One of the first things any business owner needs to consider is how to protect against events that may threaten the future of their business, like the death or disability of a proprietor, partner, or key employee.
Owning your own business can be one of the most satisfying experiences of your life. You can follow your own dream, earn a good living, provide employment opportunities for others, and maybe even make a difference in the world. But owning a small business also entails a lot of responsibilities – to your business, your employees and your family. As a small-business owner, you’re responsible for two families: the one you have at home, and the one you have through work. No matter what your business is, a well-conceived insurance program is essential. If you die or become disabled, insurance can help protect your family and your business.
To have a better understanding of how well you’ve planned for these responsibilities, ask yourself these questions:
How can I help ensure that my business will be able to get by unforeseen financial hardships?
What will happen to my business when I retire?
What will happen if certain key employees die or become permanently disabled?
When was the last time I had a professional insurance advisor review my portfolio?
What will happen to my business if I become disabled?
What will happen to my business and family if I die?
While you’ve probably thought about these questions in the past, you may not have adequately addressed all of them. One of the first things any business owner needs to consider is how to protect against events that may threaten the future of their business, like the death or disability of a proprietor, partner, or key employee.
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Let’s start with the worst-case scenario- the death of one of the business owners. What will happen to your business if you die? Many small-business owners take out loans to help grow their businesses, and often secure these loans with personal assets. If you have business loans and were to die before they were paid off, you might think your family could sell or liquidate the business to cover the debts and provide financial security for them. In reality, this doesn’t happen too often. When the family is in a position to have to sell the business quickly, they may have to sell at a discount or during market conditions that make the business less attractive. In other cases, the business may be worth very little without the proprietor or partner. Individual Life Insurance can protect your family by providing funds to cover debts, ongoing living expenses and future plans, in the event you passed away.
Disability insurance replaces a portion of your income if you were to become sick or injured and unable to work. It’s an important type of insurance coverage that is often overlooked, as few people stop to consider what would happen to their business and their personal income if they were unable to work. In addition, business owners should consider Business Overhead Insurance, which reimburses a business for overhead expenses in the event a business owner becomes totally disabled. A policy typically pays benefits for a period amount of time to help cover expenses like salaries, taxes, employee benefits, rent, mortgage, utilities, equipment, malpractice premiums, etc. That could mean the difference between a business surviving or closing its doors.
Life insurance also can be structured to fund a buy-sell agreement. This is a contract among owners to buy a deceased owner’s share of the business at a previously agreed upon price in the event of death, disability or retirement. Why are these agreements so important? You might think that if you die, your family could maintain their income by running the business themselves or by hiring someone to handle the day-to-day management. The fact is, your loved ones may not have the skills or the desire for the job, and your co-owners may not welcome the idea of an unintended partner. With a properly structured and funded buy-sell agreement, your business partners won’t have to scramble to come up with the money to buy out your share of the business, and you’ll be guaranteed that your survivors will be compensated fairly and promptly. Buy-sell agreements are typically funded by life insurance policies purchased on the lives of each of the business owners. The amount is usually specified in a contract created with the help of an attorney. You can enter into a buy-sell agreement at any time, but it often makes sense to do so when a business is formed or when new owners are brought into the business. Because business values can fluctuate, it’s important to review the contract with your accountant at least once per year or to include a calculation method in the agreement. Also, it is important to be sure the insurance coverage funding the agreement is up to date.
Key Person Insurance
Key person insurance is another essential component of a smart business continuation plan. Key person insurance is life or disability insurance purchased by the business on such an employee and payable to the business. When a key person dies or becomes disabled, insurance can help make up for lost sales or earnings or cover the cost of finding or training a replacement. As your business grows and your needs change, your insurance policies you have in place may need to be updated to reflect new circumstances. For example, the people who played a major role in your business when you first started and put these plans in place (from business partners to key employees) may not be the same people that you rely on today for continued success. In addition, there may be other elite insurance carriers that may offer the same plan(s) you already have for a reduced cost.