If your business is making money, you should ask yourself whether your spouse, family or dependents will be economically damaged if you are not there to run the business. Unless one or more of these people can step in to run the business at your death, you should think about whether the income from your business needs to be replaced. In doing so, factor in all other insurance that you have on your life and whether your family's expenses will go down if you are no longer there.

 

John Stead's business (writing handicapping information for horse racing publications) generates yearly profits of $45,000, the only source of his family's income. Because no one in his family has the specialized skills to run the business, he does not intend that it will be operated after his death, and the business has no value after his death. He figures that if he is not alive, his family expenses will be decreased by $10,000 per year. He will need to replace $35,000 of yearly income.

After you have figured the amount of income that needs to be replaced, you need to estimate how much investment return your survivors can obtain on the insurance funds. If, for instance, you estimate that your heirs must replace $20,000 of income, at your death, and can make 5 percent on their money, they will need $400,000 from insurance or other sources to do this.

It may sound cruel, but at least from an economic point of view if your business is not profitable it is a liability, not an asset. Generally speaking, you should insure assets (such as a magic machine that makes money) rather than liabilities (a machine that eats money). Having said this, you may still want to consider buying life insurance to replace the future earnings that you believe your business will generate.

Also, it can be a good idea to get insurance now if you have reason to believe that you may not be insurable in the future. If you want to do this for a relatively low cost, consider buying term insurance. But if you buy term, make sure that it is guaranteed renewable, so that you can't be made to take a new doctor's exam when you renew, or be refused renewal because of ill health.

Different considerations apply if your business is generating profits and you think that your family members will be able to continue its operation after your death.