The worst case scenario
As a small company, we had never before really considered what would happen if any of us were to become disabled or die. In 2008, I came down with an extreme case of labyrinthitis overnight and couldn’t walk by myself for months, and couldn’t drive for nearly two years. The blessing was that the only task I could really do was sit and look at a computer screen without moving my eyes more than a few centimeters at a time, so I was able to work. Then, at the end of 2009, our founder and CEO had a series of eight myochardial infarctions and came extremely close to dying.
While everyone has recovered nicely, it has forced us to consider what would happen if either of us as the primary leaders were injured or gone. We have spent years cross-training each other and keep one another extremely close into the loop on everything we do separately, and we have a contingency plan in place for if either of us is unable to work.
But we’re a small startup, we can pivot, and we can flex, but when companies are more than a handful of people, that cross training and contingency plan of flexibility is not realistic. I recently met Angie Smucker, the founder of independent firm, CTI Insurance, and this topic came up, and the idea of that contingency plan in place for a larger company or more traditional model was mind boggling to me, so Angie spent some time illustrating below how “Business Succession Planning” (aka that contingency plan) works in those cases.
Smucker tells AGBeat, “When a company is investigating vendors, preparing to do a significant amount of business with the right vendor, there’s usually a set of criteria for that final selection. For some companies, an important factor is the contingency plan that should be in place to ensure a business’ continuing ability to fulfill its contractual obligations when and if the business owner or a highly valued employee becomes disabled or dies. This contingency plan is called a ‘Business Succession Plan.’”
Additionally, Smucker notes that “Proper planning involves a written agreement but it also involves funding of the plan. Without a written agreement, the plan is nonexistent. Without funding the written agreement, the plan is ineffective. A properly written and funded plan works:
- To encourage the person to remain with the company until his retirement.
- To fund the necessary costs to replace that person in case he leaves or dies unexpectedly.
- To provide for his family to demonstrate that he is an important part of the team
- To add to his retirement fund in a way that rewards him now and into the future.”
Smucker says that working with an experienced financial advisor can often translate into getting free legal assistance with writing the business succession plan. Insurance companies have templates available, through a financial advisor, when they know the client/prospect is likely going to want a life insurance policy to fund the plan. So, the financial advisor and the insurance company provide a plan template and life insurance on the employee.
A real world example
“As an example,” Smucker says, “here is a recommendation for a $1,500,000 whole life insurance policy:
If employee stays with the company to retirement:
- His retirement will include the $500,000 cash value accumulation in the life insurance policy. This is referred to as his “golden parachute”.
- The company will receive $250,000 cash value to fund finding a replacement and paying James a consultant fee for 2 years to train the replacement.
If employee is killed accidentally before retirement:
- His family receives a $1,000,000 death benefit. This shows the employee and his family that the company owners care about them. This is referred to as “golden handcuffs”.
- The company receives a $500,000 death benefit to fund finding a replacement and to replace lost income from clients who may leave because James is no longer representing the company.”
“The insurance company offers a life insurance policy with a monthly premium at $300,” Smucker said. “Following Internal Revenue Service rules for corporate owned life insurance, the payroll service must show $50 of additional monthly income for employee but the company also gives him a raise which equals almost exactly his additional taxes. Finally, he can let his family know that they will not be relocating. His stress level is reduced and he becomes even more effective as the face of the company. And, employee’s’ wife is convinced that her husband and her family are exactly where they need to be.”
This basic overview can be adapted to situations of disability, and Smucker advises companies of all size to work with their financial advisor and insurance company to come up with legitimate contingency plans, because we’re all human and anything can happen.