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Life insurance can help protect your family and business if you were to pass away unexpectedly.

Life insurance is important for parents and homeowners, but did you know it’s just as important for small business owners?

As a business owner, you want to make sure your business is successful — even if you’re not there to run it. Life insurance provides a way for you to continue protecting your family and business after you’re gone. Read on to learn why every small business owner should consider life insurance.

Why Do You Need Life Insurance?

Most people think of life insurance after they have a baby. It’s a common way to protect the future of a child. If a parent passes away, life insurance benefits can help with the cost of the child’s needs like education, housing, and food.

Consider your business. There’s a good chance you think of it as your baby. Similar to a parent, you can use life insurance policies to protect your business if you pass away. With the right coverage, your life insurance can also protect your family from unexpected debt or liabilities related to your business.

What Type of Life Insurance do You Need?

In general, there are two main types of life insurance: term policies and whole life policies. Term policies provide coverage for a set number of years. Whole life insurance lasts for the life of the person insured. Term life insurance is often much less expensive, but whole life policies include cash value that can grow over time.

Choosing between term and whole life policies is only one part of life insurance for small business owners. You’ll also have to choose between three types of policies:

  • Personal
  • Key Person
  • Buy-Sell Agreement Policies

Personal Life Insurance

A personal life insurance policy isn’t directly tied to your business, but it could provide the protection your family needs if you pass away unexpectedly. As a small business owner, you might not have the benefits of someone with more traditional employment, such as employer-sponsored life insurance.

Personal life insurance also provides the same benefits it does to non-business owners. First, it helps replace the income your family loses if you pass away. The death benefit of your life insurance can be used by your dependents to pay housing costs, college expenses of your children, retirement income for your spouse, and other everyday expenses your income helped provide.

The second benefit of a personal life policy is to cover potential debts that come due after you pass away. If you used your house as collateral for a business loan, for example, your life insurance can help pay off the business loan so your family doesn’t worry about losing their home. It can also help pay for other inherited debt your family might face, such as car loans or credit card debt.

Key Person Insurance

A key person life insurance policy is designed to protect a business if an important member of the business passes away. The business purchases the policy and pays the premiums. The policy insures a key person. If that person passes away, the business is the beneficiary of the death benefit.

Key person policies are most common for business owners, founders, and top executives. Employees with essential skills or specialized knowledge may also be insured with key person insurance. Businesses use key person insurance to cover the cost to hire and train a replacement, create new strategies, change directions, or cover the costs to close the business.

Buy-Sell Agreement Policies

Business owners who have co-owners or partners need a buy-sell agreement. This agreement defines what happens to an owner’s share if they leave the business. It outlines the terms, such as price, for other business owners to purchase the share of the leaving owner.

Life insurance can be used with a buy-sell agreement to define what happens to an owner’s share if they pass away. Known as a cross-purchase agreement, it works like this:

  • Each owner purchases a life insurance policy on the other.
  • If one owner dies, their partner uses the proceeds of the life insurance to buy their share of the business.

The deceased owner’s shares can also be bought by the business itself using an entity purchase plan. In this case, the business purchases life insurance policies for each owner and uses the proceeds to buy the shares if an owner passes away.

Related: Best Banks for Small Business

How to Use Life Insurance as Collateral on a Small Business Loan

One of the unexpected benefits of a life insurance policy for small business owners is the ability to secure a business loan. Some lenders will let you use a life insurance policy as collateral for a small business loan.

The insurance policy helps guarantee you’ll pay back your loan if you pass away. In the event of your death, your lender is paid first by the death benefit to cover the remaining balance of your loan. Any leftover funds from the policy then go to your beneficiaries.

How to Find Life Insurance as a Small Business Owner

Choosing the right life insurance as a small business owner is similar to finding a policy for your personal use. You’ll need to weigh your options to find what works best for your small business.

  • Define Policy Needs: If you go with a term policy, you’ll need to consider how long of a term you need. Businesses with multiple owners or essential stakeholders will need to choose who is covered with key person policies or whether a buy-sell agreement policy is needed.
  • Get Enough Coverage: Getting the right amount of coverage is a big part of purchasing life insurance. If you get too little, your death benefit may not be enough to cover business debt like loans. Be sure to also consider the long-term needs of your dependents, such as college expenses or mortgage payments.
  • Shop Around: Don’t settle for the first option that meets your budget. Shop around to find the coverage and price that works best for you.

Once you find the right policy for your business, you’re ready to apply for coverage. The process works the same as any other life insurance policy:

  1. Apply for Coverage
  2. Take a Medical Exam
  3. Wait for Approval
  4. Sign Your Policy
  5. Pay Your Premium

Related: Best Insurance for Small Businesses

Best Life Insurance Options for Small Businesses


Policygenius works like an online broker to let you compare quotes from multiple life insurance companies. The tool helps you find the right policy by walking you through the process. That means you won’t get spammed with calls and emails from insurance companies.

You don’t have to pay extra fees to use Policygenius. However, they don’t offer insurance options in every state, so you’ll have to check what options are available in your area.

Leap Life

Leap Life is an online life insurance broker. They let you compare term life policies from various insurance companies. One great feature is the ability to apply for a policy online with no medical exam required. If you want coverage fast to use as loan collateral, LeapLife could be a good option.

The downside to Leap Life is no online option for whole life policies. You’ll have to call them directly or find a different provider if permanent life insurance is right for your business.


Bestow only offers life insurance. You can choose between the following term-life options: 10, 15, 20, 25, and 30-year term lengths.

You won’t need to complete a medical exam and there are several payment options, including ApplePay. Coverage options go up to $1.5 million.

FAQs: Life Insurance for Business Owners

Small business owners should have life insurance, as well as any employee or stakeholder whose skills or knowledge make them essential to the success of the company.
Key person insurance is a life insurance policy taken out by a business to insure a person vital to the success of a company. It’s usually used for business owners and top executives. The company purchases the policy and is the beneficiary. If the key person passes away, the business receives the life insurance benefit.
You can use proceeds from life insurance to cover business debts, keep the business running, or close the business. For example, if the business needs to close, the funds could go to severance packages for employees.
Yes, you can usually use a life insurance policy as collateral to help you secure a small business loan.

Bottom Line

Life insurance can help protect your family and business if you were to pass away unexpectedly. You may want to consider a personal policy and a business-owned policy. Start protecting your business today by getting quotes from top-rated life insurance providers.

Author Bio

Total Articles: 3
Tara Seboldt is an experienced personal finance writer with a professional background in financial services. She has a passion for taking traditionally boring topics and explaining them in a way that’s a little more exciting for an everyday reader. Her expertise includes insurance, real estate, credit and loans, personal finance, and small business finance. When she’s not writing, you can find Tara hiking, camping, and skiing the Idaho mountains with her husband and their Border Collie, Rudi. You can learn more about Tara at Seboldt.com.

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