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As a solo entrepreneur, you probably have a lot on your plate. You are likely responsible for creating a business plan, managing day-to-day operations, developing growth strategies, supporting customers, and many other tasks. Running a business usually requires long hours and a lot of concentrated work.
If you weren’t there to turn all those plates around, your loved ones and your business could suffer significant financial hardship. We’ll go over five reasons why you need life insurance to protect your business and your family, as well as 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 policies, but only last for a set period of time. For example, you could buy a 10 or 20 year term life insurance policy.
You could purchase an additional term policy or upgrade to a permanent policy in the future. Permanent policies are more expensive but protect you for life.
Also note that some policies take weeks or months to establish if you need a medical exam. So if you’re in a rush to get coverage, consider life insurance with no waiting period.
Why business owners need life insurance
Here are five reasons why you probably need life insurance when you’re self-employed.
1. Protect your family’s 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 for all expenses, such as your funeral, current bills, and future goals like going to college or buying a house.
2. Eligibility for a business loan. In many cases, you must have life insurance to qualify for a business loan from a private lender or a loan secured by the Small Business Administration (SBA). You usually need a term insurance policy that would cover the repayment period of your loan. Your lender is at much less risk when you have a life insurance policy to protect your liability.
3. Serve 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 rest of the benefit goes to your beneficiaries. You generally need a permanent policy with cash value that could be assigned to your liability.
4. Protect your business partner or key man. Life insurance should be an essential part of succession planning if you want your business to continue running after you leave. Whether you are a solo entrepreneur or have key people in your businesslike partners or employees, life insurance helps keep your business going until a successor can take over or your heirs sell the business.
5. Sell your part of the business. If you own a business with associates or have key employees, life insurance can be an essential tool for them to redeem your heirs. Instead of your family taking over your business, they could sell your share to one or more successors. The business could continue to operate without you and your family would receive a lump sum or structured payment.
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How much life insurance do solopreneurs need
There is no single answer for the 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 only to protect your loved ones, consider your savings and their future expenses. For example, add up costs such as your funeral, mortgage, car loans, child care, elder care, and the cost of college. Also consider any business liabilities your estate may be responsible for, including outstanding loans, employee or contractor payments, lease or mortgage payments, and taxes.
If you purchase life insurance to qualify for a business loan, the coverage amount must generally equal the loan amount. So if you take out a $200,000 loan, your life insurance policy must have coverage of at least $200,000.
Also note that you can have multiple life insurance policies. For example, as your income increases, you can purchase additional term policies to provide additional coverage for your family. You may have a separate permanent policy for your business purposes.
Once you know the types and amounts of coverage you need, shop around with various companies for life insurance quote online. By purchasing the best life insurance coverage for your situation, you can rest assured that your business and your loved ones will have a secure financial future should something unexpected happen to you. If you need help understanding your coverage options, consult a licensed insurance broker or business attorney for specific advice.
Related: Is Life Insurance a Good Investment?