CorePower Yoga founder’s death highlights need for key person insurance

February 28, 2017

It was a shock to anyone who knew him and might have been even to those who didn’t.

Trevor Tice, the founder of Denver-based CorePower Yoga, had been found dead in his San Diego home, which was in the midst of a remodeling project.

Tice was just 48. At first, there was speculation his death might have been a homicide. As it turned out, it was accidental, the result of a fall.

A native of Telluride, Tice founded CorePower in 2002. Tice stepped down as CEO in 2014 but had remained on CorePower’s board.

Why are we writing about all of this, on an insurance brokerage blog?

Well, if you’re a business owner or investor, Tice’s untimely death raises an unpleasant yet necessary question: are your partners or principals covered by key-person insurance?

We don’t know if Tice was covered by such a policy. But losing a key executive, particularly a founder, can be traumatic for companies. Their talent is usually hard to come by, and their roles are often more than just symbolic – in many cases these executives are the face of a company. Tice certainly was a well-known corporate figure in Denver and beyond.

Regardless, the death of a key person can easily interrupt production or otherwise throw a wrench into whatever is going on at the time.

In a survey by the National Association of Insurance Commissioners, 71 percent of small-business owners indicated they were “very dependent” on one or two key staff members. Meanwhile, only 22 percent of respondents reported having a key-person life insurance policy in place.

Key-person insurance, which isn’t much different than a term life insurance policy, is important for three big reasons:

• The insurance proceeds help the business survive and pay its bills until it can hire and train a replacement.
• It gives you the means to buy out a partner’s portion of the business if they are unable to work due to death or disability.
• Lenders, including the U.S. Small Business Administration, may require borrowers to carry key-person insurance to qualify for SBA financing.

We know the idea of buying life insurance on your business partners or founders sounds odd. But in the high-tech world, it’s not uncommon for venture capitalists to require that the founder of a startup take out a key-person policy. The rationale is fairly obvious: if that key person suddenly died, the business could easily collapse, taking with it the investors’ money.

So, what happens when the insured executive passes on, for natural or any other reason?

Well, the firm receives a lump-sum death benefit. The money can help offset the costs of recruiting and training a replacement, to pay off debt and other expenses and, perhaps most critically, to help replace lost revenues.

Figuring out how much coverage is needed can be tricky. Most life insurance companies will approve up to five to 10 times the key employees’ annual salary including bonuses.

What else should you keep in mind?

• The thinner your company’s top-management ranks, the more you need key-person protection.
• You’ll need more coverage than you imagine, so buy as much as your company can afford. Why? Well, if a surviving spouse wants to sell off the late founder’s stake in the company, your proceeds could be eaten up rather quickly, leaving you with little for working capital.
• Don’t forget to regularly re-evaluate coverage levels. If yours is a growing business, the value of your key person keeps changing, so annual rechecks on coverage just make sense.

Regrouping and getting back on track after losing a founder or even a key salesperson is never easy. But key-person coverage can help ease the financial pain.

Mike Rosser leads the Private Client practice at CCIG. Let him know if you have questions or concerns. Reach him at MikeR@thinkccig.com or 720-212-2068.

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