of why you may need life insurance, take a look at these top two reasons:
Your family depends on you and your business income, and your company may not survive if you pass away
Your spouse or other family members may not be capable of running your company if you die. They also may be forced to sell the business. Worse yet, if they can’t sell it, they may have to shutter it with a mountain of expenses to cover—leaving them in even more of a financial pinch.
You may have taken out a business loan or have managed your cash flow imbalance with advances through an invoice financing company like Fundbox
This could leave your spouse or family to deal with repaying your loans or advances while coping with your death. To complicate matters, if your personal assets were used as collateral for a loan, your family could lose their home.
So, now the question becomes this: What type of insurance do you need as a small business owner? According to the non-profit organization Life Happens, there are many types of insurance available. It’s important that you take a close look at your particular needs and have a succession plan in order in the event of your death. Here are some insurance options recommended by experts:
A personal term life insurance policy
As explained above, an insurance payout from a life insurance policy should help your family cover your business debts as well as their ongoing living expenses. There are many life insurance policies available, but a term life insurance policy is generally the most affordable and offers flexible coverage for a set period of time. With a term policy, you pick the benefit amount, like $250,000 or $500,000, and the amount of time you’d like your coverage to last for, such as 20 or 30 years. Term insurance is not only a good option for your personal beneficiaries, but it may work out well if you have a business partner. For example, if you and your partner own 50 percent of the company, you may have a buy-sell agreement stipulating that if one of you should die or retire early, the other partner can buy out the rest of the business. But what if your partner should die and you don’t have the money to buy the other 50 percent? Term life insurance could offer a financial solution. If you and your partner each purchase a policy, naming the other as beneficiary, a payout could provide you with the funds to buy out that 50 percent.
Disability and other types of insurance
Although disability insurance doesn’t cover your family and business if you pass away, it does offer financial protection if you can no longer work due to an illness or injury. This invaluable coverage is often overlooked as small business owners often don’t want to contemplate what would happen to their businesses if they can no longer work.
Business overhead insurance
While considering disability insurance, take a look at business overhead insurance. This type of coverage would pay for your overhead if you become disabled, according to Mass Mutual. Most of these policies pay for overhead for one to two years and cover expenses like your rent, utilities, equipment costs, salaries, taxes, and employee benefits. For a small business owner, this important insurance could allow you to keep your business running in your absence.
Key person insurance
For a small business, key person insurance is, well, key. This type of policy is essentially life or disability insurance taken out by a business on a particular employee to offset costs if that person should become disabled, according to Principal. If the covered person should die, the payout goes to your business and is designed to help cover costs associated with finding a replacement and training a new employee. The insurance benefits can also help cover costs associated with lost sales and earnings.