- Six Types of Insurance You'll Need for Your Small Business
- What Happens if You, Your Partner, or A Shareholder Dies or Become Disabled? Now May Be A Good Time To Consider: "Insurance for Buy-Sell Agreements"!
Six Types of Insurance You'll Need for Your Small BusinessVery few things in life are riskier than starting your own business. With so much to think about, it can be reassuring to know that some aspects of your business are covered by insurance. Small business owners have to deal with many different insurance needs, ranging from health to property to liability.
- Property insurance. This is probably the most important type of insurance for protecting the financial wellbeing of your company. Property insurance should cover your assets, including money, inventory, equipment (including both office supplies and machinery) and even intangible property like the trademarks you own.
- Liability insurance. This type of insurance is also known as commercial general liability (or CGL). Liability insurance protects you in the event that you are sued. It covers four different events that your business could be held responsible for: bodily harm (to individuals other than your own employees, who are covered by worker’s compensation), slander / libel, damage to someone else’s property and making misleading public statements or false advertising.
- Auto insurance. If your company uses a company vehicle (and most businesses today do), you’ll need to have it insured. This will protect you in the event that your vehicle is damaged, stolen, or most importantly, involved in an accident in which your company is found to be at fault. If you use the same car for business and personal use, make sure that your insurance company knows this.
- Worker’s compensation insurance. This insurance is mandated by law. It protects your employees (and their dependents) by giving them financial and medical benefits in the event they are injured or killed on the job. It is not the same as health insurance.
- Health insurance. Employers are generally not required by law to provide their employees with health insurance, but many choose to do so because it’s a benefit their employees want. It’s up to the business owner to decide whether to get group coverage or individual coverage.
- Natural disaster insurance. This only applies if your business is located in an area that’s particularly susceptible to catastrophic weather events, such as hurricanes and floods.
What Happens if You, Your Partner, or A Shareholder Dies or Become Disabled? Now May Be A Good Time To Consider: "Insurance for Buy-Sell Agreements"!Own a business? Have a will for your business? Sole proprietorships, partnerships and small closed corporations all need to consider what happens if the owner or one of the partners or shareholders dies or becomes disabled. Who will purchase the company or the deceased partner’s or shareholder’s interest? What is a fair price? When will the sale be made? Will the deceased owner’s/partner’s/shareholder’s families be given a fair shake and taken care of? These are real questions every small business should deal with before the event occurs.
- You can wait and see – “I’ll worry about that if and when it happens.” A sole proprietor can say, “I’ll be dead, so no reason for me to worry about it.” Sure! If it is a partnership, the partnership dissolves automatically and, “My partner will do the right thing.” Is that what you want? You can use your personal funds to buy-out your partner’s stock. But what if it comes at a bad time? Your personal stock portfolio is down, you’ve got two children in college, and you’ve had to take less income form the business lately because business has been in a slump. Maybe, after a lengthy probate the corporation can buy the stock and place it into treasury stock, if funds are available. But where does this leave the family of the deceased? Would you leave it up to your partners to do the right thing for your family no matter what the personal cost would be to the partner?
- You can borrow funds – obviously, borrowing funds is not an option to a dead sole proprietor. Could a key employee put together the money to purchase the company? Can the surviving partner(s) borrow enough to purchase the assets of the deceased partner? Maybe they can take out a second mortgage on the house? Maybe the lost one is the one depended upon by bankers and suppliers. Maybe the repayment and interest is simply too burdensome.
- You can set-up a savings account within the company in anticipation of an event like this happening but, again, if you are a corporation there may be accumulated earnings tax problems and if you are not a corporation, it may be difficult to maintain a savings account or the death may occur prematurely before enough funds are available.
- You can buy life insurance.
- an agreement is prepared which sets forth the employee’s obligation to buy, the price the employee(s) will pay for the business and the method of payment
- the employee takes out a life insurance policy on the owner. The employee is the owner of the policy, the person who pays the premiums and the beneficiary.
- Cross-Purchase Plan – in this plan each partner buys a life insurance policy on each of the other partners. The partnership itself is not a participant in the agreement. Each partner owns, pays the premium payments and is the beneficiary of the insurance policies on the other partners in an amount equal to his share of the purchase price set forth in the buy-sell agreement. The proceeds are used to purchase the partner’s business interest from the heir’s of the deceased.
- Entity Plan – in this plan partners enter into an agreement with the partnership who owns, pays the premium payments and is the beneficiary of the policies. When a partner dies, his/her interest is purchased from his/her estate by the partnership at the buy-sell agreement price and the interest is then divided among the surviving partners in proportion to their own interest.
- Cross-purchase plan – each stockholder owns, pays for and is the beneficiary of life insurance on the other stockholders in amounts equivalent to his or her share of the purchase price. The corporation is not a party to the agreement. The surviving stockholders purchase the interest of the deceased stockholder as individuals from the estate of the deceased stockholder. This plan is like the cross-purchase plan described in the partnership section above. Obviously, the more shareholders the more difficult this plan becomes.
- Stock redemption plan – the corporation, rather than the stockholders, purchases the insurance policy, pays the insurance premiums and is the beneficiary on the lives of each shareholder. The amount of insurance on each stockholder is equal to the proportionate share of the purchase price. Upon the death of one of the stockholders, the death benefits are paid to the corporation who then buys the deceased’s stock from the deceased’s estate. Premiums are not taxed deductible but the proceeds are received income tax free.
* * *EDITOR’S NOTE: This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. For information about specific insurance needs or situations, contract your insurance agent. Our articles are intended to assist in educating you about insurance generally and not to provide personal service. They may not take into account your personal characteristics such as budget, assets, risk tolerance, family situation or activities which may affect the type of insurance that would be right for you. In addition, state insurance laws and insurance underwriting rules may affect available coverage and its costs. If you need more information or would like personal advice please consult insurance professional, Downer of Lawe Insurance Brokers Limited, located at Suite 104, 28-28 Barbados Avenue, Kingston 5. Phone: (876) 968-6317; Mobile: (876) 410-6929; eMail: firstname.lastname@example.org.