As a wealth management advisor at CI Assante, I have helped many Montreal business owners protect what matters most to them: their business and their family. When I discuss insurance planning with my clients, one question often comes up: “How much life insurance do I need as a business owner?” It’s a valid question that, unfortunately, has no “one size fits all” answer.

Determining the amount of life insurance a business owner needs requires an in-depth analysis of his or her particular situation. In this article, I offer a few tips to help you quickly assess the amount of life insurance you need to better manage your risks as a business owner. You can then work out a detailed insurance plan tailored to your needs with a qualified wealth management advisor.

Key Highlights

  • Life insurance is essential for protecting businesses from financial issues if a business owner dies.
  • The death benefit from a life insurance policy can help pay off debts, cover ongoing costs, and support the replacement of a key team member.
  • Business owners should carefully evaluate their life insurance needs. They need to consider things like business debts, income for dependents, and future financial plans.
  • Getting advice from a financial advisor can help business owners understand their options and choose the best coverage for them.

Why Do Business Owners Need Life Insurance?

Picture your business as a ship, and you’re the captain. Your employees, family, and business partners are all aboard, relying on your leadership to stay afloat. Life insurance acts as a lifeboat, ensuring everyone reaches shore safely if something happens to the captain.

As a business owner, there are two main types of life insurance available to you, depending on your situation and business structures: individual-owned life insurance and corporate-owned life insurance (COLI). You may decide to use both types of life insurance as part of your wealth management plan, depending on your objectives.

Individual-Owned Life Insurance

An individual-owned life insurance means that you pay the premiums and can designate any beneficiary. Choose this type of insurance if you wish to designate family members and/or other individuals or entities as beneficiaries of your life insurance insurance proceeds, which can be used to:

  • replace the loss of income of dependents
  • cover personal debts
  • pay funeral expenses
  • support estate planning
  • ensure business continuity by covering asset transfer costs or repaying business debts

Corporate-Owned Life Insurance

A corporate-owned life insurance is a type of life insurance policy purchased and owned by a corporation rather than an individual. The corporation is the policyholder, premium payer, and typically the policy beneficiary. Corporate-owned life insurance aims to safeguard the company’s financial interests by providing a death benefit that can cover the loss of a key employee, fund buy-sell agreements, and fund business succession plans.

In addition to these protective measures, corporate-owned policies offer substantial tax advantages, including tax-deferred growth on the policy’s cash value and the ability to manage the small business deduction by reducing passive income within the corporation. The death benefit is typically paid out tax-free, ensuring that beneficiaries receive cash flows with little to no tax burden, making this a powerful tool for both business stability and long-term tax planning.

By having both types of life insurance coverage, business owners can effectively protect their personal and professional interests.

Key Factors to Consider When Calculating Your Life Insurance Needs

Now that we know how important life insurance is for business owners, let’s talk about finding the right coverage. Figuring out this amount is not easy. You need to consider a few key factors. If you do not look closely at your financial obligations and future needs, you might end up having too much or too little insurance. Neither situation is good.

How to Estimate Your Personal Life Insurance Coverage?

While every situation is unique, here’s a practical approach you can use to determine your life insurance coverage needs as a business owner.

Start by Assessing Your Personal Debts and Obligations

  1. Income Replacement: Determine how many years your family would need financial support and multiply your annual income by that number. This calculation helps replace your income for a specified period.
  2. Personal Debts and Obligations: Consider personal debts, including mortgages, car loans, and credit card balances that require repayment.
  3. Projected Expenses: Evaluate anticipated expenses such as children’s education, medical care, and other ongoing financial obligations.
  4. Existing Assets: Estimate current savings, investments, and other assets that could offset the need for insurance coverage.

If you are the sole proprietor of your business, consider:

  1. Business Debts and Obligations: Add all your business debts and obligations, including loans, lines of credit, equipment financing, and commercial property mortgages, to ensure the policy can cover these liabilities.
  2. Financial Commitments: Evaluate ongoing financial obligations such as supplier contracts, unpaid invoices, and lease agreements to determine the coverage needed to maintain business operations.

Calculating Your Personal Life Insurance Coverage

Step 1. Calculate the income replacement amount

Step 2. Add your personal debts and obligations

Step 3. Add expected expenses

Step 4. Add your business debts and obligations

Step 5. Add your business financial commitments

Step 6. Deduct your existing assets’ value

The total amount represents the value of your life insurance coverage.

Example: Meet Emily

Emily is the sole proprietor of a small dental practice that serves her local community. She wants to ensure her family is financially secure and that her dental practice can continue operating or transition smoothly if something happens to her. Since she is the only owner, the financial burden of the practice’s debts, obligations, and ongoing operations would fall solely on her family if she were no longer there to run the business.

Here’s how Emily would calculate her life insurance coverage needs:

1. Income Replacement

Emily wants to financially support her family for 10 years. Her annual personal income from the clinic is $180,000.

👉 $180,000 x 10 years = $1,800,000

2. Personal Debts and Obligations

  • Mortgage: $350,000
  • Car loan: $30,000
  • Credit card debt: $10,000

👉 Total: $390,000

3. Projected Expenses

Emily has two young children. She estimates future education costs at $150,000 per child.

👉 $150,000 x 2 = $300,000

4. Business Debts and Obligations

Emily’s dental clinic has:

  • A business loan for dental equipment: $200,000
  • Office lease: $50,000 per year with 3 years remaining

👉 Total: $350,000

5. Business Financial Commitments

To keep the clinic running during a transition period, Emily calculates:

  • Staff salaries for 12 months: $250,000
  • Operational costs (utilities, supplies, etc.) for 12 months: $50,000

👉 Total: $300,000

6. Existing Assets

Emily has savings and investments worth $150,000 that could be used to offset some of the costs.

Total Life Insurance Coverage Needed

  • Income replacement: $1,800,000
  • Personal debts and obligations: $390,000
  • Projected expenses: $300,000
  • Business debts and obligations: $350,000
  • Business financial commitments: $300,000
  • Minus existing assets: $150,000

👉 Total: $2,990,000

Emily decides to purchase a $3 million life insurance policy to protect both her family and her dental practice. This policy will ensure her family can maintain their lifestyle, cover her personal debts, and allow the clinic to transition smoothly or continue operations without financial strain.

How to Estimate Your Corporate-Owned Life Insurance Coverage?

Taking out life insurance through your company offers many tax advantages, but assessing the appropriate coverage for this type of insurance policy is a little more complicated. You must first determine the purpose of the insurance, consider who your shareholders are, assess the corporation’s financial needs and obligations that would arise from your death, tax obligations, and much more. Because every company and every situation is unique, a qualified accountant can help you navigate the complexities and considerations of corporate-owned life insurance.

As business owners, it is recommended to work with qualified professionals to evaluate your insurance needs and options in conjunction with your wealth management plan and financial goals.

How Often Should Business Owners Review Their Life Insurance Coverage?

Life insurance needs aren’t set in stone—they can evolve as your business grows and your personal circumstances change. As a business owner, you should review your life insurance policy annually or whenever significant life or business events occur, such as:

  • Business growth or expansion
  • Changes in business partners or ownership
  • Taking on new debt or financial obligations
  • Personal life changes, such as marriage or the birth of a child

Regular reviews ensure your coverage remains aligned with your goals, protecting both your family and your business from unforeseen financial risks. A quick check-in with your wealth manager can help you determine if adjustments are needed to maintain peace of mind.

Expert Guidance Makes a Difference

Good life insurance is very important for business owners. It contributes to the smooth running of your business and secures your family’s future. To find the right coverage, you need to consider your personal and professional financial responsibilities and the amount of income you may have to replace. By taking out the right amount of life insurance, you protect your legacy and those you love.

Good life insurance is very important for business owners. It helps keep your business running smoothly and secures your family’s future. To find the right coverage, you need to consider your current and future personal and professional financial responsibilities and the amount of income you may have to replace. By taking out the right amount of life insurance, you protect your legacy and those you love.

At The St-Georges Group, we combine insurance planning with tax planning and wealth management strategies to create integrated solutions. Our team of strategic wealth management advisors works with entrepreneurs in the West Island, Montreal, Laval, Eastern Ontario and beyond to protect what they’ve built by helping them determine the type of insurance and coverage that’s right for their particular situation. Don’t leave the future of your family and business to chance. Contact us for a personalized assessment.

Darren-St-Georges, team of Strategic Wealth Advisors of The St-Georges Group

About the Author

Darren St-Georges is a Senior Wealth Advisor at Assante with over 15 years of experience in wealth management in Montreal. Assisted by a team of strategic wealth advisors, he has helped numerous clients, such as dentists, healthcare professionals and business owners, simplify complex financial issues and achieve their financial goals through proven wealth management strategies. Leveraging integrated wealth planning, Darren’s mission is to use his experience and skills to bring financial peace of mind to his clients. Contact Darren for expert wealth management advice.

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