We’re all familiar with some kind of insurance. Car insurance, for example, or health insurance. But while most of us have a general idea of how these forms of insurance work and how they benefit us, two important types of insurance are generally less understood: life and disability.
Maybe you’ve got personal life insurance (and if you do, good for you), or you’ve at least got an idea of what it is and how it works. But while personal insurance is of some value, business owners also have to consider the potential need for business insurance. In this article, we’ll talk about a few kinds of business insurance, and whether or not you might need it.
What Is Business Insurance For?
Business insurance is as the name suggests, insurance for your business. Essentially, businesses, or business owners pay what’s known as a premium (which can be billed monthly or annually) over the course of an insurance policy’s term (or lifetime), in order to receive a lump-sum benefit (payout) in the event of an unanticipated injury or death.
The purpose of this insurance is to allow businesses to carry on operating if something unfortunate happens to either an owner, partner, or key person.
What Types of Business Insurance Are There?
Business Overhead Expense Insurance (BOE)
Business overhead expense insurance is a type of disability insurance for business owners. If you own a business at which you are one of the primary employees and you become unable to work, BOE can be what (literally) keeps the lights on at your business.
BOE covers things like employee salaries (except the business owner’s), utility expenses, and even rent. And while personal disability insurance (also important) can cover part of your salary while you take time away from work, it won’t cover anything else—leaving your business potentially exposed to cash flow problems if you need to take an extended leave. The key factor in determining whether or not your business could benefit from BOE is recognizing how much you personally contribute to your business’ profitability.
At a certain point, your business may no longer be as exposed to financial difficulty if you as the business owner were to become unable to work—however, if you are essential to your business’ operations and can foresee revenues taking a nosedive without your being present, you might want to consider purchasing BOE.
Buy-Sell Agreement (For Partnerships)
Personal life insurance is important for anyone with obligations outside of themselves, but did you know you can take out a life insurance policy on someone besides yourself? Especially when it comes to business partnerships, a life insurance policy on your partner(s) can help the business survive the death of an owner.
For example, if a partner in a business passes away, their family may want some form of ownership or control of the business and its profits, or they may want to sell their interest. In the latter case, if there isn’t enough money in the business to cover the deceased partner’s interest, it can fall to the other partner either to come up with the funds on their own, or else risk putting the financial health of the business at risk for a buy-out.
A buy-sell agreement deals with both of these problems at once. In a traditional buy-sell (known as a cross-purchase agreement), all partners agree that upon the death or permanent disablement of one of the partners, the other(s) have a legal obligation to buy out the deceased/disabled partner’s stake in the business. Life insurance is taken out by the partners on each other, ensuring that funds are available for a buyout upon one of the partners’ death.
In another variation of a buy-sell agreement, the business itself (a corporate entity) can purchase life insurance on the partners, and the insurance benefit will cover the cost of buying out the deceased partner’s shares. This is called a stock redemption plan.
Key Person Insurance
Key Person Insurance is another form of business insurance; unlike the other forms mentioned above however (primarily concerned with business owners), this form of insurance is designed to cover the death or disability of a vital employee.
For example, if you own a coffee shop but hire someone to manage it who is there most of the time (perhaps they manage the books, as well as additional staff), they might qualify as a key person in the operation of your business. If they become unable to work, your business operations could suffer significantly; so, in the event of a key person’s death or disablement, a key person insurance benefit can enable a business owner to hire a replacement to keep the business afloat.
Do I Need Business Insurance?
Whether or not you need business insurance is based on your individual situation. As a business owner, you need to account for all manner of possibilities to ensure every chance of your business’ survival; and insurance can be a great way to cover the most unexpected and devastating events.
To determine whether or not your business could benefit from an insurance policy, first take into account your business’ size, profits, and what sort of operation you’re running. Next, think about what sort of business insurance might fit your situation. Finally, speak to a licensed insurance advisor to find a specific policy that suits your needs. They’ll help you navigate the complex world of premiums, policies, terms, and benefits to find a solution that’s tailored to you.
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