(480) 525-6244
Mon-Thurs 9am-5pm Friday by appointment only
5 Star Rating
Law Firm in AZ
30 Years
Free Consultation

The Importance of Life Insurance for Small Business Owners

open sign in window of small business

If you are financially responsible for a spouse or children and you pass away, it could create a serious financial bind for those who depend on you. If you are the primary wage earner in your household, then you have or have likely considered life insurance to protect them from this situation. The same circumstance is applicable for small business owners, especially if they do not have a proper succession plan in place. For small business owners, it is important to have life insurance for your business and understand the types of plans available.

When starting a business, an owner or partners are advised to create a succession plan in case the owner or one of the partners passes away. Creating a succession plan can be done in the operating agreement or a buy-sell agreement. These documents help mitigate stress for not only business partners, but that individual’s family. Partners who do not have proper succession plans in place can end up in a predicament where, if one them passes away, the deceased partner’s spouse or children are put in a position they might not otherwise be capable of fulfilling. This can be avoided by making amendments to your operating agreement or by executing a buy-sell agreement. A succession plan should be the first step in making sure your business is properly equipped to handle if you or your partner(s) passes away. Next is deciding on a life insurance plan.

When deciding which life insurance plan you and your partner will use, you first should weigh out the differences between them. For small businesses there are two common plans you can choose from, a cross-purchase plan or an entity-redemption plan. A cross-purchase plan is purchased by each partner, as they buy the policy on the other partner(s) and name themselves as the beneficiary. This would enable the surviving partner to use the life insurance death benefit to buy the deceased partner’s share of the company. Entity-redemption plans are purchased by the business, as the business takes out separate life insurance policies on all the partners. In the result of one partner dying, the business becomes the beneficiary and can use the death benefit to buy the partner’s share of the business. Choosing a plan that is best suited to protect your business is dependent on your circumstance and preference, next is choosing the length of the insurance plan.

When determining the length of your life insurance policy, the two primary policies to choose from are term and whole plans. A term life insurance plan provides coverage for a certain amount of time. This can be beneficial for businesses who plan on selling it in the not so distant future, as the coverage usually lasts around 10 to 20 years. Whole, or perm, life insurance plans are permanent and last the insured’s entire lifetime. Whole policies can be significantly more expensive than a term policy but are helpful when partners plan on being in business together for years to come. Whole life insurance policies also have a redemption value, whereas term life insurance policies do not.

In summary, it is essential to create a succession plan in the early stages of your business’s life. Creating a succession plan can ultimately save your family and your partner(s) time and stress if a tragic, unforeseen event occurs. Life insurance can be an invaluable tool in supporting your succession plan. Choosing the appropriate life insurance policy and its duration can save your business, family, and partner(s) significant amounts of stress, both financially and emotionally.

Works Cited

Bond, Casey. “8 Things Every Adult Needs To Know About Life Insurance.” HuffPost, HuffPost, 1 Aug. 2019, https://www.huffpost.com/entry/life-insurance-facts-need-know_l_5d2c00c5e4b0060b11eebd78?guccounter=1.

Marquand, Barbara. “Life Insurance for Small-Business Partners.” NerdWallet, 22 June 2017, https://www.nerdwallet.com/blog/insurance/life-insurance-small-business-partners/.

Disclaimer – This article is for information purposes only. It is not intended to provide legal advice to anyone. If you require advice, you should reach out to our firm or another lawfirm to discuss your facts and circumstances to obtain legal advice

Related Posts

Leave a Reply

Meet Margaret Tritch Buonocore

Margaret Tritch Buonocore began her legal career in Los Angeles as a litigator. She then moved to London where, after completing her LLM, she worked in international business and finance for almost a decade structuring corporate finance transactions, equity offerings, debt, and derivative instruments focusing on contract and securities law issues. Learn More…

Contact Us

(480) 525-6244

    Contact Us

    Contact Us

      Get a Complimentary 30 Minute Meet and Greet Session by Calling Us or Filling Out the Form.