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Critical Illness Insurance for Business Owners and Key Persons

November 4, 2017
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You may think the main risk to your small business, partnership or corporation is the unexpected death of the founder or key person, but there’s another risk you may not have considered.

While the death of a shareholder or key person is tragic and presents a number of challenges, the same situation exists with a critical illness diagnosis.

What happens if the individual doesn’t die but can’t work any longer?  Or if they cant work for 12 -18 months?  What are the company’s obligations and is there enough cash on hand to face the challenge ahead?

The financial chaos that accompanies a critical illness is something that most business owners don’t think about before its too late.

What is a Critical Illness?

A critical illness is a disease or severe medical condition that seriously impacts one’s health, can be fatal and typically prevents one from working consistently for an extended period.  Critical illness insurance is a contract that pays a one time lump sum benefit if the insured is diagnosed with a critical illness.  The money can be used in any way the beneficiary sees fit.

How Does a Critical Illness Affect a Business?

If a death occurs, the business family mourns and either folds the company or fills the position. With a critical illness, however, there are many variables. Here are a few possible scenarios:

  1. The business owner does not have a contingency plan and they desparately try to work while managing their health challenge in the hopes of not losing their business entirely.
  2. The business owner cannot return to work and may stop and is forced into selling the company for pennies on the dollar.
  3. The business owner cannot sell their shares to the other partners because there is not enough cash or equity.
  4. The business owner suffers a critical illness or passses away leaving creditors unsure and tighening credit availability.
  5. The business owner or keyperson is lost permanently and the business loses productivity and profitabiliy.

How can These Risks be Managed?

At the very least, a company should have a life insurance policy on its shareholders and key person(s), but truly savvy businesses will take this one step further and also have critical illness insurance policy to fund the buy/sell agreement, and as part of a crisis management plan for their key persons.

The Buy/Sell Agreement

A buy/sell agreement is a legal document that describes what happens to each shareholder’s shares should one shareholder become critically ill, disabled or dies. It details how long the company will wait for the recovery of a shareholder, the plans for work continuation in the interim, and how his/her shares will be divided if he/she cannot return to work.

This removes the risk of having family members suddenly inherit a business they did not help to build, or a shareholder being paid for work he/she cannot do.

Insurance is a necessary to fund a buy/sell agreement since it is very unlikely that companies have the spare cash to keep a disabled partner afloat or to buy out shares with little notice. Insurance creates cash when its needed most to whatever the company needs – buyout a shareholder, repay loans, recruit a replacement, supplement lost profitability, or simply survive a through a crisis.

Key Person Insurance

This business insurance provides funds to the company if the key person becomes ill or passes away. Since this person is critical to the company’s success (creative talent, specialized IT knowledge, best salesperson, etc.) their illness or death would cause a big dip in company profits. Having money to stay afloat and hire a new person is good business management.

It’s Just Risk Management For Your Business

Some company owners feel like putting a dollar value on their partners or key persons is a little crass, and planning for their demise or illness is downright morbid. Nobody likes to talk about and plan for death and illness, but when you have a business, you and many others depend on the viability of that business. Your employees depend on being paid, your family depends on your income and your clients depend on your products.

One major illness or death can have a huge ripple effect that will impact many lives. Insurance is there to make sure that impact does not topple everything you worked so hard to achieve.

Insurance is part of a good risk management plan and Shelter Bay will make sure you have the right insurance components in place.

Contact us today to review your life and health insurance portfolio and learn more.

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