Suppose you are the CEO of a business. You decide to acquire a new piece of equipment, something called a Holographic Processor (HP). Securing this machine provides great revenue opportunities for the business, but also comes with some unique management and maintenance responsibilities.
The HP has several custom-built and complex software programs that, once activated, cannot be turned off; and if the machine loses power, its useful life is ended. This requirement, to keep the unit on at all times, is offset by the fact that once they are energized, HP units tend to stay in production for a long time, typically 40 to 50 years, and they can be utilized in an almost endless list of profitable applications.
While highly sophisticated and multi-faceted in its performance capabilities, the HP is also notorious for its maintenance issues. Breakdowns are frequent, and repairs can take an HP out of production for extended periods. In fact, statistics show that over the course of its productive lifetime, the likelihood that an HP will be forced out of production for 90 days or longer due to mechanical breakdowns, defective parts, overuse, or accidents is 30 percent.
In spite of these logistical challenges, a productive HP can be a virtual money machine for your business. Most industry experts agree that, dollar for dollar, no other piece of equipment can improve a company’s balance sheet like an HP. As CEO, keeping the HP operational and productive is Job #1.
Insurance: The Practical Business Approach
Given their high long-term value in tandem with their characteristic fragility, a major management decision is how best to repair or replace the HP unit if/when something goes wrong.
Most business managers will attempt to address these challenges with insurance. Conceptually and financially, using insurance is a no-brainer; the risk of HP breakdown (and the subsequent financial fallout) is spread over many HP owners instead of forcing the company to cover all problems on its own.
There are three basic types of HP insurance:
Maintenance. This insurance covers the cost of repairs, and in some cases, preventative maintenance.
Loss of Revenue. If the machine is unable to produce for an extended period, this coverage pays HP owners a percentage of the revenue that was being earned from a particular customer. Typically this number will be 50-60 percent of the total revenue connected to the job.
Replacement. In the event of a total breakdown (where the unit loses power and shuts down permanently), this insurance provides funds for the purchase of a replacement unit.
Parallel Worlds of Business & Personal Finance
Of course, the situation above is an analogy. If you work your way through the example, you should find it riddled with parallels to your real-life financial world. You are the HP (which could stand for your Human Potential) – and the CEO. The “business” is your personal financial program. Most businesses, i.e., financial households, consist of one or two HPs. HP Maintenance insurance corresponds to health insurance, Loss of Revenue is disability income insurance (and three in ten workers will experience a disability of longer than 90 days*) and Replacement is life insurance.
In this business example, keeping the HP operational and profitable is absolutely vital to the company’s success. CEOs who neglect to spend either the time or money to adequately protect the company’s greatest resources may point to short-term savings, but most shareholders, management, and employees expect the company’s leader to make decisions based on what will provide long-term stability and profitability. In short, the expectation is that insurance and risk management are important issues worthy of serious evaluation.
In contrast, how many financial households take the same approach to insurance? If the consumer studies are accurate, there are very few. In general, Americans are under-insured. They don’t have enough life insurance, a disruption of income due to disability pushes many households to bankruptcy, and there is a large segment of the population without health insurance. Many people are simply not investing either the time or money to obtain the insurance they really want – and need. These are poor business decisions.
Be the CEO. Make Smart Business Decisions
Your ability to earn an income – and enjoy the benefits from it – is largely dependent on your well-being. Insurance is the most efficient financial format for addressing the maintenance, loss of revenue and replacement costs associated with keeping your greatest assets up and running.
*From http://www.protectyourincome.com/education-center/
disability-facts-and-statistics/statistics: Social Security Administration, Fact Sheet, January 31, 2007.
Elozor Preil is Managing Director at Wealth Advisory Group and Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). He can be reached at 212-261-1858.
By Elozor Preil
