Very few business owners would consider operating without the safety net of property-casualty insurance. Most would have a difficult time getting credit without evidence that the property and capital assets of the business were protected in the event of an accident or disaster.
Capital assets are a tremendous investment and, with the exception of service-oriented businesses, these assets account for a large share of the value of a business.
Even though the physical assets are covered, many business owners fail to recognize the importance of insuring their most critical assets, employees. All of the buildings, property and equipment in the world cannot turn a profit alone. The key to a prosperous enterprise is the people that bring the business to life. Successful business owners know attracting and keeping the best employees starts with a secure and competitive benefits program.
4 Strategies
Another critical issue facing business owners is ensuring that money is available in the event of the death of your top salesperson or one of the shareholders. Here are some methods to consider for counteracting the loss:
Build a sinking fund // Make regular deposits into an interest-bearing vehicle to build a fund from which the business can draw to offset the cost of lost revenue, hiring and training. This strategy is only effective if the savings can build over time. A sinking fund doesn’t work if tragedy strikes tomorrow.
Borrow the money // This strategy is viable, but consider the cost of credit, if it’s available. Also consider whether the lender will be amenable to extending credit to cover the loss when the business may be in a compromised revenue position after the loss of the employee, especially if the employee is also an owner.
Self-insure // Absorbing the loss of the employee’s services and picking up the extra work yourself, or spreading it over other employees can work in the short run. However, this can lead to burnout. This strategy doesn’t successfully manage the risk or prepare the business for financial impact.
Purchase key person insurance // Purchasing business-owned key person life insurance is a widely recognized method of deflecting the risk of an untimely loss. While the premiums for this life insurance are not a deductible business expense, the death benefits are payable to the company and are income tax-free. (If the requirements of Internal Revenue Code Section 101(j) are not met, then death proceeds from employer-owned life insurance contracts may be taxable as ordinary income in excess of cost basis.) The benefit can also buy time while providing more assurance.
Being in business means being at risk. Managing the impact of potential adversity is a sound strategy and is important for the future of the business. If you wouldn’t consider operating without insurance on your property and equipment, you shouldn’t neglect insuring your human assets either. You could be exposing yourself and your business to an uncertain future. Are you risking too much?
