Small Businesses

Small business owners are more aware than ever of the need to protect their businesses. However, most don’t know how life insurance could be an important tool in protecting their life’s work.

Small businesses — there are approximately 31.7 million of them — comprise 99.9% of U.S. businesses and 41.7% of the country's private workforce employees.¹

Anyone who plays a critical role in the ongoing financial success of a business may impact the business's ability to survive. To help protect against the loss of a key employee's contributions and expertise, a business can purchase life insurance on the key employee.

A business purchases insurance, known as employer-owned life insurance, on the key employee
Face amount can be determined a variety of ways, including the key employee’s impact to earnings and replacement cost
The business pays the premiums and is the beneficiary

If the key employee dies, the policy death benefit helps the business financially while recruiting and training a new key employee
The business may be able to access the cash value while the employee is still alive
If IRS guidelines are met, the employee will not be taxed and the business receives the death benefit proceeds free of income tax

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Life insurance policies can be leveraged by businesses to help attract, retain, or reward certain critical employees. The opportunity is significant given 51% of U.S. employees say they are actively looking for a new job or watching for openings.²

The business pays a bonus to select employees — the bonus amount is used to purchase life insurance to help supplement the employee's qualified plan and group term offerings
Double bonus arrangements can cover the income tax liability to the employee
Employee owns the life insurance policy and designates the beneficiary

Bonuses are used to pay premiums and are deductible to the business
IRS approval, disclosure, and annual reporting are not required
This is not a qualified plan, so there are no annual administrative costs and the business can choose which employees are offered the benefit

Learn more about executive benefits in our field guide.

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The absence of a succession plan can have a significantly negative impact on many parties, including the business itself. In fact, only 12% of small businesses survive through the third generation.³ There are numerous types of buy-sell agreements offering flexible, customizable solutions that can provide certainty, mitigate conflict, and facilitate a smooth ownership transition.

Buy-sell agreements are legally binding and stipulate that upon a triggering event, an owner must sell his or her business interest to remaining owners or the business itself
Life insurance may be purchased to provide funding for the agreement upon a triggering event
Policy ownership, number of policies, and tax considerations vary by the type of buy-sell agreement and should be drafted by a qualified professional

Adequate funds are available when they are needed to satisfy the terms of the agreement
Cash value of permanent life insurance can be accessed by the owner of the policy
Policy features, such as riders, can provide additional benefits during life