Every business, large and small realizes the necessity of protecting the business’s physical assets from disasters such as damage due to fire, weather, accidents, and theft.
The way this is typically accomplished is to buy property and casualty insurance from a reputable insurance underwriter. Physical assets might include buildings, production, office equipment, and vehicles.
What many business owners do not realize is that it is just as important to protect the enterprise from “people disasters” that can cause as much and in many instances more damage to a company than physical disasters.
So, what exactly are people disasters?
People disasters can have diverse causes; here are a few examples:
- The CEO or another employee who is critical to the company’s success dies or is for any reason unable to work and contribute.
- A competitor hires away a company’s best sales representative.
- A key staff member requires a leave of absence for an extended period of time to care for an elderly parent or sick child.
- A physical disaster such as an explosion that seriously injures or kills multiple production people who cannot be quickly replaced.
These “human assets” can be protected and secured in a number of instances through the purchase of various life insurance products just like physical assets can be protected and secured with property and casualty insurance.
For example:
- Workers Compensation insurance – This covers medical bills and lost wages for employees injured on the job. It protects the employer from lawsuits and ensures employees receive care. It turns out that every state in the US requires that employers are required to carry workers compensation insurance coverage for their employees in case of work-related injuries or illness except Texas. In Texas, employers can opt to self-insure or simply opt out of coverage. This is very risky for both employers and employees.
- Key Person insurance – Life insurance, where the death benefit is directed to the company in the event of the untimely death of a key individual, can provide the income and assets needed to strengthen cash flow, hire and train a replacement, and assure creditors of business continuity. This is often called “key man” or “key person” insurance.
- Group health insurance, group life insurance, group disability insurance, and group long-term care insurance – These group products provide protection, security and benefits to employees in the event of illness or death. These benefits help companies retain employees and thus, reduce turnover.
- Permanent Life Insurance – Permanent life insurance (there are several types) will build equity or cash value over time as premiums are paid. This equity may be used for business needs or as collateral for a loan or to help owners maintain their financial security when a physical or human disaster strikes.
- Funding Buy-Sell Agreements with life insurance – Business owners do not live forever so a properly funded buy–sell agreement between one owner and another or partners provides for mutually agreeable terms of sale and facilitates a smooth transition of management and assures creditors that the enterprise will continue to operate without interruption.
In several places in this piece, we have referred to creditors. The creditors we refer to are usually banks that have extended credit such as a term loan or line of credit to a company. In most cases, a lender, as a condition of extending credit will insist that the company purchase life insurance products as well as property and casualty insurance products to protect the company and, indirectly protect the bank and sometimes even directly protect the bank. Yes, insurance products can make a company more creditworthy.
In summary, it is important for business owners and managers to understand the benefits of protecting human capital. Now might be an excellent time to call your insurance agent and suggest that you meet to discuss protecting the business from people disasters.