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By Pearlin Siow

(Pearlin Siow is from Singapore. Let’s welcome her as our first international contributor!)

Save your company and improve your odds in the business world with these crucial insurance plans.

As an entrepreneur, you take risks and test your abilities in the marketplace everyday. Insurance improves your odds by reducing the financial consequences of unforeseen events beyond your control. What if something happens to you? Or, your sales director meets with an accident? Is your business equipped to handle emergencies like these?

A lifetime of work and dreams can be dashed if a key person is suddenly incapacitated. Creditors may panic and withdraw all credit facilities and ask for immediate payment of debt. Your company may face a decline in profits because of the disruption in operations. Employee morale may hit rock bottom as they wonder about the viability of the company.

As you can see, insurance is a form of risk management essential to all businesses. Do not confuse business insurance with personal life insurance. If you have a spouse and children who depend on your income, then you should have personal life insurance for your family. Business insurance is for your company, not your family.

Business insurance is a complex subject and designing an insurance program that suits your business needs and risks is crucial. Here is a breakdown of some important insurance plans you should consider if you are a business owner.

Keyman insurance

Keyman insurance is simply life insurance on the key person in a business. This is usually the owner, the founders or perhaps a key employee or two. These are people whose absence would make a difference to the company and you need insurance on them!

How it works: A company purchases a life insurance policy on the key employee and pays the premiums and is the beneficiary of the policy. If that person unexpectedly dies, the company receives the insurance payoff. This will help the company survive the blow of losing the person who makes the business work. The company can use the proceeds to buy time as they find a replacement person, pay off debts, and basically tide the company through the hard times.

How much coverage: That depends on your business but in general, get as much as you can afford. Be sure to ask for term insurance which is more affordable than whole life, and serves the same purpose. Ask for quotes from $100,000 to $1,000,000 and then think of how much money your business will need to survive until it can replace the key person, come up to speed and get the business back on its feet. Buy a policy that fits your budget and will address your short-term cash needs in the event of a tragedy.

Credit protection insurance

You need money to make money. If you are not funding your business out of your own pocket, your money has to be borrowed from financial institutions. The institution lending you the money will insist on a guarantee that its loan will be paid back. Even if the loan is taken by the business, whether it is a sole proprietorship, partnership or private limited company, this guarantee to the financial institution will have to be undertaken by the owners of the business. If proper risk management is not in place, your personal estate could be used to settle outstanding debts of the company. Your family will get what is left if there is anything at all.

How it works: This cost-effective life insurance can be used to pay a benefit equal to your total authorized business credit. Benefits paid will first be applied to your business liabilities to the bank. You can opt for life coverage or accident coverage which will pay out the sum assured should the insured person suffer a covered loss.

How much coverage: It depends on how much credit you owe to the financial institution. Your life or the life of the other key person, including your spouse, can be insured.

Buy-sell agreements

It is sometimes known as a continuation plan or a will for a business. Whatever you call it, a buy-sell agreement is vital to the livelihood of a business. In the event when a business owner dies or retires, a buy-sell agreement can enable his business to be as stable and well managed as possible. It ensures that his estate sells his business interest to those whom he has chosen. The owner’s estate will also have liquidity by converting his business interest to cash. This cash can be used to settle the estate and establish an income stream for his beneficiaries. It guarantees a fair and reasonable price for his business or stock.

How it works: There are several ways to fund a buy-sell agreement. Life insurance is one of the most sensible, efficient way to accomplish the task. After your lawyer draws up the actual buy-sell agreement, your insurance agent can help you fund your buy-sell agreement with life insurance. Insurance ensures that there is cash available to do the necessary buyout. Ask your agent about cross-purchase buy-sell agreement funded with life insurance and stock-redemption buy-sell agreement funded with life insurance plans.

How much coverage: This depends on your business. A purchase price should be established among all parties while the business is vital, not when it’s vulnerable to a lower price after the death of its owner.

Contractual retirement program

Many companies are caught in a dilemma – they take pains to groom an employee only to have the person poached by a competitor with deeper pockets. There are many ways to retain an employee’s services and they include salary increments, employee share option schemes, better welfare and comprehensive medical benefits. Another effective retention strategy is providing a contractual retirement program.

How it works: This is essentially a pension plan that takes the form of an insurance policy. Companies buy into it to show that they care about the employee’s retirement. This gratuity is flexible and the company can choose to give bonus payouts to the employee at regular intervals or a one-time lump sum at retirement. Most importantly, the funding of the policy makes minimum impact on the company’s cash flow yet ensures returns when the employee retires.

How much coverage: Some factors have to be considered when planning for the amount of gratuity. Is the employee an investor and partner of the company? How much money did he invest? How many years has he worked for the firm? What is his contribution to the company? In all fairness, the employee should get the fair share of the profits he has helped to reap and invest in the company.

As you can see, insurance is not just protection against disasters. It has positive benefits and advantages for business owners. It can help you retain valuable employees, protect your company from sinking due to loss of a key person as well as protect your family and personal estate from creditors. Borrowing against equity in your life insurance plan is one way to raise capital for expansion and you can even use your policy to improve your bank credit.

Steps to getting business insurance:

1. On a sheet of paper, list all the possible risks you face. Evaluate the losses you will suffer from each one. Cover your largest loss exposure first.
2. Ask business associates for referrals. Select an agent or broker from a reputable firm who is experienced in business exposures and the commercial insurance market.
3. Get several quotes or proposals and have them in writing so that you can compare the plans.
4. As you shop for your insurance, you will see special terms and concepts unique to business insurance. Ask your agent to explain anything that you are not familiar with.
5. Buy a policy that fits your budget and addresses your most pressing need.
6. Ask your agent to deliver the policy, review them with you and answer any questions that you may have.
7. Avoid having similar insurance but do not short-change your business with less coverage than you actually need.
8. Review your program periodically. The coverage you start with may be inadequate for the amount of business you are doing after six months.

Pearlin Siow is author of business motivational book, Boss of Me! which features 20 outstanding entrepreneurs in Singapore. For more business information, go to her blog, www.bossofmesingapore.blogspot.com. Boss of Me! is available on Amazon.com for $15.

*Posts or articles in this blog and/or website are for educational purposes only. Posts are not meant to be insurance or legal advice. You must always check with your local insurance agent or attorney for advice.

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