Insurance can protect against loss of indispensable employee

Succeeding in small business

May 04, 1992|By Jane Applegate | Jane Applegate,Los Angeles Times Syndicate

Remember how tough it was on everyone when your manager or top salesperson went on vacation last year? The office just wasn't the same.

Imagine how you would feel if that key person was gone forever -- either permanently disabled, or worse, dead. Apart from the emotional turmoil, can you begin to calculate the financial impact the loss would have on your business?

Although no one likes to think about death and disability, making sure you and your partners or key employees are insured adequately can prevent the collapse of your company. In these tough times, it's easy to scrimp on insurance, but savvy small-business owners do everything they can to protect what they have.

Key-person insurance, as it is called, is purchased by the business to cover a specific individual. You can buy disability and life insurance for key people. The premiums are not deductible as a business expense, but if and when the benefits are paid, the money is tax-free.

Most key-person policies name the company or corporation as the beneficiary, insurance professionals said.

Jim Sak, owner of Rose Rentals Inc. in Florence, Ala., realized he was relying more and more on his young sons, Eugene and Duane, to help him and his wife, Betty, manage the family business. Eugene was responsible for the retail rental operation, while Duane looked after the equipment and repair side of the business.

"When my insurance agent pointed out how important my sons were to the business, I realized I'd be in dire straits if they weren't around here," said Mr. Sak, who bought key-person disability and life insurance policies for his sons about a year ago.

Within weeks after the life insurance policies were issued, Duane Sak fell seriously ill with a rare blood disease.

After undergoing medical treatment, including chemotherapy, he recovered and returned work. But his frightening and unexpected illness threw the family into a tailspin.

"We didn't collect any benefits from the policies we bought, but we realized how close we came to the edge," Jim Sak said.

Brad Hall, the family's independent insurance agent, said he is especially sensitive about making sure the small-business owners he serves have adequate insurance coverage. When Mr. Hall was 4, his 49-year-old father was killed in an automobile accident.

"We had to sell his successful plumbing and heating business for 10 cents on the dollar," Mr. Hall said. "My father's death was a major reason I'm in the life insurance business."

Mr. Hall and other insurance professionals say the cost of the premiums is minor compared with the money you would spend to keep the business going if a key person dies or becomes disabled.

"Small-business owners have so much of their personal and business assets tied up in the business, they usually don't have the cash available to weather a crisis," said John Aschenbrenner, vice president of individual markets for Principal Financial Group in Des Moines, Iowa.

Mr. Aschenbrenner, whose company insures the Saks' business said small-business owners should review their insurance at least once a year.

John Davies, a general agent for Massachusetts Mutual in Los Angeles, said small-business owners without adequate insurance coverage may face a moral dilemma if an uninsured, key employee dies or is seriously disabled, leaving his or her family without any income.

"People have fire insurance for their business, yet they are so much more likely to be disabled than burned down," Mr. Davies said.

For a good overview of small-business insurance needs, read Jonathan Pond's "Personalized Financial Planning Guide for Self-Employed Professionals and Small Business Owners" (Dell, $6.99). Mr. Pond's chapter on reducing personal risk through insurance is excellent.

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