This is a guest post written by Certified Financial Planner Neal Frankle.
If you’ve done the heavy lifting to create a successful small business, it makes sense to go the extra mile to protect that business. Right? And the best way to safeguard all you worked for is to make sure you have the right insurance coverage in place. This is a quick and easy process and could be the most important business move you make all year. The last thing you need is some unforeseen and uncovered “event” to happen that threatens to take down all you’ve worked so hard to build up.
Here are the top 5 insurance mistakes business owners make and what you need to do to make sure you aren’t making any of them.
5. Don’t Rely Solely On Your Homeowner’s Policy
This is especially important for people who run at least part of their business out of their home. Homeowner’s insurance doesn’t cover any property that is used for business. That includes structures and (most) business equipment.
To make matters worse, if someone visits your home office and hurts themselves your homeowners policy won’t cover you. That’s true whether or not the person is making a business related visit or not.
In order to solve this problem, talk to your business insurance agent about the following types of coverage:
- Business Personal Property Insurance
- On- Premise Liability and Off-Premise Liability
- Errors and Omissions Coverage (sometimes required)
Important Side Note: If you have a B2B business you have to take this to the next level. Many times the company you are doing business with requires you to have very specific insurance with very specific limits. They may require you to carry liability insurance, an umbrella policy or other coverage. The challenge is, many times the type of coverage they require, the amounts, and the limits are buried in the contract and hard to find.
Whatever you do, please don’t overlook these requirements. If you’ve signed a contract stating you do have this coverage, you can be held responsible up to those limits whether or not you actually buy the policy if there is a claim. And even if there isn’t a claim you might lose the business if they discover you haven’t lived up to your side of the bargain
In order to make sure this doesn’t become your problem, read your contracts carefully and ask a lot of questions. Make sure you understand your obligations and then comply. This is absolutely a situation where an ounce of prevention is worth a ton of cure.
4. Loss-Of-Income Coverage
This is also known as business interruption insurance and is meant to kick in if the business experiences a disaster. Don’t make the mistake of thinking your property insurance is all you need. Your property insurance only pays for the physical damage done. You need the loss-of-income policy to take care of the damage done to your income as a result of the business being shut down.
The good news is that you don’t have to buy a separate policy to put this coverage in place. Instead, just add a rider to your business property insurance policy or business owner’s policy.
Make sure you understand how covered losses are defined. Towards that end, confirm that the basic policy you buy covers disasters such as water damage, fire, smoke etc. On top of that, make sure the policy protects you against natural disasters such as tornadoes or earthquakes if they occur in your location.
3. Life Insurance
Many times people who own small businesses ARE the business. You have to ask yourself what would happen to your business (and more important, your family) if you passed away? Would your business survive without you? If not, what would your family use for income? If you absence would become a financial catastrophe for the business or your family, think about using life insurance to replace the income your business will no longer provide – just in case.
And while we’re on this topic, consider whether or not you need to buy life insurance on your key employees. If your business depends on specific individuals, you need to insure their lives as well.
The good news is that this coverage doesn’t have to be expensive. You can use inexpensive term life or group life to cover your exposure in most cases.
While term life does expire at some point, that doesn’t have to be a problem. Buy your term coverage for 10, 20 or 30 years. Then, build a business and retirement plan that frees the business from being dependent on the people (including yourself) you buy insurance for.
More people are financially devastated by disability than they are by death. In fact, disability is the number one reason people lose their home. Death is the fourth reason. You may think this can never happen to you but can you take the chance that it might? Not if you care about safeguarding your business and family.
According to the Life and Health Insurance Foundation for Education, nearly one out of every three workers will suffer a disability lasting three months or more at some point during their career. If losing your pay check for that period (or longer) is enough to ruin your finances and credit, do what’s necessary to buy a disability policy.
I’ll be frank; it’s not easy to buy disability coverage these days. Many insurance companies stopped selling it years ago. Nonetheless, if you need it, get a policy in place as soon as you can.
When you buy a disability policy, try to get one that will pay you if you become disabled and can’t work in your own profession (vs. a policy that will only pay out if you can’t work at all) and one that will pay you until you reach 65 or longer.
If you are able to get a policy make sure you fully understand how much of your income is covered. In other words, if most of your income comes from commissions and bonuses make sure the policy includes that or shift your income to salary in order to safeguard yourself.
Don’t count on Social Security either. According to Social Security, only 36% of the people who apply for SSI disability actually receive it and the benefits are very limited.
I bought a private disability policy many years ago and the cheapest way to do it was to buy a group policy for all my employees. This enabled me to tailor the coverage per employee rather than provide the same benefits for everyone. That’s something you might look into. While I never had to make a claim thank goodness, it sure felt good knowing my family was protected in case I got hurt.
1. Paying Too Much
The last mistake that small business owners make is paying too much for the coverage they buy. Often, small business owners buy their business coverage from the agent who provides their personal coverage. There are times when this can work out, but it can often backfire.
Always shop the coverage being offered to make sure you are getting the best deal and don’t become complacent. Re-visit your insurance coverage each year. I talk to my agent every January and I ask her to explain each policy I own, why I still need it, what it covers and what it doesn’t.
I’ve found that many times, my business evolves or the insurance industry changes. By dusting off my policies and going through them with a fine tooth comb once a year, I make sure that I have the coverage I need, I understand what I have in place and I am paying the least amount possible.
Hopefully this article helped you on your journey to finding the best insurance to fit your small business needs!
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