Insurance options protect businesses from the unexpected

It can take years to build a small business. Don’t put it at risk by ignoring insurance needs.

By Michael Low, CMA

Many businesses and their owners have inadequate insurance coverage. This can jeopardize the future of the business, reduce the inheritance left behind and even affect the financial security of business partners. On the other hand, a comprehensive insurance strategy can safeguard a business, income, family, employees and associates. In addition to life coverage, small business owners should consider disability and critical illness insurance. All of these plans can help replace lost income and provide funds to steer a business through difficult times.

When tragedy strikes

Insurance can help ensure loved ones are financially secure in the event of death or serious illness. Small business owners are often the key source of family income — a death or disability have the potential for financial disaster. The business may even die with the owner, dealing the family a double blow.

Even if the business can continue, it may be worth little to a family that has no intention of keeping it going. Many enterprises, such as consulting firms, have few or no assets to sell, so a family can’t always count on business property as a source of funds.

For business partners, it may be a good idea to have a buy-sell agreement that specifies that one partner is obligated to purchase the other partner’s interest in the event of death or a serious medical condition.

The proceeds of a life insurance policy, for example, can be used to buy the partner’s interest from his or her estate. This will allow a smooth transfer of ownership while providing funds to meet the terms of the buy-sell agreement. This is generally cost-effective, since the cost of life insurance premiums is likely to be far less than the cash that would be required to fund the purchase of a share of the business. The policy can be held by an individual or the business itself.

In addition, insurance policies on key employees can cover the cost and time involved in replacing critical personnel. The loss of a critical employee due to death or disability can create expensive problems for a business, and the proceeds from a policy can help the business through those difficult times.

A business should also consider collateral loan insurance. This type of insurance is designed to secure funds to pay off a loan or other business debt. It is often required by financial institutions as assurance that debts will be repaid upon the death of an owner or partner. Life insurance can be used as collateral insurance, or it can take the form of creditor insurance offered by financial institutions.

Michael Low, CMA, (michael.low@edwardjones.com) is a financial advisor with Edward Jones in Toronto.

Top