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As a solopreneur, you’ve probably got a lot on your plate. You’re likely responsible for creating a business plan, running day-to-day operations, strategizing growth, assisting customers, and doing many other tasks. Running a business usually requires long hours and a lot of focused work.
If you weren’t around to spin all those plates, your loved ones and business could suffer significant financial hardships. We’ll review five reasons you need life insurance to protect your business and family and the types and amounts to consider.
Related: Why Life Insurance Is Vital for Entrepreneurs
Types of life insurance for solopreneurs
There are two main types of life insurance: term and permanent. Term policies cost less than permanent but only last for a set period. For instance, you could buy a 10- or 20-year term life policy.
You could purchase an additional term policy or transition to a permanent policy in the future. Permanent policies are more expensive but protect you for your entire life.
Also, note that some policies take weeks or months to establish if you need a medical exam. So, if you’re in a hurry to get coverage, consider life insurance with no waiting period.
Why business owners need life insurance
Here are five reasons you likely need life insurance when you work for yourself.
1. Protecting your family finances. If you have children, a spouse, partner, or aging parents who depend on your income, their finances could suffer significantly without a life insurance benefit. The lump-sum payment to one or more of your beneficiaries would allow them to pay any expenses, such as your funeral, everyday bills, and future goals like going to college or buying a home.
2. Qualifying for a business loan. In many cases, you must have life insurance to qualify for a business loan from a private lender or one backed by the Small Business Administration (SBA). You typically need a term policy that would cover your loan repayment period. Your lender has significantly less risk when you have a life insurance policy to safeguard your liability.
3. Serving as collateral for a business loan. Life insurance can also serve as collateral for a small business loan. The policy pays off your loan if you die, and the remaining benefit goes to your beneficiaries. You typically need a permanent policy with a cash value that could get assigned to your liability.
4. Protecting your business partner or key man. Life insurance should be a critical part of succession planning if you want your business to continue operating after you’re gone. Whether you’re a solopreneur or have key people in your business, such as partners or employees, life insurance helps keep your business running until a successor can take over or your heirs sell the venture.
5. Selling your business share. If you own a business with partners or have key employees, life insurance can be an essential tool for allowing them to buy out your heirs. Instead of your family taking over your business, they could sell your share to one or more successors. The company could continue running without you, and your family would receive a lump sum or structured payout.
Related: Top Ten Reasons Why Investment In Life Insurance Is A Good Idea
How much life insurance solopreneurs need
There’s no one-size-fits-all answer for the right amount of life insurance you need as an entrepreneur. However, a general rule is to have at least five to ten times your annual income.
If you’re using life insurance solely to protect loved ones, consider how much savings you have and what their future expenses may be. For instance, add up costs such as your funeral, mortgages, car loans, childcare, elder care, and the cost of college. Also, consider any business liabilities your estate could be responsible for, including outstanding loans, payments to employees or contractors, lease or mortgage payments, and taxes.
If you purchase life insurance to qualify for a business loan, the coverage amount typically must equal the loan amount. So, if you’re taking out a $200,000 loan, your life insurance policy needs to have at least $200,000 worth of coverage.
Also note that you can have multiple life policies. For instance, as your income increases you might purchase additional term policies to layer on extra coverage for your family. You could have a separate permanent policy for your business needs.
Once you know the types and amounts of coverage you need, shop various companies for life insurance quotes online. By purchasing the best life coverage for your situation, you can rest assured that your business and loved ones will have a secure financial future if something unexpected happens to you. If you need help understanding your coverage options, consult with a licensed insurance broker or business attorney for specific advice.
Related: Is Life Insurance a Good Investment?
