Owners often fail to carry adequate personal liability insurance, "umbrella insurance". With privately owned companies, it is critical to have adequate insurance for each Company owner. The owners are vulnerable to all kinds of lawsuits, and defending against such suits is extremely distracting and costly. Umbrella insurance extends your personal liability coverage for judgments for physical injury, libel, mental anguish or other causes. We suggest you contact your insurance agent for more information.
You may not need to continue to fund your life insurance. In many instances, term insurance can simply be dropped. Whole life, universal life and other such policies can be maintained but with no additional cash contributions. Review your life insurance cash values with your agent. You may be able to reduce or eliminate premiums. As you know, life insurance premiums are generally not deductible. However, a way to make life insurance payments deductible and provide a larger death benefit is to incorporate the policy into a retirement plan.
If you were to become disabled, how would the Company stay in business? One common way to bridge such a loss is to purchase "business overhead expense insurance". This insurance covers the cost of business expenses and salaries as a result of the owner's disability. However, it does not provide disability income for the owner. Therefore, a separate disability policy for the owner(s) should be in place. This policy should be purchased personally, not through the Company.
If you die, can your business continue to function until it is sold at its true value? If not, an immediate sale could take place, at a large discount. With proper actions, an owner can help the Company retain its value after death until a well-organized sale can take place. To maximize the sales price from such a sale and the related cash available to your family, consider buying "business continuation insurance". This is simply life insurance in an amount sufficient to provide the necessary cash to keep the business doors open until the business can be sold at its fair market value, instead of at a "fire-sale" price. This insurance can be inexpensive term insurance.
If death occurs, how will the estate taxes on your Company's value be paid by your estate? Your business is a high-value, non-liquid asset. (An asset that cannot be converted to cash easily.) If one spouse dies and the assets go to the other spouse, there are no estate taxes due. However, when the surviving spouse dies, a huge tax liability will probably be due. Consider obtaining insurance coverage to provide for these estate taxes so the business' value can be preserved. Otherwise, the second spouses' estate may need to sell the business in a "fire-sale" for a fraction of its true value. The most popular and least expensive way to buy this insurance is through a "second-to-die" policy. This policy only pays off when the second spouse dies. IMPORTANT: Neither spouse can own this policy or it will go into the estate of the second-to-die. The policy must be in the name of an heir or trust, which must also pay the policy premiums. However, you can gift cash to cover the premiums each year.
Key employees can make your business vulnerable to loss. We have seen a case where a Company unexpectedly lost their best salesperson. The Company floundered and the business couldn't afford to pay its owners as in the past causing financial hardship. If you have a key employee, consider buying key man life insurance to sustain the business in the event of such a loss. It can be transferable from one employee to another and is often inexpensive. The key man premiums are not deductible, but the benefits are not taxable.
Employee fraud and theft are normally found by pure luck, often after thousands of dollars are lost. The theft is usually by someone you trust. Make sure you have controls in place to limit your exposure. Contact us to discuss controls. Also, you should bond employees handling cash or checks since this is inexpensive. For bonding, contact your insurance agent.
We recommend you evaluate the insurance coverage you are carrying on your building(s) to ensure you have adequate coverage. Costs may have increased dramatically since you placed your current insurable value on your building and therefore your building(s) may be underinsured if a casualty occurs since insurance, even if it includes replacement costs, will only pay up to the limit of insurance. Don't be fooled by the recent reductions in selling prices. Consider increasing your coverage and talk to your insurance agent.
We recommend you evaluate your insurance coverage for the contents of your building. Think about not only the furniture, fixtures and computers, but also intangibles such as reconstructing accounts receivable and customer lists. If you do not own your building, be sure to review the terms of your lease for stipulations as to what you are responsible for in case of a casualty. Things often overlooked are special wiring, security systems, phone systems, special lighting, office supplies (especially custom items like business cards and letterhead that are often expensive to replace), etc. One way to document your property is to video your business assets periodically. We suggest you discuss this with your insurance agent.
