A Family Protection Plan for Business Owners
Protecting the family against unexpected events that could threaten its financial security forms the foundation of any financial plan and is typically anchored by insurance products such as life insurance, property and casualty, and disability insurance. When the family’s primary source of income and future financial security is a family-owned business, it can create additional layers of liability and complexity that require a more comprehensive approach to protection planning.
In addition to the legal and financial liabilities that accompany owning a business, business owners also need to evaluate their family protection needs in the more routine aspects of insurance planning to ensure their families have the maximum protection.
Life Insurance Protection
For the typical family, life insurance provides capital to replace the lost income and pay off debt obligations. For family-owned businesses, additional consideration must be given to providing capital to ensure the business can continue operating during a transition of ownership - either to other family members or partners in the business.
Life insurance protection for business continuation should be a separate solution that funds a legal agreement between family members and partners regarding how business ownership is to be transferred. The life insurance proceeds can be used to provide operating capital during the transition, hire key people, or buy out other interests to protect the family’s interests.
With a one in seven chance of an adult becoming disabled before age 65, business owners are just as susceptible as any other worker to the risk of an injury or illness that could prevent them from generating an income. While most workers can address the risk by purchasing disability insurance, business owners must consider the additional risk of losing their business should they be unable to return to work for any length of time.
In addition to disability insurance, which replaces lost earnings, business owners should own a business overhead expense (BOE) policy which can pay for essential business operating expenses for a period of time. This will ensure the doors remain open and employees are paid until the business owner can return to work. BOE policies typically provide expense reimbursement for one to two years.
For family-owned businesses, the business is their lifeblood, so every measure should be taken to protect it. With many small businesses, losing a key employee or partner could result in a loss of revenue, and the business could incur substantial costs in finding a replacement. Key employee insurance coverage can provide the capital needed to bridge the business during a transition.
Businesses are considered entities unto themselves and are, therefore, subject to liability claims that can arise from a number of situations - personal injuries, property damage, product liabilities, negligence, errors, omissions, etc. The fact is there is no single type of insurance coverage that can protect against all possible risks facing a business owner.
A comprehensive risk protection program should include a combination of coverages to ensure the business and, ultimately, the family is protected. It should include general business liability insurance, Employers Liability and Worker’s Compensation, product liability insurance, business property insurance, professional liability insurance, and umbrella liability coverage.
Business owners also risk exposing their personal assets to business-related liability claims. Business owners who guarantee business loans with their personal assets are vulnerable to creditors. To protect their personal assets, business owners should consider all legitimate asset protection strategies.
Families that rely on a business for their financial future must ensure that the maximum protection is in place to protect both the family and the business. It is highly recommended that business owners work with a qualified risk management specialist to create a thorough, well-coordinated family protection plan.