How life insurance can help protect your small business

As a small business owner, there are many things you need to be successful. A great team. Positive customer feedback. A strong read on your competitors. But consider life insurance for a moment. Life insurance also may be an important resource for your business, so it can one day still succeed without you. In addition, it can help secure your loved ones' financial futures, provide a clear succession plan and protect your business from financial harm.

With that in mind, here's a closer look at what makes life insurance so important, along with an overview of commonly used types of life insurance for business owners and which might be a wise choice for your needs.

Just like anyone, small business owners often have people they want or need to provide for in case they die early. A life insurance policy can provide a cash payout—called a death benefit—to your family and others you care about. It can help to replace your income and shore up your loved ones' financial futures after you're gone.

Some business owners are responsible for a major part of their company's revenue and may hold special expertise or valuable networks of business relationships. If you died, your skills and knowledge could be hard to emulate. Your business might struggle financially while trying to hire and train someone to take over your responsibilities.

What would happen if there were no clear successor to lead your company? Life insurance for small business owners can help solve this situation in creative and personalized ways. Among the many possibilities, you may want to consider a key person life insurance policy that names the business as your beneficiary. Then your company might have some financial runway to keep paying bills and making payroll until someone else takes over.

The best type of life insurance coverage for you will depend on the kind of business you run, how it operates, your overall succession plan and your family's personal financial situation. You also may want to consider life insurance that helps you protect against specific business risks.

For example, a sole proprietor with no employees and no one to pass the business to might be interested in just an individual life insurance policy to provide financial protection for their loved ones. But someone who is part of a large, complex operation might want to have key-person life insurance to help keep the business running in the event of their unexpected death.

Let's look at different types of life insurance that a small business owner can invest in:

Just like you would get if you were an employee, an individual life insurance policy lets you name someone as your beneficiary. When you die, that beneficiary receives the death benefit proceeds.

With these policies, the business is the beneficiary and receives death benefit proceeds when you die. Key person life insurance also can be purchased to cover not just an owner but any employee who has special expertise and responsibilities and whose premature death could expose the business to severe financial risk.

Key person life insurance can help your business handle an unexpected loss, supplying a replacement for the revenue the covered person used to deliver while the remaining stakeholders chart a course for the company's future.

This type of policy is combined with a business purchase agreement. You make a deal in advance for a successor—such as your business partners, if you have them, or an outside buyer—to take over your ownership of the business for a set price. After your death, the transaction is funded with the proceeds from your life insurance policy.

By using life insurance for a buy-sell agreement, your surviving loved ones can receive a cash payout from the sale of your business, and your business partners (or future business buyer) can manage their risk and get ownership of your business without having to cover the full price that you asked.

Life insurance policies can be "term," with coverage lasting only for a fixed time (such as 15 years), or "permanent," with coverage lasting the duration of your life (as long as you keep paying the premiums and the contract retains its value). Both pay out a benefit to your beneficiary if you died.

While term life insurance often has lower premiums than permanent life insurance, some types of permanent life insurance have the potential to build cash value as long as you pay premiums, and sometimes offers an investment component (i.e., through variable universal life insurance). As you consider life insurance for yourself or another key person, the affordability of term life insurance may be attractive. But keep in mind: The cash value of permanent life insurance may provide additional funds to tap into for personal or business-related expenses while you're still living. And the guaranteed payout can give some extra relief to your family or business partner if they're expected to cover expenses after you're gone.

Life insurance isn't only an essential financial product for business owners—it also can be a wise choice for their family members. In fact, business owners' spouses and other loved ones may want to consider getting a life insurance policy for themselves as well. As a business owner, you'd likely take time off to mourn and manage your family's affairs if your spouse were to die. But you'd also want to keep paying your bills. Including life insurance policies in your overall personal and business financial strategies can bring you that much-needed confidence, clarity and financial stability in tough times.

Life insurance is a crucial aspect to consider when you run your own company. Along with protecting your loved ones from worst-case scenarios, life insurance can help small business owners like you secure your company's financial future. But don't assume that life insurance is all the same. Business owners often have particular needs and responsibilities to worry about.

Talking with a financial advisor can help you design the right package of life insurance² and other strategies to protect your operations, secure your family's future and keep you feeling calm and motivated to do what you love: run your business.