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When Sheryl was diagnosed with liver cancer her partners did what they could to accommodate her needs. Eventually, however, she was unable to work at all and, at her death, the company they had all built from scratch 10 years ago began to falter. "How could this have happened?" one partner asked. It is a common question, one that every business owner should ask.

A death or disability can cripple your business. It can also destroy the financial well-being of a co-owner's or employee's family. What many business owners fail to realize, however, is that this "probability factor" is a great deal higher than they think.

The more key players in your business, the greater the probability that one could be lost due to a death or disability. Let the statistics speak for themselves. That way, as a business owner, you can decide for yourself about your exposure to these dangers to your business.

The Risk of Death
What are the odds that a member of your team will die before age 65? Say that you are a 40-year-old male. According to actuarial statistics, there is a 22% probability that you will die prior to age 65. While the odds are not really all that bad, they do show that there is significant risk — more than one in five — that you could die prior to retirement.

Source: Commissioners 1980 Mortality Table
PROBABILITY OF ONE DEATH PRIOR TO AGE 65
AGE SOLE
OWNER
TWO
PARTNERS
THREE
PARTNERS
30 23.5% 41.5% 55.2%
35 22.8% 40.4% 54.0%
40 21.8% 38.9% 52.3%
45 20.5% 36.7% 49.6%

However, the probability of death starts to increase more dramatically when there are two or more people in the organization. As the chart above shows, if you and a partner are both 40, the probability that one of you will die prior to age 65 jumps to almost 39%. If there are three partners, co-owners or key employees, the odds pass 50%.

AGE OF PERSON RISK OF DISABILITY OF ANY ONE PERSON RISK OF DISABILITY TO ANY ONE PERSON OUT OF TWO RISK OF DISABILITY TO ANY ONE PERSON OUT OF THREE RISK OF DISABILITY The probability of one long-term disability (90 days or more) prior to age 65 to any one person 30 46.7% 71.6% 84.9% 35 45.1% 69.9% 83.5% 40 43.0% 67.5% 81.5% 45 40.1% 64.1% 78.5%

he Risk of Disability
Then there is the risk of disability. If you're a 40-year-old sole proprietor, the odds that you will suffer a disability of at least 90 days between now and age 65 are 43%. Bring on one partner, same age, and the odds shoot up to 67.5%. Add a third member to the team and the disability risk factor rises to 81.5%.

Do these numbers sound a bit high? The fact is that they are as accurate as scientifically possible. Based on mortality and morbidity tables, these probabilities are derived from research and information compiled by insurance companies for more than 150 years. These tables are used to help insurers make decisions based on scientific, historical data. This is not to say that you or a partner will die prior to age 65 or that you will suffer a long-term disability. However, the probability is there... and it is real.

How the business can be affected by the death or disability of a key person:

• Productivity may fall off, as survivors scramble to take over the lost person's responsibilities. Very often, while this may be possible for a short period of time, the business may gradually fail completely.
• Expenses may rise when productivity is falling. Survivors will have to hire replacements eventually or farm projects out to independent contractors. If a partner is disabled, other owners may try to continue his or her salary for as long as possible, putting a further drain on the company's cash flow.
• Sales may decline as customers become cautious of the company's future. The effective way to meet your obligations to your valued employees, partners, and your business may be adequate life insurance coverage for all employees, plus "key person" insurance on select personnel, with benefits payable to the business.
• Credit may shrink or dry up. Lenders know that the key to a company's ongoing stability and success is its key people.

Families are also affected. What would you do if a partner and friend died or became disabled? Their family may go instantly from financially secure to potentially destitute. Could you turn your back on them? You certainly wouldn't want to. However, if the business is already in trouble, you might have no choice.

The Solution
Tough odds and tough choices. More businesses today — from sole proprietorships to multi-partner enterprises — take the following steps:

1. They establish formal buy/sell agreements that lay out in black and white exactly what will happen to the business if one of them dies or becomes disabled.
2. They fund the agreement with adequate life and disability insurance. Proper coverage can provide instant cash to keep a business going through the tough transition period, pay a disabled owner's salary, and help provide the money for a buy-out, if necessary, that provides for a deceased or disabled owner's family.

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