Top Thing to Invest in Right Now: You
My company has a $1 million life insurance policy out on me. It was a condition of landing our VC funding when we launched Personal Capital. That's standard operating procedure in Silicon Valley. Investors aren't going to dig into their pockets without knowing there's a financial backstop that would help the business weather the sudden death of a key employee.
Step outside the Valley, however, and you'll have a tough time finding an entrepreneur carrying this insurance. According to a National Association of Insurance Commissioners survey, seven in 10 small businesses reported being "very dependent" on a few key employees, yet only 22 percent of the companies had insurance policies that would deliver money in the event that a key employee died or was disabled. That data is from 2007 (the most recent available), but given the rough economy since then, it's unlikely to have changed.
To be blunt, you are nuts if your business doesn't carry key-person insurance on you or on any other integral member of your team. Not going after VC funding? Fine, but if you're interested in a loan backed by the Small Business Administration, it's typically required.
More important, do you really want to leave your company high and dry if something happens to you or another crucial employee? With a life insurance policy in place, you give your business the ability to regroup after a loss.
Key-person insurance can be ridiculously affordable. There are two broad types of insurance: term and permanent. Term, which pays out for a specific period of time--hence the name--is cheap. Permanent, which includes a side investment component, is way more expensive. Stick with term. It's all you really need, and it won't put a dent into your cash flow.
You'll also need to choose the actual term. Ten years should be plenty if your business is just getting started and still building up cash reserves. If the business is more established, pick a term that will get you well beyond major financial milestones, such as the date by which the business plans to pay back any loans or launch an expansion.
How large a death benefit should you be willing to pay for? If you're a solo act and your death would effectively end the business, think about a benefit that would pay off your debts and close your books with dignity for your survivors. For larger businesses that will continue on, focus on providing an adequate cushion during the transition. Maybe that means a multiple of your salary. Or it might make more sense to think in terms of monthly operating expenses, including the time and cost of recruiting, while the company looks for a replacement and struggles to get its bearings. Another consideration: If you're one of a small band of equity investors, you may want to give the company the ability to buy out your share from your heirs.
Every company is different. But if you're healthy, it's probably worth going right to $1 million, because that will require you to go through the burden of a complete health screening, which is a good thing for you and your investors anyway. You can also add in disability coverage. Stick with a guaranteed term policy; the premium doesn't change from year to year.
Your insurance broker can work up a few quotes for you. Or you can do some ballparking at term4sale.com. I'm a 56-year-old healthy male, and my $1 million policy costs about $3,000 annually. A $1 million, 10-year guaranteed term policy for a healthy 40-year-old male can cost as little as $500 or so a year. For a 40-year-old woman, it might be $50 or so cheaper. Are you really going to tell yourself you can't afford $40 or so a month to buy that much peace of mind?
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