What kind of life insurance do small business owners need?

Most small business owners need Life Insurance in two layers. The first layer is personal: a policy, usually term, that replaces your income for your family, because owners have no employer-provided group life plan to fall back on. The second layer protects the business itself: key person insurance on the people the company cannot function without, and life insurance that funds a buy-sell agreement if you have co-owners. Established owners often add a third layer of advanced structures, such as executive bonus plans or corporate-owned life insurance, to retain key employees and plan for succession. This is not a niche question in North Carolina: the state has about 1.1 million small businesses, which are 99.6% of all NC businesses, and the Charlotte metro area alone counts more than 307,000 small businesses.

Why business owners cannot rely on group coverage

Employees often lean on the group life certificate that comes with a job. As a business owner, you are the job. Self-employed people and owners do not have employer-sponsored group Life Insurance, so every dollar of coverage is a personal responsibility. Even owners who left a corporate career should remember that group coverage typically ends or shrinks the day you leave an employer, which is exactly why individually owned coverage is the foundation of any serious plan.

That reality shapes the whole answer to what kind of life insurance business owners need: build the personal layer first, then add business-side policies as the company grows and other people start to depend on it.

Layer 1: Personal Life Insurance that protects your family

Term life: the workhorse policy for most owners

Term Life Insurance covers a set period, typically 10 to 30 years, at the lowest cost of any policy type. That low cost is what lets a business owner carry a large death benefit, often $1 million or more, during the years when income is variable and the business is still growing. Term is the natural fit for:

• Replacing your income for a spouse and children if you die during your working years
• Paying off the mortgage and other household debts
• Covering business loans or leases you have personally guaranteed, so those obligations do not land on your family

The trade-offs are that term builds no cash value and that renewing coverage after the level term ends is far more expensive, which is why the term length should be matched to how long the obligation will actually last.

Whole life and IUL: when permanent coverage earns its keep

Permanent policies, such as whole life and indexed universal life (IUL), provide lifetime coverage plus tax-deferred cash value that can be accessed through withdrawals or policy loans. The cost difference is significant: whole life premiums commonly run 5 to 10 times the cost of comparable term coverage. Permanent coverage tends to fit established owners with stable cash flow who have business-continuation needs, estate liquidity needs, or a buyout obligation that never expires. It is generally not the right first policy for an owner on a tight budget. One caution on IUL specifically: its flexible premiums are a feature and a risk, because underfunding an IUL policy can cause it to lapse.

Layer 2: Business life insurance for owners, protecting the company itself

Once the family is protected, the next question is what happens to the business if you, a partner, or an irreplaceable employee dies. This is where business life insurance for owners becomes its own discipline, with its own tax traps.

Key person insurance

With key person insurance, the business owns the policy, pays the premiums, and is the beneficiary. The insured is whoever the company cannot function without: the owner, a co-founder, a top producer, or the one person who holds the client relationships. Three sizing methods are common in practice:

• Multiple of compensation: typically 5 to 10 times the key person's annual compensation, with higher multiples sometimes justified for revenue-critical roles
• Contribution to profits: the profit the person generates times the years needed to recover; for example, a producer contributing $600,000 of annual profit, insured for five years of contribution, points to $3 million of coverage
• Cost to replace: recruiting, hiring, training, and ramp-up costs; executive recruiting fees alone commonly run 20% to 35% of first-year compensation

The compliance trap most owners miss is IRC Section 101(j). For employer-owned policies issued after August 17, 2006, the death benefit above the premiums paid is taxable income to the business by default. The tax-free treatment is preserved only if the insured employee receives written notice and gives written consent before the policy is issued, and a statutory exception applies. The business must also file Form 8925 with its income tax return every year the coverage is in force. A missed consent generally cannot be fixed after the policy is issued, so this paperwork has to be done right the first time.

Buy-sell agreements funded with life insurance

If you have co-owners, a buy-sell agreement funded with life insurance guarantees the money is there to buy out a deceased owner's share, so the survivors keep the company and the family gets paid. Three structures dominate:

• Cross-purchase: each owner personally owns a policy on each co-owner and buys the deceased owner's interest directly. The buyer gets a cost-basis increase, but the policy count multiplies fast; with several owners you need one policy for every owner-to-owner pair.
• Entity purchase (redemption): the company owns one policy per owner and redeems the deceased owner's shares. It is administratively simpler, but see the court decision below.
• Wait-and-see: a hybrid that defers the choice, typically giving surviving owners the first option to buy with the entity redeeming whatever they decline.

The decision every owner group should know about is Connelly v. United States, decided unanimously by the U.S. Supreme Court on June 6, 2024. The Court held that a corporation's obligation to redeem a deceased owner's shares does not reduce the company's value for federal estate tax purposes, while the corporate-owned insurance proceeds earmarked for that redemption do count as a corporate asset that increases the company's value. In plain English: a redemption-style agreement funded with company-owned life insurance can inflate the taxable value of the deceased owner's estate. Since the ruling, advisors have shifted many clients toward cross-purchase structures and special-purpose insurance LLCs that keep the policies off the operating company's books. If you already have a redemption agreement in place, it deserves a review even if your estate is nowhere near the federal exemption, because the same valuation logic can distort the buyout price itself.

The funding choice follows the obligation: term life is the low-cost answer when the buyout horizon is defined, while permanent coverage fits when the obligation is lifelong or a lifetime buyout is contemplated. If you are earlier in this process and simply wondering how to insure a co-owner at all, start with how to get life insurance on your business partner.

Group life insurance for small business owners with employees

Group life insurance for small business owners usually means group-term coverage offered as an employee benefit, and the tax treatment is favorable: the employer's cost of group-term Life Insurance for employees is deductible as compensation, and under IRC Section 79 the first $50,000 of employer-provided group-term coverage is excluded from each employee's income. Coverage above $50,000 generates a modest amount of imputed income for the employee under an IRS table. That makes group-term life one of the most affordable benefits a small company can add when it starts competing for talent.

For the owner personally, though, a group certificate is a supplement, not a plan. Group amounts are usually modest and the coverage is tied to the business itself. The individually owned policies in Layer 1 come first.

How the main options compare

Advanced strategies for established owners

Once the foundation is in place, several structures let profitable companies use Life Insurance as a retention and succession tool:

• Section 162 executive bonus plans: the business pays a bonus, the employee uses the after-tax bonus to buy and personally own a permanent policy, and the business deducts the bonus as ordinary compensation. A double-bonus variant grosses the bonus up to cover the employee's taxes. Because the employee owns the policy, there is no Section 101(j) issue. One caution: for an S corporation or partnership owner bonusing themselves, the deduction flows back to their own return and the tax benefit largely washes out, so these plans work best for C corporation owners and non-owner key employees. See how a Section 162 executive bonus plan works.
• Split-dollar arrangements: the business and an executive share the costs and benefits of one permanent policy under one of two IRS regimes, often as a selective benefit for highly compensated people or as an estate-planning tool.
• Corporate-owned life insurance (COLI): companies use COLI to informally fund deferred-compensation promises to key people. The same Section 101(j) notice-and-consent rules and annual Form 8925 filing apply, because COLI is employer-owned life insurance.

These strategies sit on top of the foundation, not in place of it, and every one of them should be designed alongside your CPA or attorney.

The tax rules business owners most often get wrong

• Premiums are generally not deductible. Under IRC Section 264(a)(1), no deduction is allowed for premiums on a policy where the taxpayer is directly or indirectly a beneficiary. That applies whether the buyer is you personally or a business that names itself beneficiary, and it covers key person and buy-sell policies. The main exception is the cost of group-term coverage for employees, which is deductible as compensation.
• The death benefit is generally income-tax-free to the beneficiary under IRC Section 101(a). The notable exceptions: employer-owned policies that missed the 101(j) notice-and-consent step, policies transferred for valuable consideration, and interest paid when the insurer holds proceeds over time.
• The estate tax picture changed in 2025. The federal estate tax exclusion for deaths in 2026 is $15,000,000 per person, made permanent by legislation signed in July 2025, with a top federal rate of 40%. With portability, a married couple can shelter roughly $30 million. And here is the North Carolina angle: NC repealed its state estate tax in 2013 and has no inheritance tax, so only the federal estate tax applies to North Carolina residents. The Connelly decision matters most for owners whose business value plus insurance proceeds approaches the federal exemption.

This page is educational only. Tax and legal specifics for your entity should be confirmed with your CPA or attorney before you put a structure in place.

Where to start: a simple order of operations

• 1. Personal term policy sized to income replacement, the mortgage, and any business debt you have personally guaranteed.
• 2. Key person coverage on anyone whose death would materially hit revenue, with the 101(j) consent paperwork completed before the policy is issued.
• 3. Buy-sell agreement and funding if you have co-owners, and a post-Connelly review if you already have a redemption-style agreement.
• 4. Group-term life for employees once you are hiring competitively and want an affordable, tax-favored benefit.
• 5. Advanced structures such as executive bonus plans, split-dollar, or COLI once the company is profitable and stable enough to fund them properly.

Talk it through with The Jordan Insurance Agency

Business-owner Life Insurance decisions sit at the intersection of insurance, tax law, and entity structure, and the best policy type genuinely differs from one owner to the next. The Jordan Insurance Agency is an independent agency in Charlotte, North Carolina that works with multiple carriers, which means we can compare term, whole life, and IUL options across companies instead of fitting you into one carrier's product line. Using an independent agent does not cost you more: agent compensation is a commission the carrier builds into its filed premium, so a given carrier's policy generally costs the same whether you buy it through an agent or directly. You can also verify any North Carolina agent's license for free through the NC Department of Insurance producer lookup, and we encourage you to do exactly that.

Whether you are a solo operator who needs a straightforward term policy or a multi-owner company reworking a buy-sell agreement after Connelly, the conversation is free and there is no pressure to buy. Tell us how your business is structured, and we will map out which layers you actually need, in plain English.