Reduce Business Risks by Implementing Business Protection Insurance for Management Team and Key People
As Business Owners, we all assume certain business risks. In my discussions with business owners, I’m astounded by the types of business risks that some owners are willing to make. Ironically, none of these individuals I would consider stupid, overly aggressive or brazen. Some of these short term decisions, however, can have a profound effect upon business continuity management, future succession plans, business retirement plans and ultimately a business exit strategy.
I’ve been out to see a surprising number of business owners who if something happened to them, the business could not sustain itself for a significant period of time. The usual questions come back to, “can the business survive without the owner?” and “can the owner survive without the business?” The usual answer in both cases is no! This not only affects the business owner but his/her family, the business’ employees and the business’ customers.
Obviously, depending upon the maturity and size of the business, the effects of an owner’s absence due to disability, illness or death are varied. The business can equally be affected by the disability, illness or death or a key person within the organization. How can a key person’s absence be absorbed by an organization either on a temporary, indefinite or permanent basis?
- Buy-Sell Insurance: Buy-sell insurance or Shareholder Insurance is probably the most common insurance held by a business to mitigate against the death of a shareholder. This is intended to deal with the buy-out of a shareholder in the event of a shareholder’s death by utilizing the proceeds of insurance to buy the shareholder’s shares and pay out the estate. Most shareholders in a business partnership have this in place.
- Key Person Insurance: Key person life insurance may sometimes exist with a business but usually based upon a keyperson’s death but not if one gets sick or disabled. Critical illness insurance is probably more vital to an organization as it represents a one-time influx of cash into the organization, which is intended to help the business weather the absence of a key employee. The likeliness of an illness is significantly greater than a key employee’s death. The cost of critical illness insurance as a consequence is significantly greater based upon the likelihood of a pay-out. There are options for Return of Premium riders which can result in a complete refund of premiums if the insured never claims while the policy is in force.
- Disability Insurance: If a key employee becomes disabled, if a group insurance disability benefit is offered, it doesn’t necessarily cover the amount for a higher earning employee due to a group benefits plan’s underwriting limitations. A private supplementary disability plan would be recommended to top-up any shortfall with disability coverage.
- Guaranteed Standard Issue Insurance: This can be a stand-alone or supplement to a group benefits plan’s Long term disability and/or Critical Illness coverage. This can be offered to higher salaried employees or key individuals where the group plan would represent a significant shortfall if someone would become disabled or stricken with a serious illness. This is an individual plan that requires limited underwriting, is portable and thus can be taken with an individual if they should leave the business.
- Business Overhead Expense Insurance: In the event of a business owner’s disability, there’s insurance that will ensure your company’s business expenses will get paid. This insurance can pay for salaries, rent, business loans, insurance expenses that don’t go away in the event of an owner’s extended absence from work.
- Deferred Bonus Succession Plan: another opportunity is to have key employee bonuses put into a permanent policy to eventually leverage the cash value for a succession buyout of the existing owners. Time is an important consideration for a strategy like this, as time will give the policy the ability to grow tax-free and allow the power of paid-up additions, dividend growth to contribute towards the future cash value. Coupled with Partnership Agreements and Letters of Direction, this can be a very enticing way to retain talent and put a succession plan for your business in place, years before you plan on leaving.
The truth is, no one wants to buy insurance until they no longer can qualify for it. By undertaking a number of the ideas above, you not only protect your business but also ensure its future value, retain its key talent and devise a potential long term succession strategy. Understanding your exposure is vital but understanding some of the opportunities that insurance can afford you will make the cost of insurance a lot more palatable.
Chris Coulter is the Founder and President of The Finish Line Group. Chris works with business owners to leverage their businesses to increase their wealth, reduce corporate and personal taxes, create viable succession strategies and allow them to create a strategy to exit their businesses on their terms.
Chris’ passion for what he does evolve from the mistakes he made in his first business; by not diversifying his risk and not utilizing a lot of the opportunities within his business to create significant wealth. Chris found out the difficult way and now educates business owners on how to avoid many of his former oversites and ultimately control where their finish line ends.