Life Insurance for Small Business Owners

Business life insurance is coverage used to help a company manage financial risk when an owner, partner, executive, or other essential person dies. Depending on the policy and arrangement, proceeds may help replace lost revenue, recruit a successor, support a lender relationship, fund a buy-sell transaction, or provide financial stability for the owner’s family. Ownership, beneficiaries, and intended use should be established carefully.

Key person life insurance is a business-owned policy on an employee, founder, executive, or partner whose loss would materially affect the company. The business generally pays the premium, owns the policy, and receives the death benefit. Proceeds can provide working capital, help cover lost revenue, support recruiting and training, and reassure creditors or investors while the company transitions.

A buy-sell agreement establishes how an owner’s interest may be transferred after a triggering event. Life insurance can provide the liquidity needed for the surviving owners or the business to purchase that interest after death. An attorney should draft the agreement, and a valuation professional may help establish the business value. OOC Unlimited focuses on coordinating the insurance funding component.

Yes. Life insurance can be one component of a broader succession or exit strategy. It may help provide liquidity for a partner buyout, support a transfer to family members, equalize inheritances among heirs who will not receive business ownership, or address uncertainty around sale timing. Effective succession planning also requires coordination with legal, tax, and valuation professionals.

An executive bonus plan, often associated with IRC Section 162, is a selective compensation approach. A business provides a bonus to a chosen employee, who uses it to fund and own a permanent life insurance policy. The employee controls the policy and names beneficiaries. Potential deductibility, taxation, and plan design depend on the facts and applicable rules, so professional tax guidance is important.

A Restricted Executive Bonus Arrangement, or REBA, is a variation of an executive bonus plan that adds restrictions or a vesting schedule. The executive may own the policy, but access to cash value, loans, surrender rights, or beneficiary changes can be limited until employment milestones are met. This structure is designed to encourage retention of key leaders over time.

Some life insurance policies offer living benefits or accelerated death benefit riders. If the insured is diagnosed with a qualifying chronic, critical, or terminal illness, these riders may permit access to part of the death benefit while living. Availability, payment method, qualifying conditions, and exclusions vary by carrier. Using benefits generally reduces the death benefit remaining for beneficiaries.

The appropriate amount depends on the risk being addressed. For key person coverage, consider lost revenue, replacement costs, debt obligations, and the time needed to stabilize operations. For buy-sell funding, coverage commonly aligns with the agreed business valuation and ownership shares. A review with your insurance professional, CPA, attorney, and valuation specialist helps ensure assumptions are documented and current.