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Actions How to Prepare Your Business for the Unexpected
Key Takeaways
- Have a plan to protect your business in your absence.
- Death or disability can put your company at risk.
- Insurance can protect your business if you're disabled or you pass away.
When Dawn Fitch fell ill with an autoimmune disease more than 17 years ago, she started whipping up alternative bath and body products in her kitchen in an effort to improve her health. Today she runs Pooka Pure & Simple, a company that sells natural bath and body products online and in dozens of Whole Foods Markets.
As the company's founder, she handles most of the business's daily operations. But Fitch worries about her company and her employees in the event that her disease progresses and she's unable to work.
“I need to really make sure that this business — if I'm not here or if I can't do anything — can run independently,” Fitch says.
It's a dilemma many small business owners face. Luckily, there are a number of things they can do to ensure that if they're gone — whether for the short term or the long term — the business and its employees are protected.
Life insurance
Individual life insurance is generally about protecting loved ones who are dependent on your income. As a small business owner, however, it can also fill a void if you're gone. A life insurance payout can be used to help manage day-to-day operating expenses, business debts and any costs to replace you, if necessary.
Think about what kind of financial needs your team would face in your absence, and consider a policy that would cover them. A term policy offers lower premiums for a fixed “term,” such as 10, 20 or 30 years. A permanent policy will cost more but will last your lifetime, if needed.
Disability insurance
The chances of becoming disabled and unable to work are higher Opens in new window than your chances of passing away prematurely. In fact, one in 10 people PDF opens in new window aged 18 to 64 are disabled. But many small business owners don't plan for that possibility. Disability insurance replaces part of your pay if you're unable to work, decreasing the financial burden on your company and your family.
You'll likely need at least two years of tax returns to prove your income, and the insurance will cover your pay, not the business's profits. These premiums aren't tax deductible, but benefits are tax-free.
Business overhead insurance
This is also known as business expense insurance. If the policyholder becomes disabled, it covers overhead expenses, typically just for one to two years. Note that disability insurance covers personal expenses, while business overhead covers business costs.
That includes items such as employee salaries, rent, taxes and utilities — but not your salary or that of a replacement employee. Premiums are tax-deductible for the business, but all benefits received are taxable, unlike disability insurance.
Key person insurance
If there's a person (or persons) crucial to the operation of the business, key person insurance is a good idea. With this coverage, a business buys life or disability insurance on that “key” employee. If that person is disabled or passes away, the business receives the benefit, which it can use to cover operating costs and other expenses until it can find a replacement, or until the business shuts down. This wouldn't be necessary if you were running a sole proprietorship with no other employees — in that case, you'd be covering loved ones with individual life insurance.
Buy-sell agreement
If you own your company with a business partner or partners, what happens when one person dies, becomes disabled or decides they no longer wish to be involved? You may not want a partner selling his business shares to an outside party, or you may want to establish the value of business shares to prevent a future dispute when someone wants out.
A buy-sell agreement outlines what a business will do in various circumstances — kind of like a business prenup. These agreements are frequently financed by life insurance policies on each partner, which the partners (not the business) purchase, and for which the partners are beneficiaries.
What you can do next
Talk to your financial professional about your options and what kinds of policies make sense for your situation. Much will depend on the structure of your business, any debts you have, whether you have a partner and how many employees depend on you. You may need an attorney to help you draft any buy-sell agreements.
Please consult your tax and legal advisors regarding your particular circumstances.
Kate Ashford is a freelance journalist who writes about personal finance, work and consumer trends. She has written for BBC, Forbes, LearnVest, Money, Real Simple and Parents, among others.
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