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Life Insurance Strategies for Business Owners

Life Insurance Strategies for Business Owners

Running a business is a bit like having a second family: there are people that depend on you, like coworkers and employees, and many associated financial responsibilities. So it makes sense that you’d want to protect your business with life insurance.

What is Life Insurance for Business Owners

While the basic understanding of life insurance is that it issues a tax-free lump sum of money (also known as the death benefit) to a beneficiary if the insured dies while the policy is active, there are many more layers to life insurance. For instance, some may not be aware that life insurance can be owned by an individual or by a corporation. The latter scenario is particularly of interest to business owners.

In the simplest terms, life insurance for business owners is a type of policy that is owned by the business instead of an individual. If the business owner, a partner, or a key employee dies, the policy will issue a lump sum, tax-free benefit to support the business. In other words, business-owned life insurance can play a critical role in protecting the business you’ve built should a key person in the company die.

It should be noted that life insurance for businesses should not replace a personal policy: in an ideal situation a business owner would have a personal policy to protect their family and dependents and a business-owned policy to protect their business. Beyond providing a financial safety net to your business in case an owner or key partner dies, life insurance for businesses can also provide certain benefits, which we’ll explore more below.

Benefits of Life Insurance for Business Owners

  • Business-owned life insurance can protect business owners’ families from having to pay any debts or loans if the policy holder dies.
  • Business-owned whole life insurance offers an increasing cash value which business owners can use as leverage to obtain loans to grow or adapt their business.
  • Business-owned life insurance provides a tax-free payment if the business owner, partner or key employee dies, which can alleviate the financial impact of finding and training a suitable replacement.
  • Business-owned life insurance can strategically be used to improve employee experience and retain valuable employees.
  • Some forms of business owner life insurance have tax deductible premiums, including life insurance owned by an employee but with premiums paid by the business owner, and group health insurance premiums for employees. Premiums are not tax deductible if the business receives the death benefit.

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Life Insurance Strategies for Business Owners

There are a few different life insurance strategies for business owners to explore, each of which offers distinct advantages.

Buy-sell agreements

Buy-sell life insurance agreements are specifically tailored to businesses with co-owners. In this life insurance strategy, a legal agreement is made between the business owners to plan for any unexpected death. This buy-sell agreement is supported by life insurance and is intended to protect the business and the surviving owner or owners. Typically, a buy-sell agreement will result in a death benefit totalling a relative portion of the company’s value. In other words, if there are two co-owners, the death benefit will be 50% of the company’s value. This money is given to the deceased’s family, while the late owner’s stake goes to the surviving partner.

The reasoning behind these agreements is that it isn’t always desirable to have the beneficiaries of someone’s estate take over ownership of a business. Having a legally binding contract to eliminate this situation is a solution that helps both parties. Funding it with life insurance allows the business to pay the premium on the policy rather than keeping cash on hand to pay the deceased partners share out.

Key employee insurance

Key employee insurance is an effective life insurance strategy for business owners that rely on a particular employee for critical tasks. In other words, a person whose absence would greatly impact the business’ operations and productivity. Particularly useful for small business owners who rely on a lean, highly trained team, key employee insurance is essentially a life insurance policy that covers a vital team member and issues a benefit to the business if they die. The payout is intended to support the company through a transition period of finding and training a new team member.

Estate equalization

Estate equalization is a good strategy for business owners seeking to pass their business along to a family member, such as a child, when they die. In this scenario, an estate equalization plan would enable the whole business to be passed down to a single person without leaving little or nothing to the business owner’s other children or dependents. How? It’s simple. The business owner takes out a life insurance policy worth the value of the business and names the other dependent (who isn’t inheriting the business) as beneficiary. If there are more children, additional life insurance policies worth the same amount can be purchased. This life insurance strategy also generates more wealth for the next generations, doubling or tripling the business owner’s estate value when they die.

Employee bonus plan

Another potential life insurance strategy for business owners is to reward key employees with a life insurance contract. Bonuses are an effective way to retain valuable employees. Following this strategy, a business owner would put the employee’s bonus towards a life insurance policy (typically a permanent policy). This would give the employee access to a death benefit (to be paid to a beneficiary of their choosing) and the policy’s cash value. This strategy differs from group insurance plans because the business owner is effectively choosing an individual life insurance policy to reward an employee.

Types of Life Insurance for Business Owners

There are several types of life insurance for business owners to choose from. Find out more about the different forms of life insurance and what situations they are best suited to.

Term life insurance for business owners

Term life insurance for business owners is a type of policy that is active over the course of a specific term—typically in 10 year intervals. Term life insurance is a good option for new business owners who may need temporary protection while their business gets off the ground and to cover for any loans the policy holder has taken on their business.

Whole life insurance for business owners

Whole life insurance for business owners is a type of permanent life insurance policy, meaning it is active for the duration of the insured’s life. Whole life insurance also has the advantage of increasing cash value, which business owners can leverage for loans to be used for new business ventures or expansions.

Group life insurance for small business owners

Group life insurance provides coverage to a business’ employees and their dependents. There are distinct advantages to group life insurance for small business owners. Group life insurance is typically offered as part of an employee benefits package, which can improve employee satisfaction and retention.

Universal life insurance for business owners

Universal life insurance for business owners is a form of permanent life insurance with flexible premium and investment terms. It is a good option for business owners that are seeking to benefit from both life insurance coverage for their business and a flexible investment component. Any investment income can be withdrawn at the business owner’s discretion, and the policy’s cash can be used as collateral for business loans.

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How can life insurance help business owners?

Life insurance can help business owners in various ways. While a personal life insurance policy will protect the business owner’s family and dependents, a business-owned policy will protect the business, including partners and employees, if the insured dies. In addition to providing a tax-free lump sum payment if the insured dies, life insurance for business owners can also offer an investment component and be used as leverage for business loans.

Do small business owners need life insurance?

If a small business owner has people in their business that rely on them for employment and income, it is a good idea to have a life insurance policy in place. Having a business-owned life insurance policy in place will enable the business to continue should a co-owner or key employee pass away. More than that, a business life insurance policy can cover any loans in the insured’s name, which stops the financial burden from being passed on.

Can you take out life insurance on a business partner?

Yes, with their consent. The most common approach for business partners seeking to purchase business-owned life insurance is a buy-sell agreement, where each partner buys a life insurance policy for the other partner. If a partner dies unexpectedly, the death benefit is paid to the insured’s beneficiary, while their stake in the company goes to the surviving business partner or partners. In other words, the death benefit buys out the deceased’s share in the business.

Can a business buy life insurance?

Yes, it is possible for a business to own a life insurance policy. Typically, a business-owned life insurance policy will cover the life of a business owner, co-owners, or a key employee. In some cases, a business-owned life insurance policy will pay a death benefit to the business if the insured dies. In others, the death benefit is paid to a beneficiary, typically a dependent of the insured.

How much does life insurance cost for small business owners?

The cost for life insurance for small business owners varies significantly depending on a number of factors, including type of insurance (term life insurance is substantially cheaper than whole life insurance), the size of policy, and personal factors, like age and health of the insured. To get a better idea as to how much you would pay for life insurance as a small business owner, get in touch with one of our life insurance advisors.


There are many life insurance options available to small business owners, as well as medium and large business owners. As we’ve seen there are benefits and limitations to each—what is really important is finding the right fit for your business’ specific needs. For more guidance on life insurance for business owners, don’t hesitate to get in touch with a member of our team, or head directly to our instant life insurance quote tool for a custom quote.

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