When the phrase “life insurance” comes to mind, we often think of protecting our families. Most of us have been taught that life insurance is important, especially if you have a family, as it can ensure your spouse and/or children are cared for in the event you pass away.

But what about life insurance to protect your business? If you’re a small-business owner, there are two other reasons it might be worth considering.

Life insurance can provide collateral for a small-business loan

Melbourne O’Banion, CEO of Bestow, an online term life insurance company, says that life insurance can help get a business up and running. “Any type of life insurance policy can be used to provide collateral to lenders so that small-business owners can secure small-business loans,” says O’Banion.

Here’s how this works: If you decide to take out a loan to start a business, your lender may give you the option to put up a life insurance policy as collateral to ensure you can repay the loan in the event you pass away.

One you have the life insurance policy in hand, you sign an agreement with the lender and insurer stating that if you pass before you've repaid your loan, the death benefit will be paid out to the lender first and any remaining proceeds will go to your beneficiaries.

Life insurance allows businesses to continue

Yvonne Tepsick, owner of Tepsick Insurance, says that life insurance can also help business owners ensure that their businesses continue if they are no longer around.

"Life insurance can protect the key stakeholders in your business by paying their salaries so they don't have to find a position elsewhere and leave your business hanging," explains Tepsick.

Get an affordable term life insurance policy today from our partner Bestow »

There are certain types of life insurance policies that can help you guard against the loss of key staff members. These are often known as "Key Person" policies or "Buy/Sell Agreement" policies.

How business owners can find the right life insurance policy

O'Banion says there are specific things you need to know when shopping around for the right life insurance policy.

Know your needs

Is your goal to secure collateral for your small-business loan, or do you also need to protect your family? In most cases, small-business owners purchase a policy for their small-business loan and another one to protect their family.

When considering your needs for protecting your family, think about everything that would be at risk if you were no longer able to take care of them. How would your loved ones pay the mortgage? How would your children go to college? Would there be enough savings to allow your loved ones to maintain the lifestyle that your income provided?

Know how much coverage to ask for

If securing a loan is your only interest, the amount of life insurance coverage you buy should equal the amount of the loan you're seeking. However, if you also have a desire to provide coverage to your loved ones and key stakeholders, you may want to evaluate your personal situation and determine how much more life insurance coverage you need.

The general rule of thumb is to obtain coverage that is five to 10 times your annual income. Your current financial responsibilities and goals, such as paying off a mortgage or sending a child to college, will dictate the actual amount you receive.

Know your budget

Have an idea of how much you can spend per month to secure this important protection. Take the time to look at your numbers and do the math. Your monthly premium must fit into your budget.

Know how much time you have to secure a policy

What is your timeframe for securing a life insurance policy? Is it days, or weeks? If you're on limited time because you're using your policy as collateral to obtain a small-business loan and don't want to delay your funding, you may want to focus on finding a policy that offers instant coverage without a medical exam.

Our partner Bestow offers affordable term life insurance policies starting at $5 a month »