Life Insurance for Small-Business Owners

Small businesses are making their mark on the economy and in their communities, with the U.S. Census Bureau reporting a record high 5.5 million business applications in 2023.

As small-business owners hustle to file paperwork, find clients and customers and work toward profitability, they may overlook a key part of business planning — life insurance.

Whether you’re a one-person show or managing a complex operation with multiple employees, life insurance can be valuable to your business plans, says Alison Salka, senior vice president at LIMRA Research, a Connecticut-based insurance trade group.

Small-business leaders have the well-being of their families, employees and clients at stake if an owner or important team member dies unexpectedly. They and their families may be left to handle day-to-day operations and move the business forward — all while processing personal grief.

Life insurance can help you or your business avoid liquidation, pay estate taxes, provide income for loved ones, or carry on operations for your clients. Certain types of coverage for business owners can also ensure that ownership and shares are transferred fairly to partners.

Understanding the key types of life insurance for small businesses can help you make the best choice for your needs.

If you run a small business with no employees and are the breadwinner for your family, an individual life insurance plan like term life insurance may be sufficient to meet your needs.

Individual life insurance plans are popular among small-business owners because they serve both a personal and business purpose, Salka says. You’ll want to buy enough coverage to manage your personal debts and living expenses for your family, especially if they rely solely on your business income.

Sometimes called key man insurance, key person life insurance protects your business if an important employee or business member dies. Some small businesses rely on specific individuals with unique skills and knowledge, like skilled developers, CEOs or spokespersons.

Having key person insurance gives you breathing room to maintain the value of your business if you lose an important team member, Salka says. A key person life insurance policy can cover the expense of recruiting and training a new employee or replace the lost business income that the employee would have produced.

A buy-sell agreement establishes a clear transition of ownership if a partner dies, retires or becomes disabled. This type of contract provides a framework for co-owners or key employees to buy out a deceased owner’s stake in the business.

Business partners may take out life insurance policies on each other as part of a buy-sell agreement so they have the funds to make the business purchase.

Both large and small businesses can offer group life insurance as a benefit to employees. These policies can be cost-effective for business owners and employees since premiums paid by employers are tax-deductible as business expenses in some cases, Salka says.

Group plans can make coverage accessible to a wide range of people, regardless of pre-existing medical conditions. Plus, offering additional benefits like group life insurance can help you attract and retain top talent.

Nearly 3 in 4 U.S. adults (72%) overestimate the cost of life insurance, LIMRA’s 2024 Insurance Barometer Study found. In reality, a healthy 40-year-old man could pay less than $350 a year for an individual 20-year term policy with a $500,000 death benefit, according to Quotacy, a life insurance brokerage.

Follow these steps to insure yourself or your business.

1. Decide how much coverage you need. Consider both your personal and business expenses to calculate how much your family or business would need to survive long-term without you. 

2. Choose which type of life insurance you need. The size of your business and how you want ownership handled after you die can help you choose among an individual policy for yourself, a buy-sell agreement, key person insurance or a combination of multiple policies.  

3. Shop around and get quotes. Compare life insurance quotes from three to five companies online or over the phone. Working with an agent or broker can help you find coverage and negotiate the best terms for your needs.