Succession planning in small businesses usually focuses on getting enough key person life and disability insurance. But neither product fully addresses the financial strain on the business and business owners that occurs when an owner is stricken by a critical illness such as a heart attack, stroke, cancer or dementia. Not only does this result in a coverage gap, it also means the agent failed to sell the full solution.
But now, a rising product, critical illness insurance (CI), can plug the gap for a reasonable premium. With more carriers offering a wider variety of CI products, there are more opportunities for you to profitably solve your client's problem.
Succession planning starts with a sound analysis of the current situation. You need to understand who the business owners are and whether the need is to protect the business, the owners, their beneficiaries or all these entities. To that end, find out what kind of insurance is in place, the purposes designated for each insurance policy, and the current values of each of those policies.
In many small businesses, insurance proceeds are used to buy out the interest of an owner who dies or becomes disabled. CI fits in perfectly here because it provides a lump-sum payment of up to $500,000. The full benefits are paid when a covered critical illness is first diagnosed. The better policies cover about a dozen major illnesses. There's no coordination of benefits, so receipt of funds doesn't diminish payments from other policies.
CI can provide the business with a buffer if a key owner or executive becomes seriously ill. Replacing a top person is time-consuming and expensive. Money in the bank can buy the business the time it needs. Though the individual may already have disability and/or long term care insurance that pays monthly benefits, a lump sum payment can make an immediate difference to reduce the financial strain placed on the business and/or the owners.
The beneficiary or beneficiaries can be the business itself, the owners or family members.
Pick a classy chassis
CI policies are built on either a health insurance or life insurance chassis.
The health insurance chassis is the more common approach. This is a stand-alone CI policy, with premiums payable monthly, quarterly, semiannually or annually. (Payroll deduction via list billing is available.) A big advantage of this model is that the policy owner can keep the policy for life with one carrier (but with other carriers the policy will terminate at age 70). Some CI insurers reduce the benefit amount by 50% at age 65, but some do not.
