One of the natural obstacles that we face as financial advisors is the reluctance of prospective clients to embrace life insurance. In part, it is in their discomfort in discussing mortality or facing the limitations or finality of our lives. It may be because we are natural optimists, but it is remarkably common for entrepreneurs not to take out life insurance.
According to the Life Insurance Marketing and Research Association (LIMRA), 41% of business owners and individuals do not have life insurance meaning they likely don’t have the necessary funds earmarked to support their business, employees, and their families if something happens.
Entrepreneurs have a unique mindset and perspective that sets them apart from other professionals. Their company is born with a mission in mind, and this creates individuals who tend to be both persistent and impatient, yet disciplined.
When launching a business, entrepreneurs are supported by peers, investors, teams, and their families who all share in their company’s vision, but these groups are also the most at risk should that vision be cut short by an unforeseen event. Without proper life insurance protection, the sudden death or disability of a founder could derail a company, resulting in layoffs, bankruptcy and possibly the collapse of the business itself.
There are various reasons that business owners may neglect to take out an adequate life insurance plan. Establishing protection for themselves is rarely a top priority when starting a business, as finances are stretched and owners are subject to a never-ending to-do list.
Like most people who start a new business venture, they may be bootstrapping their business and at the onset, their income may be non-existent. Most small business owners drilling into their own savings to invest in their venture. They are determined that somehow, some way, they are going to make their business work and the only thing that could get in their way is time. In order to feel good about risking their short-term financial future, they don’t want to put their family at risk.
No one likes to think about the unexpected events that could occur, such as an injury, disability or even death, to yourself or a business partner, but a good business person should anticipate all possibilities whether they are positive or negative.
However, we should as entrepreneurs recognize that from the onset we are putting ourselves, our business, and our family at risk if we fail to take out adequate insurance. From a business perspective, it’s a smart idea to take out life insurance, which can protect your company from financial loss, liabilities, or instability in the case of death. It can also assist you in maintaining your business through turbulent times, by providing short-term cash flow, keeping your operations running and suppliers happy.
From a personal perspective, life insurance is one of the best decisions you can make on behalf of your family. Yet only 60% of family-owned businesses have a detailed contingency plan in the case of death or disability. Having adequate life insurance would give them great peace of mind as they built their business knowing that their family and their legacy would be protected should the worst happen to them.
Just like buying a tailored suit, a life insurance police should be a good fit, reflecting the scope and scale of your business. To that end, when purchasing life insurance, business owners need to evaluate their individual insurance needs based on several factors, including their level of debt, income replacement and future obligations. One of the main reasons business owners are underinsured (for the 60% who are insured) don’t have life insurance is that they do not know how to adequately measure their financial risk. This is where entrepreneurs should seek help, as being unaware of vital financial measurements, including the value of their business, leads to business owners receiving inadequate cover or no cover at all. What’s worse, when a company is underinsured, any claim payouts will be insufficient to help get the business back on its feet.
Luckily, advancements in technology and data now provide business owners and advisors with accurate and reliable business valuations that help to identify an adequate level of insurance coverage. Using digital valuation tools, the insurance industry has the means to evaluate business valuation data with actual underwritten policies, historical trends, and best practice, thereby generating a holistic report.
Just as no entrepreneur is the same, no business startup is the same. It begins with a thorough understanding of how much insurance they need based upon their business value and their equity stake in that business. Armed with this information, entrepreneurs can accurately incorporate vital components into their insurance plan, including the following to help establish a safe and secure business:
- buy and sell funding,
- key person coverage,
- life and disability, and
- property and casualty
This will also give entrepreneurs peace of mind that their business and loved ones are covered, and provide them with the satisfaction of being able to cross off one more task on that never-ending list of jobs to be done.
I think some entrepreneurs may have a sense of infallibility but this shouldn't be mistaken for reality. Business owners should be reflective of finding a shorter term workable solution to provide appropriate coverage at the beginning while their new business builds and funds future enhancements and affordability. They can be surprised by the viable options that are available and should find the time to speak to a financial advisor. It's about risk mitigation and leverage. Taking the time to properly plan for risk is a key way of Keeping Life Current and ensuring the viability of their new venture.