Life Insurance for Entrepreneurs: What You Need to Know

Many people start thinking about life insurance when they start a family. What if your business is your “baby”?

Whether or not you’ve got actual kids, when you’re an entrepreneur, you have a legacy to protect and other people’s financial needs to consider.

Here’s why life insurance can be worth considering for entrepreneurs (and self-employed individuals), and priorities they should keep in mind—for their businesses and their families.

Life Insurance for Entrepreneurs: Why You Need It

The most important reason to get life insurance is to protect the people who mean the most to you. Your family supports you as you grow your business, and they rely on you in return.

If you opened your doors with business partners, a life insurance payout can also help keep them from losing their dream without you. While there’s no replacing a person, a life insurance benefit can cover the critical financial support you would’ve otherwise provided. That means essential financial goals for your family and business can still be in reach, even if you pass away.

For entrepreneurs, life insurance can also be a step toward important business opportunities. Besides protecting loved ones, there are a few business-specific reasons to consider a life insurance policy.

Entrepreneurs May Need Life Insurance to Get Business Loans

You’ve probably heard the saying, “You have to spend money to make money.” Starting a business or scaling up your growth often involves investing in property or equipment.

Many entrepreneurs turn to a small business loan to get the funds they need. If that’s you, you might find a life insurance policy on the list of requirements for loan approval. Loans backed by the U.S. Small Business Administration (SBA) require life insurance if the business is “dependent on the principal’s active participation,” which is true for many small business owners and entrepreneurs.

Even if you’re not going after an SBA loan, commercial lenders may require life insurance in their internal policies.

A term life insurance policy generally meets this requirement. You’d take out a policy term that matches or exceeds the life of the loan. That would assure the lender that if you die, there would still be a way for your estate to pay back what you owed.

Some entrepreneurs also use life insurance as collateral for a loan. It may be possible with certain life insurance policies to set up a collateral assignment. That’s an agreement to pay the lender the balance of the loan first, and then direct the rest of the insurance payout to your beneficiaries.

This latter approach only works with assignable, permanent life insurance policies that have a cash value large enough to cover the collateral requirement. (What’s the difference between term and permanent life insurance?)

Business Legacy and Succession

Some entrepreneurs hope their company will continue after they’re gone. Life insurance can make funds available to keep the business afloat during an unexpected transition.

That’s why some business partnership agreements or succession plans include a life insurance component. Your business partners and legal advisor may suggest that all owners have a life insurance policy large enough to fund the time it’d take to find someone to replace the co-owner’s role.

When you die, your estate will inherit your share of the business. You might prefer to set co-owners up to “buy out” your share from your family using life insurance proceeds. That would let your business partners continue the company in your absence, while leaving your family with additional cash as an inheritance.

If you run your business solo, a life insurance plan can still help fund operations as your designated successor takes over the company.

Life Insurance Policies for Entrepreneurs

Small businesses can range from a one-person side hustle to a multi-million-dollar operation. There isn’t one perfect “entrepreneur” policy, because there isn’t such a thing as a “standard” entrepreneur.

If you’re working with a lean budget, you may be interested in looking for solid coverage at an affordable cost. Term life insurance can be a strong option to consider if you’re looking for policies with lower premiums than some other types of life insurance.

If you’re well-established and have the funds to pay higher premiums, looking into a permanent policy with cash value might be worthwhile. Some permanent life insurance policies can let you borrow from cash value or offer other advantages in qualifying circumstances. Your budget, investment preferences and business priorities may all factor into the decision on what type of life insurance feels like the right fit for you.

For some business owners, it might be easiest to purchase multiple policies. You might get a term life plan that covers your family, for example. Then, you might get a separate policy that covers your business debts and transition costs for a co-owner. This can help avoid needing to set up multiple beneficiaries or leaving complex instructions on a single policy. Not all insurance providers can support one person holding multiple policies, so review your options carefully.

How Much Coverage Do Entrepreneurs Need?

As an entrepreneur, you’ve got personal obligations and you run a workplace. You might have a co-owner and employees who rely on the paycheck you provide. Considering the full spectrum of all your financial contributions and obligations can help you assess how much coverage feels like enough.

A co-owner or high-level employee generates a certain amount of revenue for the business and provides value in terms of their creative, strategic or management skills. The hiring process for a new executive can take months to nearly a year. Not to mention that your replacement needs time to come up to speed. A life insurance benefit that covers several years’ worth of your contribution to your company can help cushion a transition period for the business.

Covering business liabilities and debts factors in, too. Outstanding costs related to your business might include:

• Lease or mortgage on business property

• Credit debts

• Outstanding loans

• Payment due to employees or contractors

• Income or sales tax obligations

These debts need to be paid, even if the business closes when you die. Depending on your business structure, creditors may be able to claim assets from your personal estate to satisfy the debt.

If you’ve structured your business to remain separate from your personal assets, creditors can only go after business assets.

Your plans may look different depending on whether you plan to dissolve your business when you die, pass it to an heir or have a co-owner continue running the business (among other options). It can be helpful to have a life insurance policy with a sufficient benefit for beneficiaries to be able to settle outstanding debts, cover the costs of closing a business or help meet expenses during a transition period.

Whatever your plans may be, leaving clear written documents with your wishes and any information about finances and policies can be helpful for people handling your business matters. Leave a list of your obligations somewhere your beneficiary can find it easily, so they know what bills you intended to cover out of a life insurance benefit.

A legal or business advisor can help you check any special requirements if you’re getting life insurance as part of a business agreement, like a buy-sell agreement.

Entrepreneurs should consult a professional for advice on the best insurance policies and succession plans for their needs.

Depending on your situation, life insurance may not only protect your family; it can also help open doors for business opportunities like loans. The right level of coverage can help provide a sense of security and a valuable benefit for your business and family’s future alike.

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