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Protecting Your Small Business: Key Insurance Solutions Every Owner Should Consider

Alleson Tate
Three business owners smiling and looking at computer screen.

We are pleased to introduce a new contributor to the MBE magazine team Alleson Tate. Alleson is a certified financial planner and founder of Avere Wealth Management who will be providing financial content to help you do better business and secure wealth.

Alleson Tate headshot
Alleson Tate, Avere Wealth Management

Running a small business requires dedication, passion, and strategic planning. As a small business owner, you invest countless hours and resources into building your dream. In the midst of the excitement and growth, it’s critical to safeguard your business from unexpected events that could disrupt operations or threaten survival.  

In this article, we’ll explore the importance of four essential insurance solutions for small business owners: buy-sell agreements, key person life insurance, key person disability insurance, and business overhead expense insurance.  

These valuable tools can provide financial security and peace of mind, ensuring the continued success of your business. 

1. Buy-Sell Agreement 

A buy-sell agreement is a legally binding document that outlines the transfer of ownership in the event of certain triggering events, such as the death, disability, or retirement of a business owner. This agreement ensures a smooth transition of ownership and protects the interests of all parties involved. 

Why is it important? 

  • Continuity – A buy-sell agreement ensures business continuity by providing a clear roadmap for the transfer of ownership. It prevents conflicts and uncertainties that could arise during a transition period. 
  • Fair Value. -The agreement establishes a fair value for the business, avoiding disputes over its worth and protecting the financial interests of both the exiting and remaining owners. 
  • Financial Security – With a well-crafted buy-sell agreement, you can secure the financial stability of your loved ones by providing them with a fair buyout, helping them maintain their livelihoods and support. This is critical for those who want to keep their business in the family to build generational wealth.

2. Key Person Life Insurance 

In many small businesses, certain individuals play a critical role in the company’s success. Key person life insurance is designed to protect the business in the event of the death of a key employee or owner. It provides financial resources to help the business cope with the loss and recover from the impact of losing a key contributor. 

Why is it important? 

  • Financial Protection – Key person life insurance ensures that the business has funds to cover expenses such as hiring and training a replacement, settling outstanding debts, or even surviving the loss of revenue during the transition. 
  • Business Continuity – With the financial support provided by key person life insurance, the business can continue its operations smoothly and minimize the potential disruptions caused by the loss of a key person. 
  • Credibility and Confidence – Having key person life insurance demonstrates to stakeholders, such as clients, lenders, and investors, that your business is prepared for unforeseen circumstances. It instills confidence and strengthens your business’s reputation in the marketplace. 

If you have key person life insurance on the business owners and a buy-sell agreement, this will provide funds to buy out one partner’s ownership stake in the business and settle any debts they own or provide a personal guarantee.  

3. Key Person Disability Insurance 

While key person life insurance protects against the loss caused by the death of a key individual, key person disability insurance focuses on the financial consequences of that person becoming disabled and unable to work. This coverage ensures that the business can continue to function and thrive, even in the absence of a key contributor. You have a greater chance of becoming disabled for 12 months or more than you do dying before the age of 65.  

Why is it important? 

  • Financial Stability – Key person disability insurance provides a regular income stream to cover ongoing business expenses, employee salaries, and other financial obligations during the disability period. It helps the business avoid financial strain and maintain its operations. 
  • Resourceful Recovery – With the financial support from key person disability insurance, the business can allocate resources to find temporary replacements, implement necessary adjustments, or invest in training and development programs. 
  • Employee Retention – This insurance coverage helps businesses retain valuable employees by providing financial support for continued employment, even when a key person is unable to work due to a disability. It showcases your commitment to your team’s well-being and builds loyalty. 

As a bonus, key person disability insurance can be a deductible expense.  

4. Business Overhead Expense Insurance 

Business overhead expense insurance offers protection for small businesses by covering essential expenses if the business owner becomes disabled and is unable to work. It helps to keep the business running smoothly and ensures the ongoing management of day-to-day operations. 

Why is it important? 

  • Expense Coverage – Business overhead expense insurance covers crucial expenses such as rent, utilities, salaries, loan payments, and other regular operating costs. This ensures that the business can maintain its operations and continue generating revenue during the owner’s disability period. 
  • Peace of Mind – With the assurance that critical expenses are covered, business owners can focus on their recovery without worrying about the financial strain their disability may impose on their business. 
  • Competitive Advantage – Offering business overhead expense insurance as part of your employee benefits package can attract top talent, demonstrating your commitment to supporting your team’s well-being and providing a competitive advantage in the marketplace. 

As a small business owner, protecting your business from unforeseen circumstances is vital to its long-term success. By implementing key insurance solutions such as buy-sell agreements, key person life insurance, key person disability insurance, and business overhead expense insurance, you can safeguard your business’s continuity, financial stability, and reputation. These insurance tools provide a safety net that enables you to focus on growing your business, nurturing your employees, and achieving your entrepreneurial dreams.

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