Business Owners
What Happens to Your Business If You Can't Show Up?
Most small businesses are one health event away from a serious problem. Key-person coverage is the plan for that scenario.
The key-person problem
In most small businesses, there is one person — sometimes two — whose absence would materially impair the business's ability to operate. That person might be the owner, the lead salesperson, the technical expert, or the relationship holder for the firm's most important clients. If that person is suddenly unable to work — due to a serious illness, injury, or death — the business faces a crisis that goes beyond the personal tragedy.
Key-person life insurance
Key-person life insurance is a policy owned by the business, on the life of a key employee or owner. If the insured person dies, the business receives the death benefit — providing capital to recruit and train a replacement, cover lost revenue during the transition, satisfy obligations to clients, or simply keep the business solvent while the partners figure out next steps. The business is both the owner and the beneficiary of the policy.
Business overhead expense coverage
Business overhead expense (BOE) insurance is a type of disability coverage designed specifically for business owners. If the owner becomes disabled and cannot work, BOE coverage pays the fixed overhead expenses of the business — rent, utilities, staff salaries, equipment leases — for a defined period. This allows the business to continue operating while the owner recovers, rather than collapsing under the weight of fixed costs with no revenue coming in.
The personal disability gap
Business owners often have inadequate personal disability coverage. They may have no group plan through an employer, and individual disability policies may not fully account for business income, distributions, or the variable nature of self-employment earnings. The combination of personal disability coverage and business overhead expense coverage addresses both the personal income replacement need and the business continuity need.
The question to ask
If you were unable to work for six months — due to a serious illness or injury — what would happen to your business? Could it continue operating? Would your partners be able to cover your responsibilities? Would clients stay? Would the fixed costs be manageable? The answers to those questions define the coverage need. Most business owners have not asked them.
A business that depends on one person is a business with a single point of failure. Key-person coverage and BOE insurance are the plan for when that failure happens.
If you have not reviewed your business's exposure to a key-person absence, that is worth putting on the agenda.
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