Over the last few weeks, I’ve been talking about the business owner’s support team and the various professionals that need to be a part of it. As I’ve gone over each of these positions, I’ve been equating them to positions on a baseball team. In today’s blog, I’m going to go into greater detail on the second baseman of our team, the insurance professional. I’m not talking about salespeople. Instead, I’m referring to the professional who can advise us about which insurance business owners need to have, and why.
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A lot of times, business owners have a negative view of insurance professionals. But this is usually a result of misunderstanding what their role is. Unlike a salesperson, an insurance professional can help you understand the various forms of insurance as they relate to business owners. Salespeople can have what I like to call “commission breath.” This is the offputting stench of being sold a product that you don’t need so that they can earn a commission.
However, there is a clear distinction between a salesperson and an insurance professional. The professional can look at your individual needs to create an outline of the specific coverages that you need, in order to protect you, your family, your employees, your clients, and your business. Their expertise can be a valuable asset and they use it for your benefit. If you’re a business owner that thinks of a used car salesman when you think of insurance professionals, stop! Take another look and you’ll see that they are your ally.
A good insurance advisor will ask what you’re trying to accomplish within your business. They understand that you’ve put years of blood, sweat, and tears into your business and that you and your employees rely on the income that it provides. So, what is the role of insurance in your business? It allows you, the business owner, to face your financial future with confidence, knowing that the insurance company will provide your business with the liquidity that it needs when it is most needed. With that in mind, let’s look at the types of insurance business owners need to have.
Many business owners hope to leverage their business to fund their retirement. But, in order to do so, the business needs to be valuable and it needs to be protected from all of the risks that life throws at us. In fact, these two things are so connected that the more risk exposure your business has, the lower its total value. In order to make sure that you’re business is protected, let’s look at some of the most common forms of insurance business owners need to have.
Disability insurance exists to protect your income in the event that you experience a disability. There are a few different ways that this coverage can also be aligned to protect the business in the event of a life-changing accident. As the business owner, you obviously will need to make sure that you can still support your family if you ever become disabled. But what if you’re unable to operate your business for several months, years, or even at all? There are disability coverages that are designed for just such a situation. These coverages will pay your business expenses for a predetermined time (usually between 12 and 24 months) while you recover or make arrangements for your business to be transferred to a new owner.
RELATED READING: Business Overhead Disability Insurance: What To Know Before You Buy.
When choosing a disability policy, regardless of whether it is for personal or business purposes, it’s vital to consider your full scope of expenses. Choosing a plan that doesn’t provide enough support for you or your business can be as damaging as having no disability insurance at all.
On the personal side, you must consider your mortgage or rent, utilities, car payments, student loan debt, phone bills, gas, groceries, and even your insurance payments before you purchase a policy. Take all of your expenses into consideration and pick a policy that provides enough of a benefit to cover all of your expenses throughout your period of disability.
Similarly, you need to think about your total operating expense when choosing a business overhead disability plan. This includes mortgage, rent, utilities, payroll, inventory, etc. This is insurance business owners need to have because we have to protect the incomes of our teams as well as our own.
Another form of insurance business owners need to have is disability buyout insurance. Oftentimes, buy/sell agreements have death and/or disability clauses. When a partner passes away or becomes disabled, the buyout is triggered. In order to fund a disability clause within a buy/sell agreement, you need to have disability buyout insurance.
Now, disability buyout insurance is a separate policy. It is NOT included in your personal disability income insurance or business overhead disability policies. Typically, these policies payout in a lump sum payment so that the business owner can go ahead and pay the buyout agreement when they become disabled. It’s possible to design a policy with a recurring monthly benefit, but it’s usually best to receive a lump sum.
So, now that we understand the basic types of disability insurance business owners need to have, what do we do if we suffer a long-term disability? Obviously, there are long-term disability policies available for our personal income protection. But there’s also an interesting little wrinkle on the business side.
Some businesses have what is known as a “key-man” disability policy. These policies are designed to pay a benefit to the business if a key employee becomes disabled. As a business owner, you would have to purchase the policy covering the employee. Usually, this is done when a team member makes up a significant percentage of the company’s sales. If something were to happen to that employee, it could be very damaging to the business. So, a key-man policy can provide an extra level of protection.
One of the most common types of life insurance for business owners is “buy/sell” life insurance. Basically, it is a business succession or planning tool that helps to enhance the stability and value of a business. Usually, a term-life policy is used to fund a buy/sell agreement. Typically, these policies go until retirement age. However, there are instances where business owners choose permanent insurance along with an exit strategy.
Now, sometimes, when a business owner sells their business, they become a “key-person” for a period of 1-2 years. In this scenario, the new business owner may choose to secure their purchase by taking out a “key-person” life insurance policy on the previous owner. This is really a lot like the “key-man” disability policy. The business receives a benefit if the insured person dies during the policy’s term. Like it’s disability counterpart, key-person life insurance is often taken out on employees with high sales or specialized skills, as well.
Folks, these are very basic and broad-stroked insurance policies that we’ve just discussed. Having a competent insurance professional in your support team’s lineup is so valuable. Sit down with them to discuss your business and individual needs. You may be surprised at some of their insights. They can design tailor-made policies that really benefit you and your business while saving you money.
Look friends, I know life can be hard. Owning a business is one of the most stressful and rewarding things anyone can do. It can be frustrating. But it doesn’t have to be. With a great insurance professional, we can make insuring our businesses at least financially simple. Hey, let’s go out and make it a great day!
If you have further questions about the types of insurance business owners need to have, reach out to us. The business professionals at Financially Simple have decades of experience in our own businesses and in our clients’. We are here to help!