Business Insurance – the needs and benefits

By Finbar Garcia LUTCF, FSS, MFA

Season’s greetings. Many persons start their small businesses with dreams and goals of becoming a larger and well-known household name to all their customers. Along the way as their dreams unfold and as the business expands, the need for Business Insurance arises.

These entrepreneurs in many instances secure loans or even used all their savings as start-up capital toward the business; some may even use their personal Life Insurance policy as security at the bank, inadvertently depriving their loved ones of the security the same life policy they depended on if death had occurred.

Over time and as the business grows, they would need larger and even a variety of insurance coverages, hence the reason for Business Insurance.

Business Insurance is divided into many categories:

Sole Proprietorship: This is the simplest business entity, with one person as the sole owner and operator. There may be no need to register but the business carries the same risk or even a greater one, as you are the owner, so you are personally responsible for all of the business liabilities.

Someone who wins a lawsuit against your business can take your personal assets (car, house, savings etc), in some situations, leaving your loved ones out on the streets.

Being one and the same, there is no separation, so it may even be difficult to secure loans from the commercial banks, or even raise additional capital. It is even harder to build business credit without a registered entity.

To cover yourself and limit your exposure, you would need to have multiple insurance policies to cover the different aspects of your operations. So, while you may start at this level, you may want to convert to a Limited Liability Company (LLC).

Partnership: These entities share many similarities with sole proprietorship. The key difference is that there are two or more owners who would actively manage the business and share in the profits or losses. The key to success is choosing the right partner, lowering the risk of starting and having multiple people share the struggles and successes in the early years.

Disputes can seriously limit a business’ growth and each partner is fully responsible for the actions of the others. Some of the major issues that face this type of business is the fact that when a partner dies, the business must stop.

This brings into play the share of the deceased partner: who gets his/her share?; how do you value the amount?; do you want the spouse of the deceased to have a say in the business? These are serious issues that need to be addressed.

Most partnerships would put agreements in force from inception to cater for this type of situation. This is known as a ‘Buy/Sell Agreement’ or ‘Cross Purchase Plan’.

However, funding this is where Life Insurance would take care of it. The policy on each owner’s life would buy out the share of the deceased, thereby breathing life back into the business to continue from when it stopped. In some cases, there may be extra coverage to allow the partnership to continue unhindered financially.

Limited Liability Company: This is a fully registered business, with a board of directors who would ultimately make all the business decisions to grow the company and make it profitable.

These companies do have key persons that would oversee the operations and growth. Having to depend on these persons, the company must be aware that if any key person should die or become critically ill, then the company would suffer some setback, which would affect their bottom line (profit).

The only way to buffer this dilemma is having a Keyman Insurance, Life and Critical Illness Policy. Upon the loss or critical illness happening to the key person, the company would need to hire someone else. This would increase the company’s expenses, as the new person may come in on higher benefits.

Some of the major costs that the company needs to cater for is increased wages, training, loss of production time and any other benefit that the new person negotiated.

What may even make this cost escalate, is if the key person became critically ill, as the company may have to pay two sets of wages until a decision is made. Any way you look at it, Keyman Insurance coverage is vital for companies to consider, as it is a legal company expense, and the company owns the policy.

A point to note, there are two types of policies that can be used to cover this loss: a Term Life policy, or Whole Life policy in the event of death, and a Critical Illness policy. Both life policies carry advantages and disadvantages. Business insurance also covers the need for Overdraft Facilities, Business Loans, Lines of Credit, and upgrade of plant and machinery.

There are other types of business insurance that we would speak about going forward as some are needed by law.

So, plan ahead, let us have a chat soon.

“Always pray to have eyes that see the best in people, a heart that forgives the worst, a mind that forgets the bad and a soul that never loses faith in God” —unknown.

Send questions to myfinancialadvisor2020@gmail.com or call 620-1185.