Small businessAccording to a 2007 survey by the National Association of Insurance Commissioners, 71 percent of small business owners claimed they were very dependent on one or two key people for the success of their business. Despite this dependency, only 22 percent used life insurance to help ensure their business would survive either their death or the death of an essential employee.

Don't be one of the 78 percent of entrepreneurs without a long view. When incorporated in a small business strategy, life insurance can provide a safety valve when it is needed most. Understanding the difference between term life insurance and permanent life insurance, the relative merits of the two, and the ways many forward-thinking small business owners use life insurance policies can protect your business against worst-case scenarios.

Term and permanent life insurance

Term life insurance policies are commonly used by businesses because they are inexpensive and provide flexibility.

As the business grows, incorporating permanent life insurance policies for key employees can be an excellent strategy. Types of permanent life insurance policies include whole life insurance and variable universal life insurance. Many policies build a cash value component that can be used to fund retirements or even help the business through a difficult cash flow period.

Here are two tips to keep in mind:

1. Take business succession planning seriously. A formal plan makes sure there is no confusion at the time of your death.

2. Do plenty of research to determine what type of life insurance is the best fit for your business. Use such trusted resources as the Insurance Information Institute to guide your research.

Protecting your family

The death of the business owner will often be the death of the small business, especially a sole proprietorship. A term life insurance policy will make sure your family is not without a source of income during a difficult transition.

Buy-sell term life insurance

A term life insurance policy is an excellent way to ensure your business will continue after you're gone. The death benefit is used by your partner or agreed upon shareholder to buy out your interest in the business. This type of policy can be a win-win for your family and business partners. Your surviving spouse or other heirs will not have to run a business they are not interested in, and your partners will have the money to buy them out. It is important to have a detailed buyout plan in place that outlines your business succession plan.

Key person policies

A recent Inc. Magazine report recommends that small or midsized businesses consider life insurance policies to protect the business from financial interruption in the event that a key person in the organization dies. The death benefit would make up for lost revenue or pay the cost of replacing the deceased.

Credit line protection

Small business owners often rely on bank loans to fund expansion or cover temporary cash flow problems. The bank or lender often requires a personal guarantee, which puts your personal assets at risk if you should die with loans outstanding. A term life insurance policy can provide the resources to cover any outstanding business loans.