Key Person Life Insurance: What Small Business Owners Need to Know

We all know that life insurance helps you protect the financial future of your loved ones when you die. But, if you own a small business, what protection do you have in place to protect your business and any employees or partners you may have?

That’s where key person life insurance comes into play. This unique coverage pays the business in the event that the business owner or other key employee dies.

There are many reasons that key person insurance would be a smart option for your business. If any of the following situations exist for your company, you should consider coverage:

• The death of the key employee could cause the death of the business.
• The death of the key employee could financially cripple the business.
• If one of the business partners wants to be able to buy the other partner’s shares of the business in the unfortunate event of their death.

It is not uncommon for small businesses to rely heavily on a few key people. In fact, in a survey conducted by the National Association of Insurance Commissioners (NAIC), 71% of small business owners reported that the profitability of their business was “very dependent” on one or two key people. Despite that fact, the same survey revealed that only 22% of those companies carried key person life insurance for their critical employees. 

How Much Coverage Do You Need?
To determine how much coverage you should buy, first consider the financial impact that the death of an indispensable employee would have on your business. For example, if you are the sole business owner, you may only want enough coverage to help your heirs close your business and pay the company’s debts. If you are covering a key salesperson, you would want a policy that provides enough to cover the loss of sales income while you find someone new to replace that income.

Who Owns and Benefits from the Policy?
In most cases, premiums for key insurance coverage are paid by the business and the business owns the policy. As a result, the business is the beneficiary. The key person named on the policy, however, must provide written consent allowing the company to own the policy. 
If you think key person insurance is right for your business, talk to your broker about a policy.

Liability Insurance for Your Small or Home-based Business

Small businesses with fewer than 50 employees contribute 30% of Canada’s GDP nationwide. Maybe you won’t start the next Toronto Dominion Bank or Imperial Oil out of your garage or home office, but it's clear that the Canadian entrepreneurial spirit is alive and well.

Properly protecting your growing small business or home-based business comes with some special considerations. In particular, business liability is a risk often overlooked by startups with big dreams.

Business insurance comes in several forms, but most home-based businesses or small businesses need to focus on a core set of risks initially.
 
What is general liability insurance?
General liability insurance protects your small business against common types of claims, keeping you protected if you're found to be legally liable for injuries to others or property damage caused by your product, by accidents on your premises, or by your actions or the actions of employees at your customer’s location. Inadvertent mistakes on your part, such as errors or omissions, are handled by a separate type of liability insurance policy.

Be aware that in most cases your home business activities, including injuries sustained by clients or business visitors, are not covered by your homeowner's insurance or tenants insurance policy. Your for-profit venture can cost you in more ways than you realize if you're not properly insured for common risks.
 
What is errors and omissions coverage?
Errors and omissions coverage, also known as E&O coverage or professional liability insurance, was originally designed for doctors, lawyers, engineers, and other similar occupations in which an error or oversight can cause financial harm to the client. The application for errors and omissions coverage has expanded to reach nearly every service related field. If your small business or home-based business works as an advisor or in a consultative role with clients, errors and omissions coverage can help protect your small business against claims due to human error.

Reach out to your broker to discuss your insurance needs for your small business. Rates are often more affordable for small businesses because there's less exposure than with larger businesses — allowing you to grow your coverage as your business grows.

What Are the Top 5 Small Business Insurance Claims?

Most small business owners skip paying for small business insurance until they have a legal or contractual reason to do so. But, in doing that, many are putting themselves, and their business, at risk. According to a commercial insurance study conducted by The Hartford between 2010 and 2014, 40 percent of small businesses will experience an event that requires them to file a small business insurance claim in the next 10 years.

Here are the top five claims filed by small businesses:

Theft: Not surprisingly, theft topped the list of small business claims on The Hartford’s list. Twenty percent of all claims filed by small business owners were due to theft and burglary.
The average loss for theft claims was around $8,000.

Water Damage: Coming in second was water damage. Fifteen percent of the small business claims in The Hartford’s study were caused by flooding from frozen pipes that ended up bursting as well as collapsed or damaged roofs from snow and ice accumulation.
The average loss for water damage claims was $17,000.

Wind and Hail Damage: Another 15 percent of small business insurance claims resulted from wind and hail damage.
The average loss for wind and hail damage claims was $26,000.

Fire: Ten percent of the claims filed by small businesses in The Hartford’s study was due to fire. With the significant damage that fire causes, it’s no surprise that fire claims are the most costly on this list.
The average loss for fire damage claims was $35,000.

Customer Injury: Slip-and-fall customer accidents also accounted for 10 percent of the claims in The Hartford study.  
The average loss for customer injury claims was $30,000.

If you own a small business but don’t have small business insurance, think about the impact one of these incidents would have on your small business. You owe it to yourself, your customers, and your business to at least get a quote to see how affordable coverage can be. Talk to your insurance broker today to explore your options.