One hundred years ago, insurance probably was one of the last things business owners thought about. But technology, litigation and the Internet have permanently changed the cultural and business landscape of America, not to mention the world.
And insurance has evolved.
“Insurance mimics society — it’s ever-changing, based on the way people do business,” said Dave Reitan, account executive for Six & Geving Insurance Inc. “As our society becomes more complex, then insurance becomes more complex.”
There are five core components of insurance that small business owners should have, Reitan said.
The first, general liability, covers businesses for any type of negligent act which involves bodily injury/property damage from premises or operations; products liability; and personal injury — defamation of character, injury by humiliation, libel, slander, etc. — or advertising injury, such as copyright violation.
Next is property coverage, which should include on-site and off-site coverage if equipment is used off site. However, many business owners are not aware that if there’s a major fire in their building, they need a separate insurance rider if they want to be able to recoup lost business operating expenses while the building undergoes restoration.
The third basic area of coverage is business auto — either for vehicles owned by the company or for employees who use their own vehicles for work.
Fourth is workers’ compensation, which, of course, by law, employers must provide for employees.
But, Reitan said, in the state of Colorado, if a business owner owns 10 percent or more of the business and is actively involved, he or she can personally opt out of workers’ compensation coverage. Not a wise idea, however.
“I always encourage business owners to include themselves,” Reitan said. “They may opt out to save dollars — but if they’re severely injured on the job, workers compensation is a very cost-effective way to cover themselves.”
Fifth is umbrella coverage.
“Just like an umbrella that protects you from the rain, it will sit over the other four components and protect against catastrophic loss,” Reitan said.
And, just as the proverbial apple a day keeps one healthy, risk management is part of protecting one’s business.
One of the easiest ways to sidestep risk is avoidance — of industries or jobs that are highly dangerous or litigious. Another method is risk transfer — “transfer your risk to the insurance company or transfer risk by a contract, with hold harmless or indemnification clauses.
“You want to put the onus on the other person by virtue of the contract,” Reitan said. “It helps mitigate your exposure.”
Another aspect of risk management is risk retention. To reduce the cost of insurance, business owners can retain some acceptable amount of loss through a higher deductible.
And, finally, business owners should develop a good safety/loss prevention program.
Just as “business owners need a financial plan, an attorney, a CPA and health and life insurance,” Reitan said, “they need to develop a relationship with a good business insurance broker who will evaluate their business and the amount of coverage for risk and liability that’s right for them.”
The personal side
And for individuals and business owners alike — home, health and auto insurance aren’t the only necessary products.
“Life insurance and disability insurance are really at the foundation of a solid financial plan,” said Scott P. Theodore, managing partner of Northwestern Mutual Financial Network’s Denver office.
Of the three components of a financial plan — risk management, wealth accumulation, and wealth preservation and distribution — the first is often overlooked.
“It would make my hands go into a cold sweat to think of making a mortgage payment without having a house to live in (because of a fire),” Theodore said. “But people do this with disability insurance. Your chance of dying prematurely is 16 to 20 times more likely than your home burning down.”
The main elements of risk management are life insurance, disability insurance and long-term care insurance. These address three main issues: What happens if you live too long? What happens if you die too soon?’ Or what happens if you get sick or injured and cannot work?
“You don’t want to outlive your income,” he said.
People typically insure their homes because it’s a tangible asset — “so they don’t think twice about insuring it. But if you lose your income, then you lose your ability to rebuild,” Theodore said. “The challenge is that income is intangible — and it’s exposed every single day without being protected, but it could very well be $1 (million) or $2 million over the course of a lifetime. Disability insurance protects that which people can least afford to lose — their income.”
But don’t make the mistake of thinking that all is well because you checked the long-term disability box on your benefits plan at work.
Disability insurance through an employer is taxable to the employee and provides only 60 percent of income, less taxes.
Taxable group plans can be supplemented with an individual, nontaxable policy, in order to come closer to fully replacing an income.
As for the second component of risk management, life insurance, there are two main types.
Term life insurance is an option for people who have “a large financial need, without a lot of cash flow,” Theodore said. “If you need half a million to protect your family if you die, then you just buy term insurance.”
The downside to term insurance is that it’s comparable to renting a home.
“You get to live there, but eventually you get evicted, and you don’t build any equity.”
The other option is whole life/permanent insurance, which offers living benefits, plus a death benefit.
“It’s become a popular tool for accumulating wealth,” Theodore said. “The money grows tax deferred, and you can access the cash value to borrow money out of your policy for an emergency, or to supplement retirement or to finance the kids’ college. You don’t have to die to get the benefit.”
But, of course, the policy is more expensive.
Long-term care insurance is an entirely separate subject; it does not replace income, but protects quality of life.
“For the mature client, it’s almost like having disability insurance — it provides health care,” he said.
The key to the having the right amount of insurance — life, disability and otherwise, is to establish your financial goals and create a personal financial plan with an adviser, based on your specific needs, he said.
“And then review this plan on an ongoing basis — at least once or twice a year, more if you own a business or have significant wealth invested — because things change in life,” Theodore said.
Of course, life and disability insurance do not remove the risk of dying early or being disabled — but they shift the financial risk from the individual to the insurance company.
“We all like to think we wake up with a big ‘S’ on our chests, for Superman,” Theodore said. “But you want to make sure that the dreams don’t die with the dreamer.”