Key life insurance questions
Life, critical illness and disability insurance isn’t just for individuals and families. It can help protect your business, too.
For the first decade or so of running Matt & Steve’s, a Mississauga, Ontario-based company that sells bar drink-related foods, including pickled beans and olives, best pals Matt Larochelle and Steve McVicker focused on growth, not risk.
“When you start a business, it’s all about cash flow,” says Larochelle, whose Matt & Steve’s Extreme Bean product has become ubiquitous in Canadian grocery stores and bars.
In 2013, a few years after the duo quit their day jobs to focus on their now 50-person company, they created a shareholders’ agreement, and their lawyer suggested the company’s partners take out life insurance on each other.
They were a little taken aback at the suggestion, says Larochelle.
“On no,” he recalls saying, “how much is this going to cost?”
However, when their lawyer explained his reasoning to them – the life insurance policy would be used to buy out the other person’s share of the company should one of them die – it made a lot of sense, and it wasn’t expensive, either, he says.
As Larochelle and McVicker learned, many shareholders’ agreements outline how a partner’s shares should be purchased in the event one of them passes away. With insurance, the payout would be used to buy shares from the deceased owner’s family. Then, both the family is taken care of and the business can keep going.
There are other reasons to use insurance, too, but for many business owners this kind of protection is an afterthought. A study conducted by FreshBooks found that only 49 per cent of small business owners are confident they’re sufficiently covered, while 41 per cent believe their personal insurance will help them with business-related claims.
“I think mostly it’s a knowledge gap,” says Jordan Richardson, a Sudbury-based insurance broker, explaining why entrepreneurs don’t think enough about insurance. Many business owners understand business and professional liability insurance, but they only think about life insurance after a professional suggests it, he notes. “They don’t go looking for it themselves. It almost always comes from a third party.”
Depending on the size and nature of your company, however, this coverage could be the difference between your business crumbling in the face of a tragedy or thriving after one.
The value of buy-sell
Larochelle and McVicker’s life insurance is term insurance – they have a 10-year policy – but in a business context it’s called buy-sell life insurance. It allows partners to ensure the organization stays in business if one of them dies.
“If something happens, you’re dealing with the continuation of the business and the loss of a person, it’s a double whammy,” says Richardson.
Larochelle is married with two children, so he has personal life insurance. But the company’s policy makes sure his shares in Matt & Steve go where they should. Richardson adds that the size of a policy can vary widely, from $500,000 to tens of millions of dollars.
While Larochelle doesn’t want to reveal how much their insurance is worth, he does say that because they’re a quickly growing business with an always changing valuation, they regularly reassess their policy to make sure it’s keeping up.
Consider other types of coverage
Critical illness and disability insurance can also help businesses stay afloat, says Richardson. The former provides a payout to someone who develops a serious illness, such as cancer or heart disease, while the latter can help someone pay for their day to day expenses if they have to be off work for an extended period.
Entrepreneurs may want to consider taking these policies out on themselves and naming the company as the beneficiary. If the owner can’t work, then the company will have money it can use to pay salaries in the event the business has to slow down, or it can be used to hire a temporary CEO to run the company while the person is away.
You don’t necessarily have to take out all three kinds of insurance at the same time, explains Richardson, but it should all be taken into consideration. Larochelle and McVicker decided to skip critical illness and disability coverage, although their professional team warned against it.
“We said to each other, if something happens to you, you still get a paycheque,” says Larochelle. “We’ll figure out how to fill in the gaps while you’re gone.”
Cover a key person
In many cases, a small business can’t run effectively without a pivotal employee. In those instances, a business owner might get what’s called key person insurance, which is just insurance – life, critical illness or disability – that’s taken out in that important person’s name. It could be the owner, but also a top salesperson, a critical executive or a can’t-do-without employee. This insurance is common in real estate development, says Richardson, where contractors get a key person policy for a site manager on a project.
In most cases, premiums are paid by the company, which means those payments are tax deductible as they’re considered a business expense. Talk to a professional, such as a financial advisor, lawyer, or accountant to help determine how to get sufficient coverage without impeding your cash flow.
Once you figure out what you need, you can rest easy knowing that your company is safe, and then you can spend time focusing on what’s really important: your business.
“The premiums come out of our account every month, and it’s done,” says Larochelle about his buy-sell insurance. “We don’t have to think about it anymore.”
The opinions presented are not necessarily those of The Canada Life Assurance Company and are provided for informational purposes only, your circumstances may be different.
To learn more about this product and if it’s right for you, contact a licensed insurance advisor.