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How do I find a broker or advisor I can depend on?
Consider getting referrals from people you trust. Also, look for advisors who have industry designations beyond a license to sell insurance. For example, CLU, ChFC and other recognized professional insurance or planning designations may be helpful barometers of professionalism.
Your agent or broker that handles your other types of insurance (life, homeowners, disability, etc.) may be a candidate.
There may be an industry association for your business that has special insurance programs for your business or can refer you to agents or companies that are experienced with businesses such as yours.
Do I need to consider an estate tax plan?
The estate tax law has been revised in recent years to raise the portion of estates exempt from the tax ($675,000 in 2001 raised to $1.5 million in 2004) so that the number of estates subject to the tax has dropped (to 2.3% in 2001) and the value of the average estate that was taxed was about $2.7 million in 2001. Some proposed legislation calls for the eventual elimination of the tax over the next decade. Business owners and farmers (who may be cash poor, but rich in property or land) are among the groups that sometimes unexpectedly leave estate tax bills for their heirs. A thorough review of your insurance and financial plans should include a consideration of possible estate taxes with a knowledgeable advisor.
For those with estate tax problems, life insurance is usually the suggested funding vehicle to provide cash to pay for settling taxes and related expenses.
As a business owner, What should my personal insurance plan consist of?
Many successful business owners have substantial personal assets in addition to the business. A complete review of both personal and business finances should be made periodically with regard to business plans, personal investments, business and personal insurance and eventual business succession or termination plans and eventual personal retirement goals. Any personal legal documents such as wills or trusts should also be reviewed and updated.
Should I have key person insurance?
Apart from the business owners, the loss of a key employee (someone with expertise in production, sales or other key areas crucial to your success) may need to be insured against death or disability in case you need to replace these capabilities by finding someone else to replace these skill or provide funds that can help compensate for the loss.
How does the business owner set up these various business agreements?
These plans require experience with complex business, tax and legal issues. Anyone contemplating the establishment of such plans should consult the appropriate advisors.
What are some uses of life insurance in compensation planning?
Non-qualified deferred compensation plans: These pay future payments to certain selected employees for work performed now. The idea is to attract and retain employees considered important to the business's success. These are typically funded with life insurance. The payments would typically begin following the employee's retirement and would be taxable to the recipient at that time.
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How can buy/sell agreements and insurance help with the transition to retirement?
Cash value life insurance can be used to fund a buy/sell agreement to be carried out at the time of retirement of an owner.
What is a professional service agreement?
Professional groups (doctors, lawyers, engineers, etc.) often use an income continuation agreement that gives the heirs of the deceased a share of the earnings or a specified sum for a stipulated time period. This can be used together with a buy sell agreement for the assets. Life insurance can be used to fund both agreements.
Although you have become a successful business person with all the advantages (and responsibilities that entails) there are potential problems that you need to consider. In particular, what would happen if you became disabled or died? Or what if something happened to one of your key employees or business partners? Could your business continue? Would there be funds to pay for continuing expenses? Would the business be badly damaged perhaps to the point where forced sales of assets might be required? Would money be available to pay estate and other taxes that might become payable?
Now that I have a successful business, How do I protect my assets for myself and my family?
You know how hard you had to work to achieve business success. You should consider also what plans you have for your own financial future (retirement, etc.) and for the future of your family members. Besides preparing updated business insurance and other business plans you should review, with qualified professionals, your personal assets, investments and insurance. This should include reviewing and updating your personal insurance and investment strategies, will, and estate plans.
What basics do I need to know about disability insurance?
The key facts about a disability policy include the amount the policy will pay and the length of time the payments will continue as well as what constitutes a disability under the terms of the policy. For example, if you cannot work at your normal occupation but can do some other type of work are you considered disabled?
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What about disability insurance?
Because the risk of disability is higher than the risk of death at many ages it is important to consider how a severe disability would affect your business. Disability insurance proceeds can be used in such situations to hire someone to replace a disabled employee or manager or to fund disability buyout agreements.
What about key person disability?
Just as with the death of a key employee, there are potentially severe consequences of such a person becoming permanently disabled. The business could purchase and be the beneficiary of a disability income policy to help offset the extra expense of replacing the disabled employee and paying continuing compensation during the disability period.
Several possible techniques are available. Four common methods that are often used:
1. Apply a multiple of the key employee's salary
2. Capitalize (at some discount rate) the company's earnings traceable to the that employee
3.Estimate the reduction in the going concern value of the firm due to the loss of that employee
4. Base the estimate on judgements including such things as how much insurance the insurance company is willing to issue on the key employee.
What about key person life insurance?
If a key person dies the company is likely to experience a loss of income and/or an increase in expenses. The company could purchase a term policy on the employee to provide compensating cash in the event of the key employee's death. Since the dollar value of the employee's work for the company diminishes as retirement approaches a decreasing term policy could be used.
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What happens when a business owner dies unexpectedly?
The business interests will pass to the designated person as specified in the will (or intestate laws) and have to be reorganized or liquidated. Everyone has probably observed situations where the owner of a small thriving business dies and the business then struggles to continue or is forced to close. The best way to avoid such a situation is to plan ahead and prepare the appropriate legal documents and funding mechanisms to assure that you wishes are carried out.
What are the basic facts about why life insurance may be used by business owners?
For sole proprietorships, partnerships and closely held corporations the death of a general partner can result in dissolution of the firm. If this occurs, the surviving partners and the estate of the deceased may need to reach agreement about the disposition of the business.
This can result in forced sale, liquidation of assets, and depletion of value. Buying out the interests of the deceased partner and continuing the business may not be easy to arrange at such a time and the financing may not be available.
The solution is to have a previously arranged buy and sell agreement.
What basics do I need to understand about life insurance?
The basic types of life insurance policies are term insurance policies and cash value policies, also known as permanent insurance. Term insurance is for a limited time and tends to have lower premiums. Term policies can be renewable or non-renewable. Shorter terms (1 year or 5 years) tend to have lower premiums than those policies with longer terms (10 years or 25 years). As with your personal life insurance, term policies are often used to cover a loan or mortgage. Cash value plans are often used for business agreements where the death of the insured person would trigger a need for cash and where the need is likely to be ongoing during the life of the insured person. The cash value of the policy can also be borrowed against for business needs at the loan rate specified in the policy.
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How would a life insurance or disability policy be used in business?
There are many uses, but two of the most common are to assure continuation of the business in the event of death or disability of an owner or key individual. This is done by having the appropriate legal documents executed that will pass ownership to designated individuals in the event of incapacity or death of a person who is key to the ownership or success of the enterprise.
Why buy a business owner's policy (bop)?
Low premiums and a minimum of hassle, since the coverages are prepackaged. But the lack of flexibility may be a problem for business owners who want different options or higher maximum coverage.
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Who is eligible for a business owner's policy (bop)?
Small businesses with up to 100 employees and revenues of up to a about $1 million are candidates for a BOP. Some types of businesses, such as restaurants, may be ineligible for BOPs. If so, they should look at the individual coverages they need and purchase them separately. Of course, underwriting standards will vary from company to company. Therefore, the buyer should check with several companies to find out what is available.
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What is business owner's policy (bop)?
A business owner's policy (BOP) has been compared to a homeowner's policy for business. BOPs were first developed in the 1970s and have become a very popular form of insurance for small to medium sized businesses. BOPs combine some of the basic coverages needed by a typical small business into a standard package at a premium that is generally less than would be required to purchase these coverages separately. Business owners also like the simplified nature of the package as opposed to buying a collection of small policies. The efficiency also appeals to insurance companies and allows them to offer a lower premium for the package.
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What do I need to know about unemployment insurance and social security?
The person or vendor who provides your payroll services will make the proper payments to the state and federal unemployement organizations as part of the payroll services function.
What about workers compensation?
Most businesses with employees will need to purchase worker's compensation coverage. While details vary from state to state, there are generally requirements mandated by state law and the coverage is purchased through an insurance broker.
What are business interruption risks?
Suppose you are trying to meet an important deadline for a key customer when a disastrous, unforeseen event takes place putting your ability to complete the job in jeopardy. An example would be when the indispensable person who heads up the project becomes ill or is hospitalized.
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Since few business owners are likely to have competence in entrepreneurial skills as well as the wide variety of specialized disciplines required, it is almost inevitable that some resort to advisors will be required unless the company has grown to the point of having many employees and departments staffed by the professional specialists that handle these many areas.
Are business insurance issues extremely complicated?
Planning for business owners generally impinges as well on personal financial issues. For most business owners, the business constitutes a significant part of the owner's personal assets. Furthermore, personal financial problems can jeopardize the healthy continuance of the business through creating difficulties in raising capital, getting loans, etc. The analysis and planning issues often involve concepts that relate to business organization, laws, taxes, compensation for the owners and employees and insurance planning.
How do you set a value on the business for purposes of a buy-sell agreement or other reasons?
Since execution of a buy sell agreement or other possible transactions require an estimation of the value of the business. It is essential that a valid method for determining an accurate value be available. The agreement may have been draw up long before the time that the value needs to be determined. An accurate method that can be used when needed is essential. The calculation techniques aim at determining the "fair market value" of the business. The two primary techniques focus on the earning power or the assets of the business. Adjustments and judgements can also come into play as well as IRS advisory rulings relating to the valuation techniques.
How does a business owner create a plan to dispose of the business during the owner's lifetime?
Many business owners have no intention of disposing of their business as long as they are alive. But some others become ill, or wish to retire, or decide for some other reason that they wish to withdraw their assets through some sort of disposition of the business. Several disposition methods are possible including outright sale, installment sale, exchange of stock or assets, liquidation. These could have complicated business and tax consequences that need careful analysis with the appropriate professional advisors.
How do you create a plan for stock redemptions?
A shareholder may wish to receive cash for his or her stock in a closely held corporation in order to retire or for other reasons. Also, an extended period of disability could trigger an agreement to redeem the stock of the affected stockholder. Plans for contingencies such as this can be established with funding coming from disability insurance or life insurance policies.
What about buy-sell agreements for corporations?
The death of a shareholder of a closely held corporation does not terminate the corporate, but it may have serious consequences concerning the continuation of the business, the disposition of the deceased shareholder's stock (including the possibility of unwanted heirs or outsiders acquiring the stock and becoming involved in the business).
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What about buy-sell agreements for unincorporated businesses?
A properly prepared buy-sell agreement will require the estate of the deceased owner to sell the business and the purchaser to buy it for a prearranged price. This guarantees a market for the business, liquidity for taxes and administrative costs and improves the probability of the business being able to continue and carry on normal functions such as borrowing money.
What about business continuation in a closely held business?
The basic problem is that the business may have to be liquidated shortly after the owner's death if there is no plan for business continuation. The problems are somewhat different for incorporated or unincorporated businesses, but both are likely to need a buy-sell agreement. Life insurance is commonly used as a way to fund such agreements.
What is a buy and sell agreement? Should I have one?
A business can be crippled by the death of a partner, because the partnership is effectively ended by the death and needs to be reconstituted with the remaining partners and any new participants. But the interests of the deceased partner need to be bought out, just at a time when the business may be badly damaged by the loss of a critical member of the team and funds may not be available to pay for the deceased's ownership interests.
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Do I need fringe benefits for my employees?
It depends on your situation. If your business is new you may want to wait until you have been in business a while and have achieved a degree of success. Once you have achieved that you may need to consider providing some benefits in order to attract and retain excellent workers. The size and composition of your work force will probably be a factor to consider. If you have mostly part time or workers or workers who have other coverage (such as through a spouse), it might not be as important to provide benefits. They might consider the pay or vacation to be more important.
Do I need liability insurance?
Basic liability coverages such as provided in business owners' policies may be adequate in many cases, But if you are in a business or profession where there is an especially high risk of lawsuits (some branches of medicine for example) you may need extra protection.
Do I need directors and officers (dno) coverage?
Despite some highly publicized cases of accusations of misdeeds against officers and directors of major companies, for many small businesses it may not be necessary to have Directors and Officers DNO coverage. Each business needs to assess the need for DNO in its particular situation.
What about crime, Employee theft, And related risks for a business?
Some industries have an especially high risk of losses to various types of crime. These can include such acts as burglary, armed robbery and theft by customers or employees. It is reported that some retail organizations employ under cover shoppers to check on the practices of employees as one of the tools to try to try to minimize employee theft. Many stores also employ a variety of security personnel, alarms, tags and other devices intended to thwart theft.
Many forms of business insurance (other than property coverage, life insurance or disability insurance) fall under the general category of Casualty Insurance. This includes such risks as workers' compensation, automobile coverage (for business vehicles) and liability coverages. Since there are various types of potential liability for a business (involving actions of employees, product defects, etc.), it is important to consider all the liability exposures and make sure that you have adequate insurance against any that may be significant for your business. Your insurance advisor or insurance company should be able to advise you whether individual liability policies or a package of liability coverages will be needed.
What are property related risks?
Property damage includes a number of direct risks as well as some indirect ones. Direct damage would include fire or flooding damage to the building where you do business while indirect damage would include being out of business temporarily because of damage caused by a fire or flood. Whether you lease or rent or own the building where you conduct your business, you will probably need some type of property insurance.
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Does it help to have been a long term customer with the same company?
You have had your personal coverage with the same company for many years. Will it help you to get a better price on your business insurance? Usually, it will only be a "tie breaker." When you are comparing prices you may get a slight break on price if everything else is about even. But don't expect a lot of points for loyalty to your insurer.
What is the best buy for many small businesses?
A business owner's policy (BOP) is the best choice for many small to medium size businesses if they can qualify and if the limitations and types of coverages fit their needs. Some specific additional policies may be purchased to supplement the BOP coverages if needed.
What can dramatically add to the cost of my business insurance?
Some types of businesses including restaurants (except fast food), financial companies, some types of medical offices and others may be considered high risk for some types of insurance and so may have higher than average cost for those types of insurance. Also, they may not be eligible for lower cost packages of business insurance.
A history of large or frequent claims can also increase the cost.
What factors will control the cost of business insurance?
Many factors influence the cost of business insurance, but some important ones include the type of business, the location, the size (both physically and in terms of volume of business). Competition for the business is also a factor. If there are many companies wishing to provide insurance for your type of business, you will be in a better position to shop around for a good price.
What are some examples of risks that may not require you to buy insurance?
Buying insurance is one way to deal with risk. However, some risks can be countered with measures such as:
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ch risks need to be insured against?
Once you have analyzed the risks, you need to consider the cost of the various coverages and what your most significant exposures to risk are. Then you should consider your available insurance budget and decide which risks you should insure against.
Are there some risks that cannot be insured against?
Yes. For example, you cannot insure against many business eventualities such as loss of business to competitors or rising prices of supplies.
Why consider buying insurance for business risks?
As with other potentially risky aspects of life, insurance can help by taking risks faced by many policy owners and pooling them so as to compensate the ones who sustain substantial losses. Pooling of risks works because what is unpredictable for an individual business is much more predictable for a large group of businesses. If your building burns down or is burglarized, the money the insurance company collects from its policy holders plus what it earns from its investments is used to offset your losses. People who do not suffer losses but have paid their premiums have the assurance that if they suffer insured losses the company will do the same for them.
How are rates determined for business property and casualty coverages?
The insurance company has to pay for the cost of the coverages provided to the insured businesses. The predictability of these costs will vary based on the type of coverage. Some losses are immediately apparent (e.g. fires) while others take years to become final (e.g. court judgments for liability coverages). Various expenses, such as getting customers and administrative costs of running the business must also be paid. Investment returns on premium dollars not yet spent add to the available funds to pay these expenses. Insurance companies judge all these and other factors including competitive forces, the legal environment, the investment returns likely to be earned for some years in the future. Then they set rates that make for a profitable operation, subject to regulation by the insurance departments.
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How does insurance relate to business risks?
Property and casualty insurance provides a tool for reducing the individual business's risk by spreading the risks faced by many businesses. Many business owners contribute their premiums to the insurance company that provides the policy, but not all of the insured businesses experience losses so the insurance company is able to use some of the premium dollars to compensate those who actually sustain losses. In effect, the relatively small amount of money contributed by the many companies that are insured is used to reduce the losses suffered by the companies that actually have losses.
The cost is dependent on the specifics of your business situation. You can probably reduce the cost by shopping around. There are many companies providing business coverages and competing for your business.
Many small to medium size businesses may be able to save money by considering packaged coverage instead of purchasing a lot of individual policies for the different risks.
What kinds of insurance does my new business need?
The risk assessment process is the basis for determining what insurance you need. Many insurance companies provide a wide variety of business property and casualty coverages. These can be underwritten individually and tailored to your specific business.
What should I do about computer and data risks? Do I require insurance?
In today's business world, your computer data constitutes a key asset - perhaps more valuable than many of your tangible items such as buildings or vehicles. So safeguarding data and data processing assets are crucial success factors.
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The term "Business Insurance" refers to a wide variety of insurance coverages that can reduce or mitigate or compensate for exposure to risk for the business or its employees. It also includes coverages mandated by law such as unemployment insurance, workers' compensation social security, and (in some states) state disability.
What is a closely held corporation?
A closely held corporation has a small number of shareholders, no public market for the corporate stock and the ownership and management overlap. Many small closely held corporations are functionally not greatly different from small unincorporated businesses in such matters as how they operate, make decisions and raise capital. Despite the difference in liability exposure, some lenders have been known to require managements of small corporations to pledge personal assets to secure business loans.
How does the structure of the organization relate to the businesss risk?
The type of organization can have a bearing on the degree to which you are personally liable for obligations of the business.
Unincorporated Businesses:
Unincorporated businesses are by far the most common type of business.
The three basic forms of unincorporated business enterprises are
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How often should I review my risk analysis?
A review should be done periodically. Once a year might be appropriate for many businesses. Many insurance premiums come due or up for reevaluation annually. That would be a good time to consider any changes in your risk analysis. You should also consider a review whenever you business:
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What are some key risk management techniques?
1. Find ways to avoid risks such as eliminating potentially hazardous products or procedures
2. Reduce the frequency or severity of risks that cannot be eliminated
3. Transfer the risk to an insurance company (or perhaps to another party by means of legal agreements that your business will be "held harmless").
What types of risks need to be considered?
The size of the company, type of industry, type of organizational structure, capitalization, geographical area, management team, degree of experience and expertise in the targeted business, capitalization, competitive environment and many other factors can have a bearing on the risk environment for the company. The business owners should address such issues in their business and strategic analyses of the company's situation. A few of the potential operational risks are as follows:
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Risk analysis is a process by which you consider all possible risks and determine which are the most significant for your particular business. It may make sense to mitigate some risks by purchasing insurance. Other risks can be eliminated without purchasing insurance. After considering how likely various losses are to occur, how expensive they are to mitigate and how much money you have to spend, you decide the optimum strategy for dealing with the various risks.
Why does a business owner need to consider risks?
Running a business is inherently risky. Many factors outside the control of the business owner can influence the success or failure of the enterprise and a high percentage of new businesses fail within a few months of inception. Even large and successful businesses can succumb to changing conditions. Consider what has happened to some of the largest companies in industries such as automobiles, telecommunications, computers, and railroads. To improve the probability of success, the management of a business should think about potential risks and how to offset them.
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How do I find a broker or advisor I can depend on?
Consider getting referrals from people you trust. Also, look for advisors who have industry designations beyond a license to sell insurance. For example, CLU, ChFC and other recognized professional insurance or planning designations may be helpful barometers of professionalism.
Your agent or broker that handles your other types of insurance (life, homeowners, disability, etc.) may be a candidate.
There may be an industry association for your business that has special insurance programs for your business or can refer you to agents or companies that are experienced with businesses such as yours.
Do I need to consider an estate tax plan?
The estate tax law has been revised in recent years to raise the portion of estates exempt from the tax ($675,000 in 2001 raised to $1.5 million in 2004) so that the number of estates subject to the tax has dropped (to 2.3% in 2001) and the value of the average estate that was taxed was about $2.7 million in 2001. Some proposed legislation calls for the eventual elimination of the tax over the next decade. Business owners and farmers (who may be cash poor, but rich in property or land) are among the groups that sometimes unexpectedly leave estate tax bills for their heirs. A thorough review of your insurance and financial plans should include a consideration of possible estate taxes with a knowledgeable advisor.
For those with estate tax problems, life insurance is usually the suggested funding vehicle to provide cash to pay for settling taxes and related expenses.