Life Insurance for Business Owners

As a business owner, you understand that your business is more than just a job – it’s a lifetime investment. It’s not only important to make sure that your business is thriving, but it’s also essential to ensure that you have the right protections in place to safeguard your business and loved ones in case of the unexpected. This is where life insurance comes in.

In This Guide:

What is Life Insurance for Business Owners?

Life insurance for business owners (also known as business life insurance and company life insurance) is a type of insurance policy that provides financial support for a business or loved ones in the event of the business owner's death or incapacitation due to critical illness. This type of insurance is designed to protect a business and its assets, as well as provide financial security for the business owner's family and loved ones. You can make either a business partner or a loved one the beneficiary of your business life insurance policy, depending on who you want to protect and the kind of cover you need.

Please Note: Not all insurance providers we work with offer all types of policies. Please do your research and compare quotes before proceeding.

Why Do Business Owners Need Life Insurance?

There are many reasons that a business owner may decide to take out life insurance. Some of the most common reasons include:

Business Continuity

In the event of a business owner's death, a life insurance policy can provide the necessary funds to keep the business running smoothly during the transition period. This financial cushion can help cover operational expenses, payroll, and other costs, preventing the business from collapsing due to a lack of funds.

Buy-Sell Agreements

Many businesses have multiple owners or partners. A buy-sell agreement, funded by life insurance, allows the surviving business partners to purchase the deceased owner's share of the business. This ensures that the business remains in the hands of the remaining partners while providing financial compensation to the deceased owner's family.

Debt Protection

Business owners often incur personal liabilities or debts to fund their business operations. In case of the owner's death, life insurance can help cover these outstanding debts, preventing the financial burden from falling on the owner's family or the business itself.

Family Financial Security

Life insurance can provide financial security for the business owner's family in the event of their death. A policy can help cover expenses such as funeral costs, living expenses, educational costs for children, and even retirement income for the surviving spouse.

Tax Advantages

Life insurance policies can offer tax advantages to business owners. For example, the death benefit paid out to beneficiaries is generally income-tax-free. Additionally, life insurance can be a useful tool in estate planning, helping to mitigate potential estate taxes.

Different Types of Business Life Insurance

Understanding the various types of business life insurance policies is essential for business owners looking to secure the right protection for their specific needs. Here are five common types of business life insurance policies:

Key Person Life Insurance

Key person life insurance is a policy taken out on the life of an essential employee or executive, whose absence due to death would significantly impact the company's operations and profitability. The business pays the premiums and is the beneficiary of the policy. In the event of the key person's death, the insurance payout helps the company to cover any financial losses, recruit, and train a suitable replacement, ensuring the business remains stable during the transition.

Relevant Life Insurance

Relevant life insurance is a tax-efficient, individual life insurance policy for employees, including directors, that is set up and paid for by the employer. The policy provides a death benefit to the employee's family or beneficiaries in case of their death. Relevant life insurance policies are often attractive to small businesses that do not have enough employees to establish a group life insurance scheme. These policies offer tax benefits, as premiums are generally deductible as a business expense, and death benefits are usually not subject to income tax.

Business Protection Insurance

Business protection insurance is a broad term that encompasses several types of insurance policies designed to safeguard a business's financial stability in the event of an owner's or key employee's death. This category can include key person insurance, business loan protection, and ownership protection policies, among others. The primary goal of business protection insurance is to provide financial support to help the business continue operating and mitigate any financial risks associated with the loss of a critical team member.

Ownership Protection Insurance

Ownership protection policies, such as buy-sell agreements funded by life insurance, ensure that the remaining business owners can purchase the deceased owner's share of the business. These policies help maintain control of the business within the remaining owners' hands while providing financial compensation to the deceased owner's family. Ownership protection policies are essential for businesses with multiple partners, as they establish a clear succession plan and provide financial resources to execute the agreement.

Group Life Insurance for Employees

Many business owners offer their members of staff life insurance as part of their benefits package. These policies, often called group life insurance, typically provide a base level of coverage for all eligible employees, giving their families more financial security. These policies often provide a death benefit equal to a multiple of the employee's annual salary and can be supplemented with additional voluntary coverage options. Offering life insurance for employees not only helps attract and retain top talent, but also demonstrates a company's commitment to the well-being of its workforce.

What Does Life Insurance for Business Owners Not Cover?

While business life insurance provides valuable financial protection in various situations, there are limitations and exclusions that policyholders should be aware of. Here are some common aspects that business life insurance typically does not cover:

  • Non-death or critical illness events: Business life insurance policies generally focus on providing financial protection in the event of death or specified critical illnesses. They do not cover other situations, such as temporary disability, resignations, or retirements, which might impact the business.
  • Business failure or financial issues: Business life insurance policies are designed to provide financial protection in the event of death or specified critical illnesses. They typically do not cover losses stemming from business failure, poor financial management, bankruptcy, or economic downturns. Business owners should consider other types of insurance, such as business interruption or general liability insurance, and implement sound financial management practices to protect their company from these risks.
  • Waiting periods: Some policies may have a waiting period, which means the policy will not pay out benefits if the insured individual dies or becomes critically ill within a specified period from the policy's start date. Waiting periods can vary, so it's essential to understand any such limitations when setting up the policy.

Is Life Insurance Right for Small Businesses?

Small businesses often have limited resources and competing priorities, making it difficult to decide whether life insurance is a worthwhile investment. However, life insurance can provide essential protection to help ensure long-term success and financial security for both your business partners and your family.

While there isn’t a huge difference between the life insurance that larger and smaller businesses take out, life insurance for small business owners typically doesn’t need to offer as much cover as policies for larger organisations. By reducing the payout you’ll receive or adding a longer waiting period to your policy, life insurance can be much more affordable for small businesses.

Who Receives the Payout from Business Life Insurance?

Most business owners will either choose a business partner or a loved one as their life insurance beneficiary, depending on who they want to support financially should they die. CEOs of larger corporations may prefer their company to recevie a payout, especially if their family has shares in the business that will provide them with enough income to live on. However, sole traders and small businesses will likely want the money to go to their partner or children.

It is also possible to have multiple beneficiaries for one life insurance policy, meaning that both a business owner’s company and loved ones could share a life insurance payout. However, it’s important to consider how splitting the payout may affect the amount each party receives and whether it may be worth having two different life insurance policies to ensure everyone is protected equally. 

All business life insurance policies should indicate how a payout will be split, so read your policy documents carefully and make sure you’re happy with how much your beneficiaries will receive.

Do You Need Business Insurance or Business Life Insurance?

When it comes to protecting your business, both business insurance and business life insurance play crucial roles. However, they serve different purposes and cover different risks. Understanding the differences between the two will help you make informed decisions about the protection your business requires.

Business insurance is a broad term that encompasses various insurance policies designed to protect your business from a range of risks, such as property damage, liability claims, and business interruption. Some common types of business insurance include:

  • General Liability Insurance: Covers claims resulting from bodily injury, property damage, or personal and advertising injury caused by your business operations, products, or services.
  • Property Insurance: Protects your business's physical assets, such as buildings, equipment, and inventory, from risks like theft, fire, or natural disasters.
  • Professional Liability Insurance: Protects your business against claims of negligence or errors in the provision of professional services.
  • Business Interruption Insurance: Provides financial assistance if your business is unable to operate due to a covered event, such as a fire or natural disaster.

This is different from business life insurance, which focuses on providing financial protection in the event of death or specified critical illnesses of business owners or key employees. You may decide that a combination of both business and business life insurance will suit your financial needs the best, or you may opt for a specific type of insurance, such as general liability.

Finding Life Insurance for Business Owners

Investing in life insurance for business owners is a smart decision that can provide financial security for your business and your loved ones. Regardless of the type of policy you decide to take out, our team at Money Expert can help you to explore all your options. Get in touch to learn more about business life insurance and receive a personalised quote.