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Is your business unprotected? “Of course not,” you probably say. But how sure are you? Almost 40% of small companies would likely go out of business if the business owner unexpectedly died, according to a new report, the New York Life Small Business Insurance Gap.

The survey also reveals the average insurance “gap”—the shortfall between a small business’s financial needs and the money it would have available from an owner’s life insurance policy in the event of the owner’s death—is $1.4 million. (See the chart at the end of this post for more details.)

“These numbers are eye-opening,” says Steve Strauss, USA TODAY senior small business columnist and independent consultant to New York Life. Strauss (full disclosure: Strauss is a friend of mine) says he’s surprised, especially since so many small business owners consider their employees their “business family,” that they’d leave them so vulnerable and unprotected. And it flies in the face of the business owners saying their employees keeping their jobs is the “most important” thing when they were asked about continuation of the business if they died.

Most (72 percent) of the business owners surveyed say they plan to leave their business to their families, and 53 percent name their spouse as the person they’d leave it to. But in many cases, families and spouses, especially if they don’t work at the business, aren’t prepared to successfully carry on the company—and without adequate capital, that becomes nearly an impossible task.

How Valuable Are You Anyway?

The survey asked small business owners about the value they provide to their businesses in terms of hours worked, responsibilities and the direct impact they have on sales. Their answers show it would take three trained, full-time employees to replace one owner who had unexpectedly died. Plus, company revenues would decline 34 percent.

The business owners surveyed are no slackers, either. Most (77 percent) plan to work until they’re at least 65 years old or longer, and 35 percent say they will never stop being involved in their business. Some 79 percent are responsible for generating revenue, and more than 40 percent work longer than the typical full-time workweek.

If you don’t want your business to be left unprotected, Strauss suggests three possible solutions.

  1. Make sure you have enough personal life insurance so your family is not left without funds if you die. Many desperate spouses have had to hold “fire sales,” selling businesses for less than their value, because they’re left without the resources to continue the business until a good deal can be negotiated.
  2. If your business is a partnership, each partner could buy a life insurance policy on the other one’s life. In the event of one’s death, the surviving partner can use the proceeds of that policy to buy out the deceased’s family and become the sole owner of the business.
  3. Identify the employee you think could best carry on your duties if something were to happen to you. Train them to do your job and buy a keyperson insurance policy on them, since this will make them even more important to your business than they already are. Also make sure your contacts, contracts and other vital business information are not “hidden” somewhere no one can find them.

No one wants to think about their untimely demise. But if you don’t plan for it, the business you’ve built with your blood, sweat and tears could die along with you. Strauss advises all business owners to “think about the gap” and take action now to protect their employees, families and businesses.

The New York Life Small Business Insurance Gap – by Size

Employees Average Life Insurance Coverage in Place for the Business Average Amount Needed to Cover Self-Reported Needs Gap
10-19 $234,441 $1,549,301 $1,314,860
20-49 $356,717 $1,820,157 $1,463,441


The New York Life Small Business Insurance Gap – by Years in Business-

Years In Business Average Life Insurance Coverage in Place for the Business Average Amount Needed to Cover Self-Reported Needs Gap
5-12 $277,749 $1,732,663 $1,454,914
13+ $293,348 $1,588,081 $1,294,733
Total $285,362 $1,662,098 $1,376,736