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Reasons Solopreneurs Need Life Insurance

June 21, 2023

Here are five compelling reasons why life insurance is crucial for self-employed individuals:

  1. Protecting Family Finances: If you have dependents, such as children, a spouse, partner, or aging parents who rely on your income, a life insurance benefit ensures their financial stability. The lump-sum payment to your beneficiaries can cover immediate expenses like funeral costs, daily bills, and future goals like education or homeownership.
  2. Qualifying for Business Loans: Many lenders, including private institutions and the Small Business Administration (SBA), require life insurance coverage to qualify for business loans. A term policy that aligns with your loan repayment period is typically necessary. Having life insurance reduces the lender's risk by safeguarding your liability.
  3. Serving as Collateral for Business Loans: Life insurance can also serve as collateral for small business loans. In the event of your passing, the policy pays off the loan, and the remaining benefit goes to your beneficiaries. A permanent policy with a cash value that can be assigned to your liability is typically required to fulfill this purpose.
  4. Protecting Business Partners or Key Individuals: Life insurance plays a vital role in succession planning, ensuring the continuity of your business even after you're no longer around. Whether you have partners or key employees, life insurance provides the necessary funds to keep your business running until a successor takes over or your heirs sell the venture.
  5. Facilitating the Sale of Business Shares: If you co-own a business or have key employees, life insurance becomes a valuable tool for allowing them to buy out your share from your heirs. Instead of burdening your family with the business, the shares can be sold to successors, ensuring the company's smooth operation while providing a lump sum or structured payout to your family.

Determining the Right Coverage Amount

There is no one-size-fits-all answer regarding the appropriate amount of life insurance for solopreneurs. As a general guideline, consider having coverage of at least five to ten times your annual income. When considering coverage for your loved ones, factor in your existing savings and anticipated future expenses, including funeral costs, mortgages, loans, childcare, elder care, and education expenses. Additionally, account for any business liabilities your estate may be responsible for, such as outstanding loans, employee payments, leases, mortgages, and taxes.

If you're seeking coverage to qualify for a business loan, the policy's value should match the loan amount. For example, if you're taking out a $200,000 loan, your life insurance policy should provide at least $200,000 of coverage. Remember that you can have multiple life insurance policies, such as additional term policies as your income grows or a separate permanent policy to address your business needs.

When determining your coverage needs, compare quotes from various life insurance companies online. To understand your options comprehensively, consider consulting with a licensed insurance broker or business attorney who can provide specific advice tailored to your situation. By securing the right life insurance coverage, you can have peace of mind knowing that your business and loved ones will be financially protected in the event of the unexpected.

Our team of experienced financial advisors at IM Wealth Partners is here to help you achieve your financial goals. We take a comprehensive approach to financial planning and provide personalized solutions tailored to your unique needs. Contact us today to learn more about our services and how we can help you achieve financial success.