I always say that being an entrepreneur is not enough.
Yes, entrepreneurs are typically a fun, hearty, confident, enthusiastic bunch. That’s great, but not enough to sustain you in business. You have to be a businessperson too. By that I mean, not only do you need the aforementioned traits, but you need to have (or develop) business skills like money management, leadership, and so on.
And part of that means being financially smart and thinking ahead.
Two recent things underscore this. First are Hurricanes Harvey and Irma. According to Moody Analytics, the estimated cost of rebuilding in Houston and Florida is expected to top $200 billion. Much of that is for destroyed or damaged small businesses.
The second is a survey I justsaw that shows that many small business owners risk their business by being under-insured, especially as it relates to life insurance.The New York Life Small Business Insurance Gap survey (note – I do some work with them)found that nearly two in five businesses (38%) don’t have enough protection to keep their businessesafloatin the event of the entrepreneur’s unexpected death.
This is very bad news on two fronts:
First of course is what it means to the small business owner’s immediate family. For most people, the business is a significant estate asset. Yet whenan owner dies without adequate insurance, it often results in a “fire sale” of the business; the family will get far less than what the business is actually worth.
Second, from a business perspective, being under-insured risks the owner’s other “family” – his or her small business family. Indeed, it is no stretch to say that for many entrepreneurs, the people at the shop, store, or office – their employees – are like an extended family. Small business owners also put at risk the livelihoods of those beloved employees by not having enough life insurance.
According to the New York Life survey, the insurance gap for the average small business is $1.4 million – this is the shortfall between a small business’ financial needs and the money the business would have available in the event of the owner’s death.
Adequate life insurance can bridge this gap in three ways:
The first is having enough insurance coverage for the spouse / family. In this case, the family would not be forced into the fire-sale scenario above.
The second is for partners in a business to have life insurance as part of a buy-sell agreement. Here, each partner would own a policy covering the other’s life. If one partner passes away, the other receives a death benefit that can be used to purchase the other half of the business.
Finally, there is keyperson insurance. This is a type of insurance that covers anyone in the business who is “key.” Losing a key employee canalso mean losing clients, contacts, contracts, and connections. As well, it costs to find and train a replacement. A keyperson life policy can bridge this gap as well.
According to Brian Madgett, New York Life Vice President for the Advanced Planning Group, one of the most interesting things they found in their survey is just how difficult it would be to replace the small business owner. “The owner is the hardest working person in the business and is usually the main money-maker too. According to the survey, it would take three full-time employees to replace all of the work an owner does.”
Think about how hard you have worked to create your business. Think about what that business means to your family, to your business partners, and to your employees. Now think about what would happen to them all should something happen to you. Being a businessperson means not putting that all at risk.
The good news is that there is an easy solution.