In September, we honored Life Insurance Awareness Month by sharing a few helpful tips for securing adequate coverage to suit your needs. There are a number of articles in the popular financial press that illustrate the importance of protecting your family with the right amount and type of life insurance. But if you’re a business owner, it’s also important to protect your “work family” with life insurance — and that’s a topic rarely addressed by the media.
Here are a few reasons you should think about life insurance as an asset for your business:
Reason #1: Protect against the loss of a key employee
The most valuable asset for any company is its people — and for most small businesses, at least one “key” team member is critical to the success of the organization, as a whole. The loss of that person would cause substantial financial duress and perhaps even jeopardize the business as a going concern.
In a survey by the National Association of Insurance Commissioners (NAIC), 71 percent of small business owners reported that they are “very dependent” on only one or two key people. Despite that fact, only 22 percent of respondents reported owning life insurance to protect their companies against the premature passing of a key employee.1
For business owners, the single most important use of life insurance is to secure the lives of key contributors. If you are among the majority of business owners who haven’t addressed this risk, ask your financial advisor for help in determining an appropriate coverage amount (typically five to 10 times the key person’s annual income, including bonuses), and the type of insurance best suited for your needs.
Reason #2: Protect against the loss of a key employee to a competitor
In addition to the risk of losing key team members to the unthinkable, business owners should also take a number of steps to ensure that these employees are motivated to stay put. The obvious strategies are competitive compensation, a challenging work environment and regular performance feedback; life insurance is a less obvious yet creative and compelling strategy.
A properly structured life insurance plan can be a very attractive benefit to your top employees, and you can also structure it to create meaningful incentives to stay with your company. Traditionally, most business owners implement cash value life insurance for these types of executive benefit plans, in the form of split-dollar or restrictive endorsement bonus arrangements, among others. And when structured properly, the same policy can provide both a valuable retention incentive to your team members and the key person insurance protection your company needs.
Reason #3: Protect against the loss of the owner
If you are the sole owner of your business, you might consider insuring your life only, in the context of protecting your family from lost income. But life insurance can also be an invaluable part of your business continuity plan, allowing your business to keep running under the leadership of one or more key employees. Importantly, life insurance can also ensure that your family receives the economic benefits your business provides, without having to sell it under duress.
The “one-way, buy-sell arrangement” for single-owner businesses has become an increasingly popular strategy within our practice, especially for owners who do not have family members equipped to step in if the need arises. Here is one version of this strategy: a business owner and one or more key employees or management team members become parties to a buy-sell agreement, which specifies that upon the death of the owner, the employee(s) are obligated to purchase the owner’s share or interest in the company from her or his estate. The agreement will specify the terms of the sale, such as a negotiated price or a formula for arriving at the price, or the timing of payment. A life insurance policy that insures the owner is structured so that the key employee(s) receive a death benefit sufficient to cover the purchase price.
At the end of the day, your business is much more than a career; it’s your livelihood. Taking the proper measures to protect your enterprise, along with the people who keep operations humming every day, is just one way to ensure its success well into the future.
If you have questions about life insurance or think your “business family” could benefit from additional protection, we’re here to help. Ask your financial advisor to connect you with one of our insurance professionals today.