Tuesday, June 28, 2016

Top Insurance Strategies For Small Business Owners

FROM http://www.fa-mag.com/

As financial advisors, we've all encountered small business owner clients who are living the American dream: After years of saving and strategizing, all while working very long hours, their small business is finally starting to take off, and the entrepreneur now serves as the primary or sole breadwinner in his or her household.

Now, here’s the bad news: Many other entrepreneurs before them have experienced similar triumphs, only to see all their hard work go up in smoke because they didn’t take the necessary steps to properly insure their success against a range of unexpected turns, from medical emergencies, to acts of God, to, in some instances, just plain bad luck.

So when advising the successful entrepreneur who’s married with children and serving as the primary or sole breadwinner, what are the best ways to help them insure themselves and their business across an array of worst-case scenarios?

The following are the top four areas of insurance each advisor should explore with their small business owner clients:

1) Health insurance. Most people appreciate the importance of having medical insurance. Without it, of course, there’s a tax penalty, but aside from that, a large and unexpected personal medical bill can decimate the finances of even the most successful small business owner, and, thus, their business. But there are specific ways to make the expense of health insurance happen in a tax-savvy way.

For most small businesses with predictable revenues, it probably makes the most sense to pursue a group medical plan. Such plans not only allow the owner to gain coverage for themselves and their family but typically offer money-saving tax incentives as well.

Also, as we all know, even with insurance, prescriptions for medication, visits to the doctor and hospital stays aren’t free. A health savings account (HSA) is a good way to complement existing insurance coverage, particularly for those enrolled in a high-deductible plan, which are less expensive but cover fewer costs.

HSA contributions are tax deferred, and though they have yearly caps of approximately $3,350 for individuals and $6,650 for families depending on the plan, the balance rolls over, year over year, and can be invested in market-based solutions like ETFs and mutual funds to maximize growth. Because of this, HSAs are an ideal vehicle for both tax planning and preparing for future medical costs.

2) General liability insurance. If clients rent commercial space, have them check their lease agreement because the property owner may cover minor injuries resulting from slips and falls. But even if that’s the case, every business needs a general umbrella liability policy, whether it utilizes a commercial space or is home based. It’s far from a guarantee that a personal home policy will cover business-related liabilities if the owner or any of their employees are injured in a work-related accident—even if the accident happens in one's garage or basement.

Also, as part of any umbrella liability policy, consider business interruption insurance. Large snowstorms, earthquakes, floods and other acts of God can shut down operations for an extended period, robbing the business of revenue and endangering employee pay. Think of the destructive flooding that occurred in Houston earlier this year. How would your client be compensated if something similar happened in their area?

3) Errors and omissions insurance. If a client runs an advice-driven business, like a consulting practice of any kind, a marketing firm or offers another set of intellectual capital-based services, they will need coverage that keeps operations up and running in the event of negligent acts, including data theft and other cybersecurity lapses.

The risks tend to vary depending on the business type, so the level of coverage will be different in almost each case. Some industries, like our own business of financial advice, will have their own regulatory authorities that require a baseline level of coverage. Other industries, however, operate more in a grey area. But just because an industry may not mandate coverage, doesn’t mean your client can afford to go without protection.

A good rule of thumb: An effective errors and omissions policy should cover losses equal to at least the value of the client's total personal and professional assets. That way, they won’t get wiped out as a result of a lawsuit. While it’s a best practice to review business and personal insurance policies on annual basis, it’s especially critical here. As a small business owner, their net worth will likely fluctuate year-to-year, and it’s imperative to confirm that they will continue to have enough coverage at all times.

4) Life insurance on a business and personal basis. Obviously, this is a concern for people in all walks of life, not just small business owners. If someone has a family and a job, they need life insurance. (What type of policy is highly situational, depending on a client’s age, health, level of income, among many other factors.) But what many people don’t know is that life insurance policies are a common way to fund buy-sell agreements, a key transition and succession-planning tool for small businesses with multiple partners.

There are many ways to accomplish this. For example, partners can take out policies on one another based on the value of the business. Then, if something should happen, not only is the transition smoother and more seamless, but the remaining business partners have the capital to finance a buyout. A disability policy is another option. This approach ensures that if a partner becomes disabled or incapacitated, businesses will have the cash flow to fund a buyout.

Another thing to consider is the purchase of a "key man" policy, which is exactly what the term suggests—coverage that protects the business in case an irreplaceable employee or key man dies. This is typically the owner, with the beneficiary being the business, but such policies are sometimes applicable to other valuable employees, like a top salesperson.

The first few years for almost any small business can be a fight for survival, a grueling uphill climb just to keep your head above water. When fortunes start to turn, however, it can be a bit like finishing a marathon: It’s an exhilarating and, in many cases, life-defining evolution.

But when that happens, it can be easy to relax, pat yourself on the back and forget about potential landmines lurking around the corner, whether it’s a personal medical emergency, a lawsuit or some other event that could upend or, worse, spell a permanent end for the business. Take the step today to make sure that doesn’t happen to your clients.