The Small Business Owner’s Guide to Life Insurance

Life insurance is the most important insurance coverage a small business can purchase as it pertains to perpetuating the business. (General liability is most important operational insurance coverage).  When a person dies unexpectedly, the loss of life often has repercussions beyond just immediate family.  This is especially true if the individual was a business owner or a key member of a business.

life insurance

Some of you are nodding your head saying:

“Yeah, if we lost so-and-so our entire business would be turned upside down.  An adequate amount of life insurance would certainly help us bridge the gap between losing so-and-so and hiring/training so-and-so’s replacement.”  

You are an enlightened insurance soul. You can skip down to the third section of this article if you like.

Some of you are reading and saying:

“Life insurance is a waste of money.  Our business could survive if we lost the owner.  He doesn’t do anything anymore, anyway.”

You have some learning to do.  Pay special attention to the next section of this article.

Learning About Life Insurance the Hard Way

Let’s say you and your business partner own a successful small business that manufactures retail goods on a regional level and employs 40 people from the surrounding community.  You’ve been in business for 20 years and have a solid relationship with your raw material suppliers, your distribution channels and the retail stores that sell your product. Both you and your partner share a common vision for the business, sales are growing, and life is good.

Then you get that awful call.  Your business partner has passed away suddenly after a car accident.  A few months later you get a call from your late business partner’s spouse asking to set up a meeting to discuss the future of the business.

After a lengthy, emotional meeting, you find out your business partner had racked up mountains of personal debt financing some commercial property deals on the side that didn’t pan out.  Your business partner’s spouse, now saddled with that debt, is freaking out and demanding you sell the business to pay the obligations.  Now a 50 percent shareholder in the business, the spouse has the legal right to make such demands.  Now you either have to spend a boatload of money to buy out the spouse or sell the business you’ve worked 20 years building.

Either way, life is not so good anymore.  You wish that you had listened to your insurance professional about purchasing a Buy-Sell Agreement Life Insurance Policy (see below).

3 Types of Business Life Insurance

Individual Life Insurance

  • Technically, individual life insurance is coverage for a business owner’s family.  What makes an individual life insurance policy important for a business is defense against a distressed sale.  Many small business owners take loans out using their personal assets as collateral.  When the business owner dies, the surviving family members sell the business to cover the loan obligations.  This creates a distressed sale situation where the business might be sold for significantly less than actual value.  An individual life insurance policy on the business owner for an amount equal to obligations defends against this type of situation.

Buy-Sell Agreements (solution to scenario above)

  • In the simplest terms, a buy-sell agreement is a contract created so a deceased business owner’s share of the business is bought at a predetermined price through life insurance.  This is a protection against the deceased business owner’s family members taking ownership of a business they may not have the desire or skills  to operate.

Key Person Insurance

  • Key person insurance provides the business with cash if a critical leader or revenue-producing employee were to die.  There are many unacknowledged costs that come with losing a crucial member of a business.  The business may lose clients, contacts or connections that drive revenue. Additionally there is cost to search, hire, and train a replacement. All of these costs add up very quickly, and without the proper life insurance to provide needed cash, the gap between employee loss and replacement can critically injure a small business.

The Rub

Life insurance is a headache and hard to rationalize spending money on.  But the simple truth is that a life insurance policy has the power to change the course of the lives of the people you care about and the business you help build.  Your family and your business are important enough to take the time to do the right thing.  Your independent insurance agent can help you get the necessary and appropriate coverage.

Good luck and be safe!

Image from Arkady/Shutterstock


Ryan Hanley Ryan Hanley is Founder of Hanley Media Lab, an advanced digital marketing agency helping companies grow their audience to grow their business. He also produces one of the fastest growing content marketing podcasts on iTunes, Content Warfare TV.

14 Reactions
  1. Many small business owners have their entire life savings invested in their company. Their passing would essentially bankrupt both their families and their business. In this case, everything they’ve worked for could be lost if they don’t adequately protect their company with a good insurance policy. Business oriented life insurance can be designed with multiple goals based on the size of the company, the person to be insured, and the needs of those left behind should a business owner die suddenly. This is because the business owner him or herself is often an irreplaceable person. If a business owner dies the company itself can fall apart, and employees and heirs can lose all of their assets. But with life insurance specifically designed for business owners the company can be properly disbanded, sold, or funds can be used to open a new one.

  2. Another excellent write up on small business insurance. A must read for any small business owner looking for commercial insurance, definitely sharing this info. Thanks.

  3. Just wrote an article on this topic today. You did a great job of humanizing the topic and making the case why it’s so important for business partners to have these conversations sooner rather than later. It’s always a good idea for them to involve their families or at least spouses in the process.

  4. Wow! This blog looks just like my old one!
    It’s on a entirely different topic but it has pretty much the same layout and design. Great choice of colors!

  5. If your business partner dies, having a life insurance settlement to buy out his family’s stake in the company is a very good idea. (And quite common)

  6. Steven L. Marshall CLTC

    I strongly agree with the fact that small business owners should protect their best intrest when they have a partner regardless if that partner is family or not. I was in a very sticky situation with a similar situation. I was involved in a business that was owned by brothers. Well one of the brothers passed and the business was not protected with life insurance on the partners. Needless to say , that partner had racked up quite a large amount of debt including his sons college tuition. When the spouse of the deceased partner got involved with the company, she destroyed it. Not intentionally. But she did not know how to run the business , but had to do something besides forcing the other half of the company , her family, to sell. Well in the end , they probably should have sold it while it was worth selling. Now the entire compAny is no longer here and the entire family is broke and trying to not only mourn the loss of a great guy. But trying to keep their homes and assets in tact while trying to find lucrative enough jobs to support their lofty lifestyles!!!!!
    Insurance would have prevented this entire situation. And the premiums are TAX DEDUCTABLE!!!!!!!!!! So you really are not even putting that much of a liability on the company. That’s right the company should pay the premiums for both or all of the partners/ key individuals . Call me to talk about this concept and anything else you need insurance for . As I am now a licensed agent because of this story!!!!!!!!! I’m in the state if Virginia, but I can write insurance in any state that you would need to have this done in!!!
    Steven L Marshall

  7. Great article and this is something I stress to my fellow Chamber of Commerce members. Some have listened. If you are in NJ, NY or PA and would like help with looking at options to protect your business / family. Please feel free to call me at 609-488-1123 Gary.

  8. What happens to the life insurance policy if the partnership is dissolved?

  9. Hi I am small business owner. i am 56 year old and healthy. What kind of life insurance I should go for?

  10. Thanks for the information