There are several life and health insurance products that a business owner can purchase to help protect themselves financially if they or a critical employee becomes seriously ill or dies.
When a key person is covered under an insurance policy, the business receives a benefit that can be used to cover lost income, debt obligations, training costs for a replacement, or to keep operations running smoothly during the transition. It's essentially a safety net that helps ensure the business's financial stability and continuity when it loses someone vital to its success.
Business ownership can bring added financial risk. If something serious happens to you, your business may face more pressure than a typical salaried job would create.
Insurance may help in a few ways:
If you own a business, you may want to look at insurance options when:
The right time is often before a crisis. Early planning can give you more options and more time to review what fits. The right type of coverage depends on your goals, your business stage, and your budget.
Life and health insurance can go a long way in helping you protect your business. Here’s how:
Coverage for a set period (e.g. 5 to 40 years)
Premiums stay fixed during the term, which can help with budgeting.
Useful for time-bound needs like a business loan, mortgage, buy-sell agreement, or income protection during the years your family depends on your earnings.
Lifelong coverage as long as premiums are paid.
Some policies can build cash value inside the contract.
Useful for business owners who want protection that can stay in place for estate planning, final expenses, legacy goals, or longer-term business needs.
Offers a lump-sum payment if you’re diagnosed with a covered illness and meet the policy conditions.
Useful when you need help with one-time expenses, business overhead, or extra support during recovery.
It can also help give you breathing room when you need time away from work to recover.
Disability insurance helps protect your income if illness or injury keeps you from working.
For business owners, it can help maintain business stability and prevent them from having to deplete savings or take on debt while unable to work.
Whether you're launching a startup, scaling through growth, or operating an established enterprise, insurance can help provide essential financial protection tailored to the unique risks and challenges your company may face at every stage of its lifecycle.
When you’re just getting started, your needs may be simpler but still important. You may want to think about personal income protection, early debt, and any commitments you have made to launch the business.
As a business owner, you’re the heart of your operation. Insurance can help financially protect your business, ensuring bills get paid and operations continue while you’re recovering from an illness or after your death.
As your business grows, your insurance needs may grow too. You may add employees, take on larger loans, or bring in a partner. At this stage, buy-sell planning, key person protection, and business continuity planning may become more important.
Expanded key person coverage helps ensure that if something happens to you, your business has the financial resources to cover lost income, manage debt, and keep things running smoothly during a challenging time.
If your business is stable, you may be thinking more about long-term protection. This could include permanent life insurance for lifelong coverage, estate planning, or transfer plans for the future.
Owners at this stage may also review whether their existing coverage still fits or whether a new mix of products would better support current goals.
Later in the life cycle of your business, insurance may play a role in succession, retirement, or estate planning. You may want to leave the business to family, a partner, a key employee, or a buyer. Insurance can help create liquidity and support a smoother transition.
Permanent life insurance may fit longer-term legacy goals. Term life may still make sense if you have a defined need that will end after a sale, loan payoff, or transition.
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Insurance can help protect your business through funding a buy-sell agreement and with key person insurance. Here’s how it works:
A buy-sell agreement is a legally binding arrangement among business owners that establishes how and when an owner’s interest in the business will be transferred if a specified event occurs, such as death, disability, retirement, bankruptcy, or a dispute. A policy is purchased on each business owner’s life. The policy may be owned by the other owners or by the corporation. The agreement sets the transaction terms, including the triggering event, the business-interest valuation, and whether the surviving owners will buy the deceased owner’s shares or the corporation will redeem them.
Key person insurance is coverage a business purchases on the life, and sometimes the health, of an owner, executive, or employee whose loss could significantly affect the organization. The business owns the policy, pays the premiums, and receives the benefit if the insured person dies or experiences a covered critical illness. The funds can help offset lost revenue, protect business value, manage debt obligations, and cover the cost of recruiting and training a replacement.
It depends on the policy ownership, who pays the premiums, and how the coverage is used. Tax treatment can vary, so it’s a good idea to speak with a tax professional.
The right choice depends on your specific business needs and goals.
Term life insurance is more affordable and provides straightforward coverage for a set period. It's ideal if you need protection during your most vulnerable business years or to cover specific obligations like loans or key person gaps. However, it expires and offers no cash value.
Permanent life insurance costs more but provides lifetime coverage and (depending on the policy) may build cash value over time. This can be valuable if you're planning for long-term business succession, and retirement income. The cash value can also be borrowed against if needed.
Many business owners benefit from a combination approach. Term insurance can cover immediate, temporary needs (like protecting against income loss in early years), while a smaller permanent policy provides lasting protection for succession planning and estate purposes. Connect with an advisor who understands your business stage, cash flow, and long-term goals to determine the right mix for your situation.
Yes, life insurance policies can be used as collateral for a business loan. Lenders may accept permanent life insurance policies that have built-up cash value, as they represent a tangible asset that can be borrowed against or seized if the corporation defaults on the loan. The amount you can borrow is typically a percentage of the policy's cash surrender value. This approach can be particularly useful for business owners who need capital but prefer to keep their life insurance in place rather than cashing it out.
However, terms and eligibility vary by lender, so it's important to discuss your specific situation with both your insurance provider and lender to understand the implications and process.
Learn more about the differences between these two products.
You can hold more than one – several, even – life insurance policies. You can also have different types of insurance. Learn how.
Learn about the differences between term, whole, participating and universal life insurance policies.
This information is meant for educational and illustrative purposes only. Some conditions, exclusions and restrictions apply.
