In an interview with the CanadianSME Small Business Magazine, Michael Aziz, Chief Distribution Officer with Canada Protection Plan and Foresters Financial™, shed light on the indispensable role of life insurance for small business owners. He underscored the fact that life insurance is a key element in a business continuity plan, crucial for the survival and stability of a business in today’s unpredictable economic climate. Michael highlighted the critical nature of life insurance in protecting the interests of key decision-makers and securing the business’s value. He also stressed that, with nearly two-thirds of North American family businesses without a documented succession plan, life insurance stands as a vital component in safeguarding a business’s future. Michael further discussed the specific types of life insurance policies—term and permanent—and their strategic importance in business continuity and succession plans, emphasizing the need for professional advice in selecting the appropriate coverage.
Currently Chief Distribution Officer at Canada Protection Plan and Foresters Financial, Michael has more than 20 years of experience in financial services, including life insurance and living benefits, investments, capital markets, client services and operations. He has acquired his diverse experience through progressively responsible positions with major Canadian financial institutions. Michael is Certified Financial Planner (CFP) and holds a Bachelor of Administrative Studies (Hons.) from York University and a Master of Business Administration from the University of Windsor. Michael is passionate about Canadians having access to adequate life insurance options and estate planning resources. He regularly shares his industry insights and experience with various major publications and podcasts.
Why is life insurance for small business owners a critical component of a business continuity plan?
It’s no secret that small businesses are the backbone of the Canadian economy and an integral part of communities across the country. In 2021 alone, 98.1% of Canadian businesses were made up of small businesses that have less than 100 employees (Statistics Canada). And the economic landscape over the last few years has not been easy them, forcing some small businesses to fall into the trap of hyper-focusing on the day-to-day operations – leaving little time to think about the future, let alone succession plan. Small business owners have been busy trying to make the most of their limited resources while fighting the lingering impacts of the pandemic and the unpredictable economic environment.
The reality is that approximately two-thirds of all North American family businesses lack a robust documented continuation and succession plan for their business according to PwC’s 10th Family Business Survey. Without a well thought-out and communicated plan, this could put the future stability of their businesses at risk. A key tool in their business continuation and succession plans that shouldn’t be overlooked is life insurance coverage as it can help to protect their legacy and finances by:
- Providing long-term protection for key decision-makers
- Acting as a solid backstop to protect the value of the business
- Potentially generating cash value growth as long as premiums are paid
So, when small business owners say they don’t have the time right now to think about a business succession or continuity plan, the real question is can they afford not to?
What type(s) of life insurance should small business owners consider incorporating into their business continuity plans?
The first question the small business owner needs to consider is “How do you intend to use the life insurance coverage?” There are nuances depending on the intended use that are important to consider when trying to find the right product & right coverage. It is always recommended to have a thorough discussion with a licensed insurance professional and, depending on the situation, a tax advisor or lawyer. A few key concepts that you could discuss further would be:
- Key Person Coverage
- Buy-Sell Agreement
- Business Loan Protection
- Corporate Retirement Strategy
In the world of life insurance, there are generally two key categories: term life insurance and permanent life insurance. Term life insurance offers coverage over a defined period—be it 10, 20, or 30 years – and requires renewal at the end of each term or the coverage ends. Renewals could also mean a higher premium depending on your age and health condition. Often used to provide financial protection in the event of a death of an owner or a key person within the company that is difficult to replace; or even as collateral for a time-bound financial loan. Term life insurance offers relatively inexpensive form of life coverage and beneficiaries may receive the policy benefit tax-free upon the death of the insured, which can be used to settle any outstanding debts related to the business and cover other expenses that may arise.
On the other hand, permanent life insurance provides coverage designed to span the business owner’s entire lifetime rather than a defined term. Notable examples of this type include whole life insurance and universal life insurance policies. Two distinguishing features of permanent life insurance are: 1) it can provide lifelong protection with premiums that won’t increase as long as you keep paying the premiums; and 2) its cash value component – a feature that is not available with Term Life insurance policies. Being able to leverage a permanent life insurance policy’s cash value for a loan could be very useful – whether it’s for emergency cash flow purposes or to fund a planned improvement. Funds can be accessed through policy loans and businesses can often access these funds at a lower interest rate than traditional business loans. The death benefit of the policy is generally reduced by that policy loan amount until the loan is paid back. Whole life policies typically offer consistent premiums and generally guaranteed cash value accumulation while universal life insurance offers flexible premiums and death benefits but with fewer guarantees. Universal life policies allocate a portion of your premiums towards the life insurance itself, while the remainder is divided between savings and investment components that need to be regularly monitored to ensure they are performing to expectations.
Whether term or permanent, life insurance can play a pivotal role in your business continuity and success plans while helping to provide the financial protection for your families or other beneficiaries from the financial burdens that could follow when a small business owner passes.
Can you expand upon the role that life insurance plays in a business continuity plan?
Absolutely. Most small business owners do not have a succession or continuation plan in place that clearly communicates how they’d like the business to run if they were no longer able to run it. There are many considerations for small business owners when thinking about such an event – like who should lead the business and what types of strategies and plans they can employ.
Adequate life, critical illness and disability coverage is a major component for a business continuity plan for a variety of reasons, which can include:
- Access to emergency funds to sustain the business – Unexpected health issues for a small business owner can have a material impact on cash flow. Coverages like critical illness or disability coverage can provide some financial relief to take some time away from the business to recover or to keep the business going. Some business-owned whole life insurance offer cash values that generally increase over time and may allow business owners to use policy loans to grow or adapt their business.
- Key Person Insurance – Ideal for businesses who rely on one or two key people for critical tasks and whose absence would have a significant impact on the business operations and productivity. The death benefit is intended to support the company through a transition period of finding and onboarding a new key person.
- Helps fund Insured Buy-Sell agreements – Targeted to businesses with more than one owner and is a legal agreement that uses life insurance to plan for any unexpected death. Intended to protect the business and the surviving owner(s) and provide a death benefit to the late owner’s beneficiaries to cover their portion of the company’s value.
- Helps fund estate equalization – Great for business owners looking to pass their business onto one or more family members/ children, but not necessarily all. In the event of the owner passing, the intended family owners could inherit the business, while the others would receive an insurance payout equivalent to the value of the business.
- Help protect the financial future of their families – We’re all familiar with this one. The family finances would probably be adversely impacted should the small business owner pass – and with many of these being family-owned businesses, they may have incurred personal debts to run the business. Life insurance can help provide financial relief and replace lost income.
How can small business owners determine the appropriate type of insurance and amount of coverage for a business owner’s needs?
There are a lot of considerations for small business owners when exploring potential insurance options, and a discussion is best had with the professionals who support the business – you want enough coverage to ensure it matches the objectives of your business continuity and succession plans.
First, it’s important to consider the level of financial protection you need. Some examples include:
- Loss of a key person (like the business owner or another critical person) – estimate the length of time that would be required to successfully find and onboard a replacement and the associated cost to cover that time & task
- Keep the business running – you’ll need to know your numbers like size of business, overhead costs, number of employees, revenue stability, personal income requirements, expenses, level of debt and whether you have a Buy-Sell agreement in place
And it’s important that small business owners review their business continuity and succession plans regularly over the course of time to ensure the plans and their life or critical illness insurance coverages remain aligned with their objectives.
Why aren’t all small business owners insured?
I can only speculate that they’re busy and that time is very limited resource for small business owners. They’re likely focused on improving the day-to-day efficiency and profitability which may not leave a lot of time or energy to plan out across a longer horizon.
It can also be an uncomfortable conversation – talking about disaster planning or in the event of your own passing. It can often feel easier to procrastinate and not engage in discussion or planning exercises.
While owning a small business often requires juggling a multitude of tasks and worries, money and cashflow can be a major stressor for many. Some may decide to put off incorporating life insurance as a way to backstop their business to better manage expenses, and some may believe they don’t need additional coverage if they already have personal life coverage on themselves, and their home and/or car are already insured.
However, being uninsured or underinsured can leave small business owners and their beneficiaries at risk as they may not be able to afford to take a major hit to their business.
