Insurance Basics for Business Owners Part 1

This article was co-authored by <a href="http://biznik.com/members/sarah-bitter">Sarah Bitter</a> and <a href="http://biznik.com/members/chris-lavin">Chris Lavin.</a>First we define the purpose of insurance, as well as the terms premium and deductible. Then, we cover liability; property; and errors and omissions insurance. Finally, we outline health, life, disability, and supplemental insurance. Why have insurance? Fundamentally, insurance protects the businesses we have worked hard to build. It provides security from loss by distributing the risk of harm. Basically, insurance companies use money they collect from all the people they insure to pay the claims (requests for compensation) of those unfortunate enough to suffer losses.Insuring our personal or business risk of loss is what we pay insurance to do. Specifically, the cost of an insurance policy is called the premium – it is what has to be paid for the policy to exist. Some types of insurance also have a deductible. A deductible is what needs to be paid before the policy begins to consider payment. Deductibles can be either time or money. An example of a time deductible is the waiting period before a dental policy will cover a crown, perhaps twelve months. An example of a money deductible would be the amount that you have to pay to repair your car before your automobile insurance begins paying. To clarify, if a repair bill is $ 1600 and you are asked by your insurance company to pay the first $ 500, you have a $500 deductible.Given that purpose of insurance is to distribute risk, the first type of insurance to consider as a business owner is probably liability because businesses have many liability risks. The term liability describes the obligation to pay some sort of recompense when someone (or something) has been injured or damaged by you or your business.  Many landlords will require any business tenants to carry a stated minimum level of liability coverage in order to protect their building. That requirement is also of benefit to your business, as it serves to protect you from common events which you could be held responsible, such as trip-and-fall accidents; burns from spilled hot coffee; injuries caused by employees; and fires. Liability claims often make news headlines, especially when the real or perceived wealth of the policyholder results in an astronomical claim for damages on behalf of the injured party.The second type of insurance for entrepreneurs to think about is property. All business owners have property, which, as defined by insurance policies, is what we commonly call stuff: items ranging from a retail shop’s inventory to a computer owned by the client of a computer-repair technician. Properly insuring your business property requires careful assessment of the actual cost of loss of or damage to the property. For example; business records, both electronic and paper, are a form of business property that is frequently under-insured.Also of great importance to some types of business owners is Errors and Omissions (E&O) coverage. E & O coverage is also known as professional liability, or “mistake” insurance. For example, if an engineering firm designed a dam that failed, the firm should expect to receive an errors and omissions claim from all the wet people living downstream of the formerly-watertight dam. Examples of the types of business owners who should have E&O coverage include insurance agents, consultants of any kind, medical practitioners (malpractice insurance), architects, accountants, and engineers. If you have woken up in the middle of the night worried about a design, a deduction, or a piece of professional advice, E & O insurance would protect your business from your (real or alleged) mistakes. Health insurance might be the primary insurance concern of small businesses in America. Health insurance, despite its perceived cost, is fundamental to the functioning of your small business. Health insurance assures that those covered will have access to care during a serious medical event. Offering health insurance also increases a business’s ability to attract and retain quality employees. Health insurance plans range from comprehensive to catastrophic and the type of coverage that is appropriate for you and your business will depend upon your personal, medical and financial situation. In general, comprehensive plans have lower deductibles and lower co-pays (the fixed amount that a plan charges for certain common occurrences such as emergency room treatment and routine physical exams), but higher premiums. A catastrophic plan typically carries a higher deductible and may not cover routine care until after the deductible is satisfied (paid). Other health insurance options include health savings accounts and health reimbursement accounts, all of which will be covered in an article about health insurance options for businesses and business owners. Just as health insurance is important to a business, life insurance also has important business uses. Life insurance helps your beneficiaries to continue on after you cannot.   Beneficiaries ‑ the people or entities who get the money ‑ can include your business, your business partners, and your family. Most people are familiar with using life insurance to provide income for spouses and family members. However, life insurance that benefits the business is usually used to replace expertise or to protect surviving partners. To replace expertise “key-person” coverage is used. For example, suppose that you opened a restaurant and hired a head chef who hosted a show on the Food Channel. If this chef died, to maintain the caliber of your restaurant, you would have to recruit a head chef with an equivalent level of fame and talent. A “key person” policy would provide you with the money to hire such a chef. Buy/sell life insurance policies are used by businesses to provide funds to the surviving partners of a business so that they can buy out the share of a deceased partner. For example, consider the business establishment called Joe and Jeff’s Plumbing. To protect the business, Jeff owns a policy on Joe, and vice-versa. Upon Joe’s unfortunate demise, Jeff would receive funds from his policy so that he would be able to buy Joe’s share from Mrs. Joe.Disability insurance is one of the most important kinds of insurance for a business owner because disability insurance protects against the largest risk to a small business ‑ that of the owner being unable to work. Disability insurance provides a stream of income when someone is not able to do the regular and normal duties of their job. Policies are available to cover short-term disabilities (such as pregnancy in Washington state) and long-term disabilities (paralysis, loss of limbs, and similarly ghastly things). As a business owner, you might use disability insurance to cover both your business and personal expenses while you are incapacitated: for example, you might hire a temporary replacement and pay yourself a portion of your normal salary. A word of caution: disability policies define “disability” in many different ways and business owners should choose policies to cover themselves and their businesses carefully.Supplemental insurance is useful to business owners both as a way to protect themselves from the expenses of accident or injury and as a way to increase the benefits provided to employees at no direct cost to the business. Unlike health insurance, supplemental insurance provides cash benefits to the insured in the event of an accident or illness. (Health insurance is designed to pay doctors and hospitals.) Because it pays cash to the insured, supplemental insurance is of great utility to persons whose health insurance deductibles are large. Also, because supplemental insurance can be offered to employees on a voluntary basis, it provides a way for smaller employers to offer employees dental, accident/disability, payroll life, cancer and other coverage that the business would otherwise be unable to afford.As a business owner, insurance can be used both to protect your business and as a powerful tool for helping your business grow. We hope that this broad overview has stimulated consideration of your insurance needs as a business owner. In later articles we will focus on each type of insurance in depth, as well as provide overviews of the specific insurance needs of certain industries. 2008-04-04T18:13:37Z

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insurance-basics-for-business-owners-part-1

2008-04-04T19:16:18Z

This introduction to insurance focuses on the insurance needs of small businesses: specifically, how insurance protects businesses and also is used to attract and retain employees.

Insurance Basics for Business Owners Part 1

2009-02-24T09:43:41Z