So you have a small business and you rely on today’s technology; laptop/desktop computers, tablets and mobile phones, you have an excessive amount of valuable data stored on these devices, most will agree that your information such as contacts, sales or reporting data to name a few types of core data that if lost would be devastating, especially if Murphy’s law is implied.
So what do we do? That’s right, we back up our data, and protect what is important to our business’s continued operations and success. To do so is not only smart, it is necessary. Now what I’d like you to do is to think of what is even more important to your business than your data… that’s right, of course it’s you, or any person who is key to the business itself, the person or people who make the business work and of course who make it gain profitability. If you spend your business’s resources protecting against the loss of valuable data, it may make sense to you to protect the business against the loss of valuable employees, the people (or person if you’re a sole proprietor) who make the data and the business valuable.
Protect Against the Loss of Human Assets
The business that insures its buildings, machinery, and automobiles from every possible hazard can hardly be expected to exercise less care in protecting itself against the loss of its most vital asset: management skill. One of the best protections against this loss is adequate key employee life and disability insurance.
Wouldn’t you agree that the talent, knowledge, experience, and business contacts of a select group of employees determines the success of a business. These key people provide leadership and contribute significantly to the profitability of a business. They are difficult to replace.
The importance of key employees cannot be over-emphasized. What generates the profits of a business? The machines? The inventory? The real estate? The data? No! People make a business profitable.
What Would the Loss of a Key Employee Mean to You?
Would sales suffer? How would your banker view the loss? Would your line of credit be cancelled? Do you have a succession plan? Is a source of money available to recruit, hire, and train a replacement?
In essence – can your business survive the loss of a key employee?
The answer could be yes, provided there is enough cash on hand. Cash! That’s what a business usually needs to recover from the disability or death of a key employee. A disabled owner or partner generally represents a dual liability to the company. First, the company must usually continue the disabled person’s income during the disability period and, secondly, the remaining owners must take up the slack caused by the absence of the disabled person or hire a temporary replacement. Now, the question becomes… Where will the cash come from?
Sources of Cash
Working Capital/Surplus/Profits – Cash is critical to the operation of any business. Although it may be possible to cover a significant financial loss using cash flow, this approach may jeopardize the survival of the business.
Sinking Fund – The use of a sinking fund may be the answer, provided there is enough time to accumulate the amount required and the funds have been consistently set aside.
Loans – The use of borrowed funds may be inappropriate for two reasons. First, will the money be available after the loss of a key employee? Your local banker may not approve the loan request. Second, if the loan is approved, the business obligates itself to repay the loan plus interest. This could be a tremendous burden, as the potential loss of profits could make repayment difficult.
Disability Insurance
– A Disability Buy-Out Insurance plan will fund an agreement designed to provide the company owners with the money they need to purchase a disabled owner’s interest in the company at a mutually agreeable price and at the correct time. A disability buy-out insurance plan is specifically designed to pay an amount equal to the pre-arranged buy-out amount agreed to by the owners of the entity.
Life Insurance – Insurance can provide cash at the moment it is needed, after the loss of a key employee. The life insurance benefits are generally received income tax-free to the business. The proceeds can then be used to help replace lost profits, repay loans, maintain credit standings, and recruit and train a replacement. In the event that there is no pre-mature death, any life insurance cash value can be accessed* to help increase surplus or other business needs.
Note: This is a basic explanation. You should always consult with your tax advisor regarding your particular situation.
* Cash values borrowed through policy loans against your policy accrue interest and decrease the death benefit and cash value by the amount of the outstanding loan and interest.
Feel welcome to contact us for a complimentary review of your personal/ business retirement situation. AIPS does not provide legal or tax advice, please consult your tax and legal advisors regarding your individual situation.
Posted by Troy Barrow, LUTCF – Troy is an independent Agent practicing professionally for over seven years and is the owner of Arlington Insurance Planning Services, licensed in the States of New York and New Jersey. You may contact Troy at 646 580-5189 or tbarrow@aipsny.com.
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