What is Business Insurance?
Many people are unaware that the term “business insurance” is about protecting against operational losses. However, what kind of loss the business insurance covers depends on the insurance company, geographical limitations, and the policy wording.
Common Coverage Types
There are a variety of different kinds of business insurance. Each different in the coverage stipulations and restrictions they apply. The most common kinds include:
1. General Liability Insurance: General Liability Insurance protects the business in question against several different claims. These include, (but are not limited to) negligence, manufacturing or personnel error, liability, bodily injury, or even property damage.
2. Key Person Insurance (Also Known as a Buy/Sell Agreement): When it comes to insurance a business key person is considered vital to the company. This is because the loss of this person could potentially cause damage the company’s financial future. Key person insurance works in such a way that some benefits are paid if the key person covered is unable to work or dies. The remaining partners or owners are able to use benefits only for legitimate business costs. These might include hiring or training a replacement or purchasing the key person’s stake in the business.
3. Product Liability: Product Liability coverage protects against a number of things. These include injury, faulty products, and damage, or death from use of a defective product.
How are Business Insurance Rates Calculated?
Insurance companies use what are called actuary tables when calculating insurance rates. This is older data that is pulled from historical information. They also estimate projected risks regarding similar businesses that have experienced losses and the costs they incurred. The combination of these things leads to an applicable rate per unit of coverage. This is also known as a quote. The amount of insurance companies who issue business insurance have the ability to influence these rates. Other factors include the type and size of the business in question.
There are numerous categories of risk identification factors that go into determining coverage approval and policy rates. These include operational hazards, business experience, location.
Does the Size of my Business Matter When Deciding Whether to Get Business Insurance?
Due to the fact that business insurance spreads the risk costs among all businesses with coverage policies, a business may experience rate increases without a claim being filed. That said, the replacement costs for the individual companies are generally considerably higher. This means that making purchasing business insurance is a wise decision for many business owners. It also means that this advice is accurate, regardless of whether it involves a large, established business or a small startup.
Key Person Insurance
While most people are familiar with the term business insurance, key person insurance is often a mystery. Basically, key person insurance is taken out on the key person in a business. The title that this person holds varies by company. For example, in a small business, this is generally the owner. Sometimes key person insurance might also be taken out on a crucial employee or two. The person or persons are chosen because they are the people who are vital to the business. They are the people whose absence would potentially sink the whole company.
How Does Key Person Insurance Work?
Key insurance is a relatively simple concept. Basically, a company takes out a life insurance policy on it’s one or two vital employee(s). The business then pays the premiums on either a monthly or yearly basis and is the beneficiary. If that person unexpectedly dies, the company receives the insurance payoff. The reason this coverage is important is because the death of a key person in a small company can cause the immediate death of that company. The purpose of key person insurance is to help the company survive loss of the person who makes the business work.
The company is then able to use the insurance proceeds for expenses. Sometimes they are used to float the company until they can find a replacement. Depending on the company’s situation, at other times the insurance payout might be used to pay severance packages, to pay off debts, distribute money to investors, or close the business down. Essentially, key person insurance is there to give the company some options as opposed to immediate bankruptcy.
If a business is registered as a sole proprietorship and the only other employee is the owner, key person insurance might not be necessary. It is essential that key person insurance is not mixed up with personal life insurance. Personal life insurance takes care of your personal life, your family, spouse, personal debts…etc…whereas key person insurance focuses on the business side of things.
Figuring Out Who Your Key Person Is
So, how precisely does a business determine who needs key person insurance? Well, one of the best ways to start is to take a serious look at your business. Think, who’s leaving would impact the company the most, in a negative manner? Who is essentially irreplaceable? In the majority of small businesses, this is the owner. The one who holds the company together. Maybe they are responsible for the accounting, handles the biggest customers, or manages the employees. Remember, key person insurance is for the person, or people who keep the business running.
How Much Key Person Insurance do You Need?
Now that we have gone over how to determine who should have key person insurance, it is time to figure out how much you need. How can you determine how much of an insurance payout you need if that irreplaceable employee passes away? Well, that depends on your business. Put simply, in most cases you should get as much as you can afford. Take some time and shop around. Get some rates from different agents, the majority of life insurance agents will sell you a key person policy. When speaking with the various insurance companies, be sure to ask for quotes on $100,000, $250,000, as well as $500,000, $750,000 and $1 million. Compare the costs of each. Make sure that you take into account how much money your company would really need to stay in the black until the key person could be replaced. Be careful not to overstretch your budget, and only purchase a policy that your company can afford and will address your short-term cash needs if necessary.
Do I Need Term or Whole Key Person Life Insurance?
Unlike personal life insurance, key person life insurance is one that should always be purchased as term insurance. While not all life insurance agents will agree, here is why. Over time, businesses change, people leave, pass away, companies are sold…etc….So why would you take out a permanent key person insurance policy? Even the owner has the option of leaving or selling down the line, and key person life insurance only applies if they are employed at the company when they die. Whole key person insurance also has notably higher premiums and commissions.
When you own a business, it is vital that you are taking care of its success and preparing for the worst. This is even more true if you have other people that work for you. After all, your business is now their livelihood.
Often, people assume that by taking out any kind of business insurance they are protected. However, if the proper type of business insurance is not taken out, things can fall through the cracks, and people can get into trouble. For this reason, it is essential that you speak with a CS insured professional who will be able to break down the different options and answer any questions you might have.
While at times it can be challenging to determine who your key person or employees are, after some thought and consideration it can be done. Remember that key person life insurance is only to cover the people who are crucial to a company’s success.