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For Good Measure

Putting a price on your most valued employees
June 1, 1999
URL: http://www.entrepreneur.com/article/17820

How much are you worth to your company? A million dollars of revenue a year? Thirty million? What about the sales manager who's spent 10 years making contacts in your industry? Impossible to quantify? You'd better try.

"If someone buys equipment, they don't think twice about insuring it," says David B. Schulman, a chartered life underwriter and chartered financial counselor for Massachusetts Mutual Life Insurace Co. in Fort Lauderdale, Florida. "Yet the success of a small business depends more on its people than on its capital equipment. If a key individual dies, a business can suffer debilitating financial loss."

Companies can guard against the loss of important figures by purchasing "key person" insurance, life insurance policies that are carried by the business, rather than the individual. Key person insurance can even help your business survive a more likely event: the departure of a valuable employee in pursuit of other opportunities.

"A policy can be structured so you have the cash value of the policy available to you in the event a key person leaves the business," explains Schulman. "In effect, you're putting dollars away for when you need them."

For Your Health

When your body breaks down, your business is likely to follow. Disability insurance protects you from disaster.

When David Burros finally learned about disability insurance, it was too late to save his family's business. Ten years ago, his mother lost her antiques business after suffering a debilitating stroke. Burros, now a certified financial planner and CEO of Burros Consulting & Speaking, a personal and financial planning and consulting firm in Denver, advises his clients to learn from his experience and protect their businesses before it's too late.

"Your greatest asset isn't your business but rather your ability to create wealth," he says. "You can lose everything else, and you'll get it all back again if you have the ability to work. That's why disability insurance is the first kind of insurance business owners should consider."

Burros recommends purchasing long-term disability insurance to protect yourself from business loss resulting from a disability that lasts longer than 90 days. The price of your policy depends on the risks associated with your business, says Burros, but a business owner will typically pay approximately 3 percent of his or her after-tax income for a policy that provides coverage until age 65. In the event of a long-term disability claim, payments will be roughly equivalent to the after-tax income you achieved before your disability and are not subject to being taxed themselves.

To save money on your long-term disability policy, you can play the odds by purchasing a policy that ends before you reach age 65. Ninety-seven percent of all long-term disabilities last less than five years, according to Burros. "If you really need to save money, cover yourself for just five years," he says. "You're likely to be back to work within that time."

Playing The Odds

Chances are slim that you or a key employee will die or face permanent disability while working at your company. That's why policies to guard against these conditions are so affordable. Short-term disability--an inability to work for 90 days or less--is far more common. A nasty flu that develops into a bronchial infection or an automobile accident that leaves you temporarily disabled are just a few examples. So a policy that covers business loss resulting from short-term disability makes sense, right?

Wrong. According to Denver financial planner David Burros, short-term disabilities are so common, and the insurance to cover business loss so expensive, that buying these policies just doesn't make good financial sense. "I recommend anticipating these occurrences and being able to self-fund the impact to the business," Burros says. "For most businesses, that will be the most cost-effective use of their resources."

The Best Policy?

The odds are long that you or a key employee will die or face permanent disability. That's why policies to guard against them are so affordable. Short-term disability--an inability to work for 90 days or less--is far more common. A nasty flu that develops into a bronchial infection or an automobile accident that leaves you temporarily disabled are just a few examples. So a policy that covers business loss resulting from short-term disability makes sense, right?

Wrong. According to Denver financial planner David Burros, short-term disabilities are so common, and the insurance to cover business loss so expensive, that buying these policies just doesn't make good financial sense. "I recommend anticipating these occurrences and being able to self-fund the impact to the business," Burros says. "For most businesses, that will be the most cost-effective use of their resources."

Claire Tristram is a business and technology writer in San Jose, California.

Contact Sources

Burros Consulting & Speaking, (800) 440-2430, dbcohr@aol.com

Massachusetts Mutual Life Insurance Co., (954) 938-8800, fax: (954) 351-2468.