Are You Prepared for an Earthquake?

Over my years of advising clients, I have not found many who are excited to talk about life insurance. It is only until after someone passes away or a sickness hits that people become interested. I call this kind of event, a family earthquake. Our health and wellness are the foundation of our overall personal and financial wellbeing as a family and if that foundation cracks, then our world can crumble.

For the purposes of this article, I will be focusing on the unexpected death of a family member although these concepts also apply to sickness.

Although all of us should think through the impact of a family member dying, family business owners have a particular need to consider this. The family wealth, legacy and financial wellbeing are tied to the continuity of the business which presents a unique set of circumstances for families in business together. One cannot be considered without the other since any decision can send a ripple effect through the entire system. Therefore, I used the earthquake analogy to develop a visual to illustrate this concept. I call this the “Earthquake Model” for family businesses.

Insure to ensure. This is my favourite way to summarize the need for life insurance. In fact, I think life insurance should be called "life-ensurance." Although life insurance does not completely “ensure” you will not suffer financially from the impact, it can help make things go smoother. If someone faces a sickness or death, you will inevitably find comfort in having the time to come together as a family to heal. Dealing with financial pressures, paperwork and new responsibilities are difficult during times like these.

At this point, you are probably thinking of all the financial impacts of not having enough insurance in place. However, there are many ripple effects to family relationships and legacies that are impacted.

“Insure to ensure.”

For ease of illustration, I have summarized the impacts to the family enterprise into four pillars as outlined in figure 1. Although I am sure these are not exhaustive, I believe they represent some of the major categories of impact.

Here is the profile of a family business that I will use to illustrate the impact to each of these categories. Sometimes hearing real life stories can be the best way to relate.

Family Business Profile

The family business was started 30 years ago from the ground up. It was a furniture making business and went through many ups and downs. As the business became successful, the founder and his wife were proud of this hard work and wanted to pass this onto his three children and future grandchildren. He took time to document his story and some of the lessons he learned along the way. However, the son was currently the only one who still worked in the business with the other two girls having no interest and pursued their own occupations. However, at age 65, the founder passed away unexpectedly with no life insurance in place leaving his wife and three children. When the founder passed away, the business suffered because he had held the key relationships for the business and ran the overall operations. The will stated that all the assets go to his wife first and then equally to all the children. Because the business was losing money, the wife decided to sell it at nominal value relative to what it was worth prior to the death of the founder.

#1. Legacy

What is a legacy? It can mean different things to everyone, but, by definition, it is “a gift by will especially of money or other personal property”. However, many family business founders agree that this legacy goes beyond the family wealth. Legacy often extends into ongoing values within the family which can be sustained through the ongoing operations of the business. In this example, clearly the founders’ original intention of having the business last many generations did not work out. All the founders’ hard work was diminished in an instant.

How would life insurance have helped this in this situation? If there was life insurance in place the company could have received an injection of cash to pay the bills, cover loans and find a suitable replacement for the founder. Arguably having a successor in place to cover this event would have significantly improved the chance of continuity of the business.

#2. Family Relationships

I think it is fair to say that families want to get along and have harmonious relationships. Parents generally want to see their children remain close and be there for each other. Siblings want to see their own children to be close as well. I think this is human nature. Unfortunately, many times we have seen money and hurt feelings interfere with this.

In this example, the son felt that he deserved to receive the full value of the sale of the business since he was the only who had built his livelihood around the business. The rest of the family felt that it was only fair if they received a portion since they noted the terms of the will. Unfortunately, in this case, the business was only sold for a third of the value and all the wealth had to be retained by the wife since she needed it to live during retirement. The son harboured ill feelings and continued to blame his mother for selling the business and ruining his future.

How would life insurance have helped this situation? If there was life insurance in place to protect the full value of the business his wife could have had enough to retire with and exit the business regardless of how much it would have sold for. Perhaps the business could have been left to the son and other insurance could have been in place to equalize the estate among the other two children.

#3. Business Ownership

The role of the owners is to instruct management on the long-term strategy and vision for the business based on the values and the vision of the family. If someone is not interested performing these tasks effectively it could jeopardize the continuity of the business.

In this case, the wife was not interested in running the business and decided to sell it to raise some money for her own retirement. If the son had taken out some insurance on his father’s life and put in place an agreement to buy the shares of the company, he could have purchased it from his mother and kept it going. This way, ownership continuity within the family would have been maintained.

#4. Business Value and Wealth

Quite often the business is the biggest source of wealth for the family. Not only does wealth come from the business value or the dividends, but in the employment continuity of the family members working in the business. In this case, the founder was key to the value of the business and its’ continuity. Although this business needed a continuity plan, life insurance would have also helped secure the wealth for his wife and at the same time, proceeds of a corporate owned policy could have provided an injection of cash into the business to try to keep it running. Because this was not in place, his wife received less than was desired and the son’s future employment and ownership potential did not come to fruition.

Summary

You will see that these four pillars are all inter-twined. When something happens in one, it impacts the other. It is no coincidence. The family enterprise is unique in this aspect which is why it requires careful planning from day one. Insurance is only one tool that can be used but in certain circumstances it can make all the difference.

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Susan Brown CLU®, FEA, CFP®, RRC®, CIM®

Insurance Advisor ǀ Propel Insurance and Advisory Inc.

T: 403-616-7699ǀ susan@propeladvisory.ca