Why Life Insurance Is Important for Small Business Owners

When you own a business, life insurance isn’t just important for your family. It can also help protect your work and your employees from the unexpected. Here’s what to know when putting your small business life insurance plan in place.

Buy-Sell Agreement

This type of life insurance helps protect your business if your partner passes away. Buy-sell agreement funding provides financial support you may be able to use to buy out your partner’s shares of the business. 

If your business has multiple owners, or people who own different percentages of the company, you’ll want to work closely with your attorneys and financial professionals to make sure your buy-sell agreement is set up equitably.

You might have set up a buy-sell agreement for your company years ago. If you set up an Entity buy-sell agreement, it may be a good time to revisit it because the Connelly Supreme Court case from 2024 may change how your previous agreement affects your personal estate plan. 

When you set up a buy-sell agreement, you’ll need to get a business valuation. Be sure to update your buy-sell agreement coverage if the value of your business changes significantly.

Key Person Insurance

Your business might need life insurance for you, your partners and anyone else whose death might create a financial hardship. Key person insurance provides protection so you have the money you need while you find a way to replace that person and their contributions. 

To figure out how much you may need in key person insurance, you should estimate the value that a person adds to your business and how long it would take to replace them.

Term Life Insurance vs. Whole Life Insurance

As with life insurance you use to protect your family, you can choose either term or whole life insurance policies to protect your business. 

• Term life insurance provides protection for a specific time period (term), such as 10, 20 or 30 years. 
• Whole life insurance gives you access to the cash value in the policy while the person it covers is alive as well as a payout when the person passes away.

There are pros and cons to each.

Term Life Insurance

Term life insurance policies are less expensive, so you can get coverage and free up revenue to use in other areas of your business. This can be an attractive option if your business is younger and growing. 

Whole Life Insurance

Whole life insurance policies cost more, but they offer benefits that might be advantageous to your company. They can add cash value that you can build into your future plans. They have tax benefits, and you may be able to take out a loan from them.

Protecting Your Business

Life insurance for business owners is complex. You may need to factor in competing interests, changes in your business and tax implications. Your local Farm Bureau agent can evaluate your business, talk to you about your goals and put a plan in place that gives you the coverage you need.