“I need to really make sure that this business — if I'm not here or if I can't do anything — can run independently,” Fitch says.
It's a dilemma many small business owners face. Luckily, there are a number of things they can do to ensure that if they're gone — whether for the short term or the long term — the business and its employees are protected.
Individual life insurance is generally about protecting loved ones who are dependent on your income. As a small business owner, however, it can also fill a void if you're gone. A life insurance payout can be used to help manage day-to-day operating expenses, business debts and any costs to replace you, if necessary.
Think about what kind of financial needs your team would face in your absence, and consider a policy that would cover them. A term policy offers lower premiums for a fixed “term,” such as 10, 20 or 30 years. A permanent policy will cost more but will last your lifetime, if needed.
The chances of becoming disabled and unable to work are higher Opens in new window than your chances of passing away prematurely. In fact, one in 10 people PDF opens in new window aged 18 to 64 are disabled. But many small business owners don't plan for that possibility. Disability insurance replaces part of your pay if you're unable to work, decreasing the financial burden on your company and your family.
You'll likely need at least two years of tax returns to prove your income, and the insurance will cover your pay, not the business's profits. These premiums aren't tax deductible, but benefits are tax-free.
Business overhead insurance
This is also known as business expense insurance. If the policyholder becomes disabled, it covers overhead expenses, typically just for one to two years. Note that disability insurance covers personal expenses, while business overhead covers business costs.
That includes items such as employee salaries, rent, taxes and utilities — but not your salary or that of a replacement employee. Premiums are tax-deductible for the business, but all benefits received are taxable, unlike disability insurance.
Key person insurance
If there's a person (or persons) crucial to the operation of the business, key person insurance is a good idea. With this coverage, a business buys life or disability insurance on that “key” employee. If that person is disabled or passes away, the business receives the benefit, which it can use to cover operating costs and other expenses until it can find a replacement, or until the business shuts down. This wouldn't be necessary if you were running a sole proprietorship with no other employees — in that case, you'd be covering loved ones with individual life insurance.
If you own your company with a business partner or partners, what happens when one person dies, becomes disabled or decides they no longer wish to be involved? You may not want a partner selling his business shares to an outside party, or you may want to establish the value of business shares to prevent a future dispute when someone wants out.
A buy-sell agreement outlines what a business will do in various circumstances — kind of like a business prenup. These agreements are frequently financed by life insurance policies on each partner, which the partners (not the business) purchase, and for which the partners are beneficiaries.