BY FAZAAD BACCHUS
“Take away my people, but leave my factories and soon grass will grow on the factory floors. Take away my factories, but leave my people and soon we will have a new and better factory.” Andrew Carnegie
In my twenty-six years as a financial advisor, I have seen businesses close their doors due to lack of proper risk management and proper financial planning. Most entrepreneurs know that their important asset lies in the talent and skill of their people they employ or those that they themselves have. Many business owners understand the need to protect against unforeseeable risks like fire, theft and the like, but the major one that is often forgotten is the value of the human potential or human capital.
Every business has a backbone or a Key Person on which it depends, so if this person is taken away due to death or disability then we have the possibility of a catastrophic loss. First and foremost, the business is disrupted while the owners try to assess what’s happening, when to reopen, who should manage operations while trying to develop some plan of action. During this time there is the typical drop in sales as things are not in full focus and a probable loss of customers etc.
Then there is the issue of creditors who may come knocking fearing that their loans might not be repaid or even suppliers who may decide not to extend any more credit until they can see the direction your company takes. Your customers unfortunately may decide to hold off on payment due to the predicament you are in, which further compounds the problem. And while all of this is happening, rent, lease, salaries, loan payments and utilities still has to be paid if you want to keep your business.
And now having returned to work, if your business survives, you must replace that key person. This requires finding, hiring and training that person and every business owner knows that’s not an easy task. Your business can survive if the key person losses are small but if it is large, you would be in for quite a challenge. The rippling effect can be too much for many, when running a business, dealing with emotional and financial loss is not a good place to be.
Fortunately, this catastrophe is one that you can plan for. By taking steps to insure your Key Person, especially when that person is an owner, you can transfer the risk you carry to an insurance company.
The way the planning works is to sit with a financial advisor who specializes in business insurance planning. You would be required to complete a Business Needs Analysis to identify your Key Persons and to quantify what loss you are likely to suffer should you lose that person. Your company can insure the Key Person for an amount that will indemnify the business losses should he or she die or become disabled. That injection of money will pass to your cash account and help to keep the business afloat. Note also that this benefit is also tax free.
Usually the type of insurance used is term as it’s the most economical but often times I have helped clients use permanent insurance to capitalize on tax deferred growth of cash values. This cash value can be used for many other purposes such as funding a gratuity payout etc. There have been times where I have structured policies to ensure that there is a full return of premium if the Key Person lives to retirement. Life insurance is the cornerstone of any Key Person protection strategy. Talk to a business specialist today and save your business.
