INSURANCE THAT PROTECTS YOUR BUSINESS
As a business owner, you constantly have a target on your back. Accidents could happen at any time that cost your business big time money. Is your business insurance up to the task? Your insurance coverage should protect you from the main target areas to which your business is exposed.
One of the main duties of the executive team is to protect the assets of the business. If protections are not in place to prevent theft, property damage, etc. then the executive team could be the target of a lawsuit from the shareholders. Even in the case of a small business, the owner needs to have safeguards in place to ensure the company’s assets are properly protected for the sake his or her family’s financial well-being.
Coverage For Property and LiabilityHere are some of the most common coverages that a business should have in place:
- General Liability Insurance – Broad insurance coverage for your business and activities
- Professional Liability Insurance (E&O) – Covers professionals for negligence and errors that result in injury to others
- Employment Practices Liability Insurance (EPLI) – Covers employment-related liability other than on-the-job injuries
- Directors and Officers Insurance (D&O) – Covers directors and officers of a company for negligent acts or omissions and for misleading statements that result in lawsuits against the company
- Commercial Property Insurance – Protect your business with insurance for your commercial property
- Commercial Buildings – Covers replacement costs of the building
- Flood Insurance – Covers damage from flooding that is excluded from normal commercial building insurance
- Business Personal Property – Covers fixtures, equipment, machinery, inventory and furniture at a specific location
- Business Income (Business Interruption Coverage) – Reimburses a business for lost profits and fixed expenses during the time that a business is closed.
- Electronic Data Processing Insurance (EDP) – Coverage designed to protect your computer related equipment
- Business Auto Insurance – Cover your business with insurance for commercial vehicles including use of personal vehicles in your business
- Commercial Umbrella Insurance – Insurance coverage that helps protect your business from the rising costs of lawsuits and protects your business assets above and beyond the limits of your other property policy limits
- Workers Compensation Insurance – Pays for medical care and rehabilitation of employees injured at work and helps replace lost wages while they are unable to work
- Bonds – Protect your assets with financial backups for promises made by others
Having these policies in place allow you to conduct business as usual even if an accident occurs and a claim is filed against your insurance policies. But if this all you are covering then you are forgetting about your most important assets – the people in your organization!
Coverage For Most Valuable Assets - Your People!
Think for a moment what would happen to your business if certain people simply were no longer able to show up for work. How would the business operate without the owner, the sales manager, your top technician, and other important people? Chances are that you would suffer a major disruption if these people became disabled, died, or even left for better employment prospects elsewhere.
Here are some insurance coverages that can help you continue doing business as usual even with a disruption involving your most important people:
Business-Owned Life Insurance
You might be wondering why a business would want to buy life insurance on its owner or employee(s). There are numerous ways life insurance can help a business stay in business in a time of tragedy. This policy is extremely valuable if the owner is the heart and soul of the business. The main benefit is the business maintains its value instead of becoming basically worthless due to the owner’s death.
1. Key Person Life Insurance – Business Owner
The #1 Key Employee of any small business is the business owner. Just think of what would happen to a business if the owner suddenly passed away. The value of the business would quickly be dramatically impaired and/or the business would probably fail altogether. This would be a tragedy considering the time, money, and energy spent on building the business!
Having the business purchase a life insurance policy on the owner provides the business with funds to hire an experienced manager to oversee the operations and serve existing customers. The business would be able to continue operations until the surviving family members can either sell the business for it full fair value or continue operating with competent, qualified staff.
In order for the insurance benefit to be a non-taxable payment, the business must meet two of the following criteria:
a) The employee/owner must have been employed at least 12 months preceding the death
b) Prior to issuance of the policy, the insured individual was notified in writing of the business’ intent to insure the individual’s life, and the individual provided a written consent to be insured
The tax-free death benefit will offset at least some portion of the loss of market value the business suffers. It’s possible that the tax-free benefit may be higher than the after-tax realizable value if the surviving family were to sell the business in a taxable transaction.
The key point is that the surviving family members are provided with time and cash resources so they can make the best decisions for their situation.
2. Key Person Life Insurance – Managerial Staff
Buying life insurance on non-owners who are key team members provides the business with a tax-free source of funds to hire replacement staff to keep the business operating at peak capacity.
3. Business Overhead Expense Policy
One scenario that many business owners do not often consider is what would happen to their business if the owner became disabled. How would debt payments, lease payments, payroll, and other obligations be paid? Lenders are more concerned about getting paid on time rather than about the well-being of the business owner. The likely end result would be that the business would fail and the lenders would sue the business owner for unpaid debts.
Here’s a cost-effective solution. The business can purchase a disability policy called a Business Overhead Expense policy. If the business owner can’t perform his or her normal functions due to health failure or accident the insurance company will pay the business a fixed amount that can be used to pay loan balances, lease/rent expenses, payroll, etc.
4. Buy/Sell Life Insurance – single owner
In an ideal situation, a family-owned business has multiple family members who could manage the business operations if the owner were to pass away. But this ideal situation is the exception rather than the norm. If there are no other family members who are interested in, or capable of, running the business in their absence then the best choice might be for the business owner to enter into a pre-arranged sale of the business to a third-party. In this scenario, the third party enters into a contract to buy the business at a specified price and purchases life insurance on the business owner for the sale amount. At the business owner’s death the third party receives ownership of the business and the surviving family receives a cash payment according to contract. This is a very efficient way of transferring a business and avoids the complications of trying to sell a business at an impaired value at a very stressful time.
5. Buy/Sell Life Insurance – multiple owners
In a business with multiple partners or shareholders, there is no need to involve any third parties to purchase the shares of the business owner upon his or her death. The remaining business owners can enter into a pre-arranged buyout of the deceased owner’s shares using a life insurance death benefit to provide the necessary cash.
This arrangement has a number of benefits including keeping the ownership in the hands of people most familiar with the business, providing needed cash to the surviving family of the deceased business owner, and avoiding the prospect of having the deceased owner’s surviving family members becoming involved in the business.
Business Succession Plan
The real key to making the buy/sell arrangements work as described above is to actually put a formal plan in place. Care should be taken NOW to make sure that a ready buyer is placed in a position to purchase the business at the owner’s death. Without a formal contract in place and life insurance to provide the funding, the desire to sell the business for a fair value is no more than a hope and a prayer.
To make the contract fair for both parties (and to make sure IRS guidelines are met) an experienced attorney who is familiar with business succession plans should be involved. A third-party business valuation specialist may or may not be needed but is highly recommended.
We work with experienced attorneys who can draft this plan for you efficiently at a reasonable cost. We also work with experienced business valuation experts who can provide an independent estimate for the worth of the business that each party can agree on.
We Can Help You Get The Right Coverage
Whether your business is large or small, we can help you find the right insurance coverage for your unique needs. Larson Wealth Management is licensed as an insurance agency and our advisors are experienced business advisors. We also work with experienced business insurance brokers who can produce quotes from a variety of insurance companies to find the best rates and coverage options for your company.
ARE YOU READY TO WORK ON YOUR ASSET PROTECTION PLAN?
Getting started is easy. The first step is to let us know how we can help you. Just fill out the simple contact form below and we will be in touch with you right away – or just call us at 480-699-5540.