The Business Continuity Insurance Every Company Needs

Business continuity planning is the process of preparing for future events that can cause an unexpected business interruption. For example, let’s say your startup took off and your company was successful from the get go.Now it’s two years later and you’ve expanded across the country, and just landed the big contract everyone was waiting for. On his trip to finalize the deal and sign documents, your business partner is killed in an automobile accident.

What happens then? Now you will need to continue the business on your own and come up with money to buy your deceased partners shares from their estate.

If you don’t have business continuity insurance, the company may now be in serious jeopardy and possible finished.

The Importance of a Shareholders Agreement

One document that’s not an insurance product but critically important to planning for future events is a shareholders agreement – without one, things can turn messy and adversely affect a business’s operations.

When a company is owned by more than one person or business, a shareholder’s agreement is how the partners set out each shareholder’s privileges, obligations and rights along with a description of the how the corporation will be organized.

This agreement is a cost-effective way to minimize future issues among shareholders, by setting out how they’ll be dealt with via dispute resolution. It should also, more importantly, outline what happens if one of the shareholders passes away, is diagnosed with a critical illness such as cancer or becomes permanently disabled.

There isn’t a statutory requirement for shareholder of a corporation to enter into a shareholder’s agreement, but there should be. People don’t always get along and although things can start out rosy, a feud can erupt at any time and threaten to disrupt the business and profitability.

The same can happen if a shareholder passes away suddenly and there aren’t provisions made for what happens to their role. It’s easier to deal with this situation when there’s a plan in place so heave thinking isn’t required while grieving. A shareholders agreement, or a buy/sell agreement, mutually protects everyone involved.

Who’s a Key Person in Your Business?

As we mentioned earlier, the loss of a key person in the business can stop a company’s day-to-day business operations. In our example, it’s easy to figure out who the key person is, but that’s not always the case.

Sometimes and in-depth evaluation is required. To help figure out who the key person is in your company, ask the following questions from the perspective of your clients:

  • Who in the company would clients least want to lose for an extended time?
  • How will you replace this person, or people, temporarily in the event of illness, or permanently if they die suddenly?
  • What losses and costs would the business lose – knowledge, sales, goodwill, skills?

This evaluation is important, although most business owners don’t think about the daily impact of losing key people. But this process and reasoning is similar to planning for business continuity in the event of a natural disaster or technology breach. It offers business owners insight into where the human value and business vulnerabilities lie.

Business Continuity Insurance – Life, Critical Illness and Disability Business Buyout Insurance

The main types of business continuity insurance every company needs are life, critical illness, and disability business buyout insurance. The insurances protect against future events that could turn into a financial catastrophe.

It’s human nature to focus on protecting personal needs by making sure spouses and dependents are provided for in the event of premature death or illness, but it’s not always thought of when it comes to business protection. *Remember, it might be your family that needs to be bought out by your business partners.

It’s hard enough dealing with the stress and grief of losing a colleague, but having to scramble to keep the company afloat facing an unknown future is almost impossible – not to mention how creditors will react. It can easily leave any business vulnerable to lost momentum, revenue, key customers and lost skills.

Life Insurance Key Person and Shareholders

Key Person Life Insurance: protects a company from the negative affect of the sudden loss of a key executive. The death benefit payout buys the company time to implement strategies to keep the company afloat, or find a new person to replace them temporarily or long-term, which is harder and more expensive than it sounds.

Shareholders Life Insurance: As with key person insurance, a company can take out life insurance policies on it’s shareholders. If there are a number of shareholders, the business has to decide if the corporation should own the life insurance policy, or if each shareholder should own a life insurance policy each other.

This depends on a number of factors. A shareholder life insurance broker can help your business decide which way is the best for your particular company.

Critical Illness Insurance – Key Person/Corporation/Shareholder

If a key person or owner suffers a critical illness, they might be away for an extended period. Worse, it may end their career. Either way, the financial health of your company will be jeopardized. This is why critical illness should be considered in a business continuity insurance plan.

In the event of a critical illness, the business would receive a significant lump sum benefit, tax-free of $25,000 to $2,000,000, depending on the company’s needs. The remaining business partners can use the benefit in whichever way is in the best interest of the company.

For example, it can be used to cover the expense of finding and hiring a replacement or to offset decreases in revenue due to lost productivity.

Disability Business Buyout Insurance

This type of insurance is important to any business continuity insurance plan because it rounds out insurance protection.

Company owners should discuss disability business buyout insurance to decide how much to get, and how much the company should spend on it. The buyout proceeds allow the remaining owners or partners to continue business operations by replacing a key person whose disability would prevent them from returning to the business.

A few questions to ask when brainstorming how much disability business buyout insurance a company needs are:

  • What impact will the disability of a key person have on the company’s income?
  • What defines a disability from the company’s perspective?
  • How long must an owner be disabled before the disability buy-out clause in the shareholders agreement is executed?
  • Is there a chance the disabled shareholder will recover, and if so, what is the plan for that?
  • How much will it cost to buy out the disabled partner?

At Shelter Bay Financial Corp., we are life & health insurance experts and can help you manage the continuity risk to your business.

To learn more, please call toll free to 1.888.498.5288.