THREE ESSENTIAL INSURANCE BASICS for FOUNDERS and ENTREPRENEURS
by Jeff Schnitz, Head of Wealth Advisory published on May 10, 2017
This article originally posted on the Silicon Valley Bank Blog. Reposted here with SVB's permission.
Great founders know the potential risks of doing business and accept or avoid those risks enthusiastically. However, many founders fail to protect themselves from financial risks, both personal and professional, that might be mitigated with the right policies. Proper insurance coverage can save time and money while providing peace of mind for the individual, loved ones and co-founders.
1. Term Life Insurance
- What is it? Term life policies guarantee a level premium for a limited duration (i.e. 10, 20, or even up to 30 Years). This coverage has no equity accumulation and no cash surrender value. This type of coverage is essential to provide income replacement, liquidity and debt protection for your loved ones (this could be family or co-founders) in the event of your premature death.
- Why do I need it? All founders should take the opportunity to discuss with family and co-founders what would happen if they were to pass away unexpectedly, so that they can plan appropriately. The coverage you may have through the company will likely not provide the benefits that your family may need.
- What should I know? Term life insurance is comparatively affordable. You can reassess your needs as the term of the policy ends, and it covers you even if you move on to a new venture, unlike a corporate policy. As an example, we recently received a quote for a California man, age 40, who is in good health (non-tobacco). The quoted annual premium for a $2 Million death benefit was about $1,530 annually or $130 per month over a 20-year period with no premium increases.
2. Umbrella Insurance
- What is it? It is a personal excess liability insurance policy that protects beyond the limits on other policies such as homeowners or auto policies.
- Why do I need it? If you have assets, it can help protect those assets or, if you don’t have assets, it can help protect your future earnings. Homeowners’ policies and auto policies (among others) have a limitation on liability protection, the umbrella policy can help bring your protection up to a proper level. Something as simple as a car accident with multiple injuries may easily exceed your auto liability.
- What should I know? Umbrella policies are often considered the most inexpensive insurance per dollar of coverage. Umbrella policies cover all underlying liability policies, whereas excess casualty policies increase the limits of liability on one particular policy.
3. Key Man / Key Person Life Insurance
- What is it? Key Person Life Insurance is a policy on the most crucial people within a firm, typically the founders and perhaps a key employee. The policy is paid for by the company and is meant to pay off in the unlikely event that one of the crucial employees were to die.
- Why do I need it? Key Person Life Insurance is considered reasonable risk protection as your company grows. Key Person coverage can help retain other key employees and make banking relationships more stable . When the company receives the tax-free insurance proceeds, the life funds can be used for expenses to hire a replacement leader, to pay off/down debts, distribute money to investors, pay severance to employees, and/or close the business down in an orderly manner.
- What should I know? Key Person coverage is generally capped at about 10X Annual Income (Salary & Bonus) of the Executive. Also, the proposed insured can use the same required physical examination when simultaneously applying for other personal life insurance policies. Most venture-backed investments, based on limited partnership agreements (LPA), require Key Person Life Insurance on your company’s top executives. Look at your business and think about who is irreplaceable in the short term. Often this insurance is grouped with D&O Insurance.
Other Types of Insurance You Should Take Time to Understand
- Disability Insurance – income replacement if you become disabled
- Officers Liability Insurance (D&O) – helps indemnify directors and officers of the company
- Workers Compensation Insurance – you need this as soon as you have employees
- Business Owners Policy (BOP) – general operational insurance
- Employment Practices Liability Insurance (EPLI) – provides protection against employee claims
- Intellectual Property Insurance – can provide defense costs for defending your IP
- Cyber/Network Security Insurance – provides additional liability coverage for certain intangible losses