Essentials of Insurance: Small Business Options
Published October 1999
In the midst of an unexpected crisis, small business owners have one thing to fall back on – their own personal assets. That makes having insurance – and being informed about it – a vital issue.
"The problem with insurance from a purchaser's standpoint is they will only appreciate the value of it when it's needed," said Jackie Porter, an insurance broker with Rol-Del Insurance Agency. She represents over 17 different insurance companies across Ontario.
We asked Porter to discuss how small businesses can evaluate their insurance needs, what types are available, and things to be aware of.
Identify Potential Losses
One of the best ways to evaluate your small business insurance needs is to identify the potential losses that could ultimately cripple your business, and insure against them. Consider the following list:
After determining the possible losses, you need to weigh the risks against the costs. A business owner should rationally determine the insurance that they really need. With careful thought, you can protect your business without draining your bank account.
Types of Insurance
There are many types of insurance that cover different aspects of a business. Porter lists the standard types:
Contents Insurance
- Covers business equipment from a named peril such as fire, flood, burglary, power outage etc.
"A good contents insurance policy will already include computer coverage," Porter said, in reference to the growing importance and need of computers in the business.
Liability Insurance
- Protects a business from the threat of being sued. It starts at $1 million and the insurance company acts as your personal representative. These could include negligence, accidents, breach of contract etc.
Disability Insurance
- Replaces business income in the event of illness, disability etc.
Critical Illness Insurance
- Personal insurance that provides a business owner with a one-time, tax free lump sum benefit of $50,000-$2 million if they are diagnosed with a critical illness such as cancer, heart attack or stroke.
"This type of coverage is gaining popularity among business owners in Canada, because it pays them a living benefit that is not linked to replacing their income," said Porter.
Key Person Insurance
- Pays out a cash benefit to the employer if a key person dies or becomes unable to perform the essential duties of their job description.
Insurance Drawbacks and Risks
One of the biggest drawbacks of being self-employed or running a small business is the difficulty in leveraging group insurance buying that is available to larger firms. These bigger companies have the advantage of many employees, and secure discounts and group rates. Traditionally, small business owners would not have access to group plans, said Porter, but insurance companies are starting to change their ways.
"Because small business owners are one of the fastest growing sectors in the economy, a few insurance companies have developed 'one person group insurance,'" said Porter. This allows an individual business owner access to benefits that would typically be reserved for major corporations. "In addition, the rates for these individual plans have dropped significantly."
"Once the business owner understands that the premise of insurance is to give them protection against an unexpected circumstance - one that they would not be able to financially prepare for on their own - they realize there are no risks in insurance," Porter said.
Protecting Your Business and Your Family
In small business, with the bulk of responsibility and jobs falling on just a few people, the potential for personal and financial devastation is high. While having to plan for a death or sudden illness of an employee or partner is a tough subject, the financial and legal results of not planning can be a nightmare.
An unincorporated small business owner should invest in life insurance to protect their families against personal liability. The assets of a business are considered personal assets and therefore would form a part of the estate, said Porter. The bank would have to put a lien on the estate in order to recover loan payments.
"The bank will go after the deceased's personal estate since there is no distinction between personal and business assets for the unincorporated business," Porter said.
Partnership based small businesses face much of the same problem. In order to ensure the business can carry on in the event of a partner's premature death, the life insurance policy should include a buy-sell agreement.
"This allows the surviving partner(s) to legally purchase the shares of the deceased," said Porter. "There are also tax implications to consider when a partner dies, and the only way to offset the tax liability is to have a buy-sell agreement."
The Bottom Line
"So many new business owners are in a vulnerable position," said Porter. "They consider insurance last on their priority list."
But with so much to lose and so little to protect yourself with, insurance is an option that businesses cannot afford to overlook.
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