Life is what happens when you are busy making other plans. This is even more apt for entrepreneurs who deal with constant change and uncertainty. Without proper life life insurance, the sudden death or disability of the entreprenuer could derail a company. Here's why life insurance is a must.
According to the UAE's Ministry of Economy, there are more than 350,000 SMEs alone, claiming 86 percent of the private workforce and accounting for 60 percent of the GDP. In other words, the driving force of the economy is entrepreneurs. Ensuring these business owners are secured, there's continuity, may seem obvious and essential. However, according to a recent YouGov survey in the UAE, only 58 percent of 503 respondents have life insurance.
This is not an UAE specific issue. Even LIMRA, a worldwide research firm helping over 850 insurance and financial services companies in 64 countries, in their latest Barometer Study confirmed this - 41 percent of business owners globally, do not have life insurance i.e. they cannot support their business, employees or loved ones in a negative eventuality. Similarly, Deloitte found that only 59 percent of family-owned businesses have a contingency plan.
It's not just about entrepreneurs but also their dependencies. Most entrepreneurs are supported initially by family, friends, and as they grow, by co-founders, investors, partners, banks, suppliers and staff who share the entrepreneur's vision - these groups are also at high risk due to lack of entrepreneur's life insurance.
What's with this apathy towards life insurance? It is all about the mindset. Entrepreneurs by nature are optimistic, persistent, risk-taking and driven that sets them apart from a typical professional or a conservative employee. Pessimism, defeatist attitude, morbid thoughts of sudden death, disability of a founder, disease, failure is rarely in their DNA.
Of course, entrepreneurs do care for a positive outcome and security. There are many other reasons as well why they neglect to insure themselves as its rarely a high priority. Finances are stretched; owners are juggling other priorities and turbulence is a way of life. Even in the case of the few who are insured, its not comprehensive or they are 'under-insured'.
Without a clear life protection strategy, the entrepreneur could be jeopardizing the company's future. A smart entrepreneur must anticipate all possibilities - positive/negative and recognise the rewards and the risk. Hence, life insurance or its planning for that matter is a must.
Here are few things to consider.
Quantify & qualify
Every entrepreneur's situation is different. Take the guess work out, skip the 'insurance packages' or one size fits all approach. See what reflects your business. The business owner must evaluate their insurance coverage based on their level of debt, income replacement and future obligations.
With the average life expectancy of 77.3 years (2014) in the UAE, factor in your current age, the possible age of retirement at 60 and exit or hire someone in the entrepreneur's position.
Tip: Use Citibank UAE’s insurance calculator to calculate short-term and long-term commitments like rent, mortgage, credit cards, loans, family expenses, etc.
The right fit
Broadly speaking, there are three categories of life insurance – term insurance (you pay per term, and no money is returned in case its availed, like a car insurance); endowment ( like a savings plan) or whole of life (a hybrid that combines life and/or critical illness cover and savings). Once you have narrowed down your insurance partner, the advisor should be able to guide you with clear options based on your situation.
Simply getting life insurance does not solve it. It has to be the right fit. According to LIMRA, consumers tend to overestimate the price of life insurance. This may deter those who believe it costs too much from purchasing. For instance, when asked how much a $250,000 term life insurance policy would be for a healthy 30-year-old, the median estimate was $500—more than 3x the actual cost.
This lack of understanding leads to insufficient coverage. Most business owners who do get life insurance are also underinsured i.e. any claims pay-outs will be inadequate to get the business back on its feet, and the entrepreneurs' needs are not adequately covered. On the other end, being overinsured means paying way more than you need and wasting capital.
Talk to a professional business valuator or chartered accountant to identify an adequate coverage that's based on actual valuation data, underwritten insurance policies, historical insurance trends, best practices, benchmark it against growth of the business and associated costs.
Take a 360 degrees approach
Having the right life insurance is only a means to an end. What about business protection, disability, short illness leading to hospitalisation, unforeseen circumstances, diagnosis of any critical ailments of the entrepreneur, co-founder, or a family member? So look for a life insurance that ticks all the boxes, casts a wider safety net that protects the company from financial loss, liabilities, instability in the case of death or turbulent times, by providing short-term cash flow.
Talk to your Citibank Relationship Manager today, to include business keyman insurance that safeguards all fronts with any possible savings components.As they say, prepare for the worst and do your best. Now that you are covered (for life), it is time to take on the world and follow your vision.
Image Credits: CC by SA 3.0. Copyright 2017 by Nick Youngson