Many small business owners view business insurance as the necessary evil, and thus they are reluctant whether they should take more coverages or not. In reality, nobody really knows (except the insurers, perhaps) until the disaster happens; in that case, it’s all too late.

The result of the reluctance is the gap between the coverage they have and the amount they actually need.  But how bad is the gap? What should small business owners do in response to the gap?

We converse with Brian Madgett, Vice President of New York Life – the largest mutual life-insurance company in the U.S. and one of the largest life insurance providers in the world, on the recent survey New York Life conducted on the insurance gap topic.

What were the key takeaways when you saw the results of the New York Life Small Business Insurance Gap survey?

There were two main takeaways:

1. This is self-reported. This isn’t the insurance industry telling small business owners what they need to do to protect their businesses. We asked small business owners what they need to protect their business in the unfortunate case of their death and then separately asked them what financial protections they had in place. Using responses, the survey firm calculated an Insurance Gap.
2. Nearly 40 percent of small businesses have a Gap. That is millions of small businesses that may be at risk because their owners lack adequate life insurance protection. The New York Life Small Business Life Insurance Gap survey was the first of its kind and revealed that many small business owners won’t be able to leave behind enough income to sustain the businesses they had worked so hard to build. The study presented us with information that we have not seen before – and answered critical questions about a very real vulnerability that faces small business owners across the country.

What was the gap between the life insurance coverage small business owners have and the amount they actually need?

The average small business would need an additional $1.4 million to cover the business’s financial needs after the owner’s life insurance paid out. This self-reported sum reflects an incredible shortfall that would be difficult to overcome.

The survey was able to calculate the value of the small business owner – can you explain that?

Yes, the survey found that losing the contribution of the small business owner would require the work of three full-time employees. It’s common knowledge that small business owners wear a number of hats, but the survey allowed us to quantify this by analyzing the value the owners reported providing to the business in terms of hours, responsibilities and direct impact on sales and revenue. The numbers made it clear just how overwhelming the loss of the owner would be and how important it is to have a plan in place to fill the potential gap in production their loss would create.

Why is it critically important to close this gap?

The survey found that the gap in life insurance coverage puts nearly 8 million* employees at risk of losing their jobs.

In addition, small business owners stressed that the continuation of their businesses is a top priority for both of their families. Firstly, the business needs to continue to provide a source of income for their immediate family. But the same holds true for their ‘second’ family of employees. In the survey, small business owners professed their dedication to leaving behind lasting jobs for their employees. The Gap puts both families at risk.

What is your advice for small business owners?

The lack of life insurance protection is at odds with the loyalty and commitment these owners have for their employees and their families. According to the survey, small business owners who actively work with a life insurance agent are less likely to have a gap in coverage – 31 percent have a gap in their insurance coverage, compared to 47 percent who have not worked with a financial professional.

My challenge to business owners is to recognize the potential risk of not having adequate protection and to seek advice from a financial professional who can help them protect their business to ensure it survives the unexpected.

Life insurance pays a death benefit, but are there any other benefits to life insurance that would benefit the small business owner while they are alive?

According to the survey small business owners purchased life insurance for their business for the following reasons:

• Provide sufficient operating capital for a period of time – 56%
• Fund the business until a successor can be found – 40%
• Help someone buy ownership in the business through a buy/sell agreement or similar arrangement – 14% And in fact, owners have put their life insurance policies to beneficial use in the following ways:

• 15% have borrowed against the value of the policy
• 18% have used the growth of the cash value in their life insurance policy to grow the cash reserve of their business
• 25% use it to demonstrate a strong balance sheet to creditors
• 21% use the policy to diversify assets to prepare for retirement

*There are approximately 1 million small businesses with 10-49 employees, employing 20 million workers; 38% of this total number of workers is 7.6 million. Source: U.S. Small Business Administration, Office of Advocacy, based on data provided by the U.S. Census Bureau, Statistics of U.S. Businesses.