Business Insurance 101
Business owners are responsible for two families: their own and their employees’. A comprehensive insurance policy is needed regardless of the size and nature of your business especially in Hong Kong where there are part of the legal requirements to run a business. Should anything bad happen to you, a proper insurance policy can help protect your family and your business.
To get a sense of your preparedness in this aspect of running your company, ask yourself these questions:
- What will happen to my business and family if I die or become physically unable to run the company?
- What will happen if certain key employees die or become permanently disabled?
- How can I attract and retain the good employees?
- How can I help ensure that my business is equipped to stand unforeseen financial challenges?
- What will happen to my business when I retire?
Death, disability of a proprietor and loss of a key man are three of the top threats to your business and you need to consider how to protect the business you’ve worked hard for against these events.
Death and Individual Life Insurance
This is the worst possible scenario. What will happen to your business if you die? Many business owners take out loans to help grow their businesses and often secure these loans with personal assets. If you have business loans and were to die before they were paid off you might think your family could sell or liquidate the business to cover the debts and provide financial security for them.
This, however, is an unlikely event. When the family is forced to suddenly sell the business they may have to sell at a discount or during market conditions that make the business less attractive. In other cases, the value of the business is lowered because of the loss of the proprietor. Individual Life Insurance can protect your family by covering the debts, rolling living expenses and future plans in the event that something happens to you.
We discuss financial protection with Life Insurance in one of our past blogs. Read: Financial Protection for Your Family After You’re Gone
Disability insurance replaces a set portion of your income if you were to become sick or injured and unable to work. It’s an important type of insurance coverage that is often overlooked. In addition, business owners should consider Business Overhead Insurance, which pays for overhead expenses in the event a business owner becomes completely disabled. A policy typically pays benefits for one to two years and helps cover expenses like salaries, taxes, employee benefits, rent, mortgage, utilities, equipment, malpractice premiums, etc. That could mean the difference between a business surviving or permanently closing.
What about your employees’ benefits?
Part of the decision making process for potential hires is a good benefits program. More importantly, this program is also crucial to retaining good, competent workers.
Benefits such as health and disability insurance and retirement plans are very desirable to employees, but they can also be costly for business owners. Sharing of these costs between employer and employee is a common practice that’s beneficial for both parties. There are also voluntary benefit programs that allow employees to purchase or increase their benefits, often through automatic payroll deduction.
Village Insurance can help you select the right mix of benefits and present business owners with various package options.
Key Man Insurance
Key Man Insurance is another essential component of a smart business maintenance plan. When a key person dies or becomes disabled, insurance can help cover potential lost sales or earnings or cover the cost of finding or training a replacement.
Buy and Sell Agreements
These agreements are generally covered by Life Insurance policies purchased on the lives of each of the business owners. The amount is usually specified in a contract created with the help of a lawyer. You can enter into a buy-sell agreement at any time, but it often makes sense to do so when a business is formed or when new owners are brought into the business. Because business values can fluctuate, it’s important to review the contract with your accountant at least once per year or to include a calculation method in the agreement.
Company owners can also insure against the risk of becoming disabled and unable to work. In this case, disability income buyout insurance would fund the buy-sell agreement, allowing the disabled owners to be bought out, typically after a one-year waiting period.