Does your business need Key Person Insurance?

Consider insurance coverage for the loss of a key employee.

If you’re the owner of a small business, you probably have at least one very important employee that you trust and rely on to keep your business running smoothly. This person knows your business inside and out, and is always there when you need him or her. But have you ever thought about what would happen if that employee was suddenly no longer there? What would become of your business if you lost that very important person?

This is where key person insurance comes in. Key person insurance protects a business against the death or disability of a key employee. A policy under key person insurance likely includes life insurance and/or disability coverage. Below is a breakdown of everything you need to know.

By Gregory Boop

When It’s Needed
A company may need key person insurance if it depends on one or two individuals to succeed. For example, Bob and Bill are brothers and business partners in a thriving restaurant called Brothers Bistro. Each has special skills that the other lacks. Bob is a creative genius and has an extraordinary talent for combining flavors. Bill has exceptional people skills and a good head for business. The restaurant’s success depends on the talents of both men. If either Bob or Bill dies or becomes disabled, the business might not survive.

To protect itself, Brothers Bistro purchases key person insurance on both men.

  • You should consider purchasing key person coverage if your business has any of the following characteristics:
  • It is highly dependent on one or more individuals who have special skills and would be difficult to replace.
  • Your company relies on a key individual to generate a substantial portion of its income.
  • Your business has debt that would be difficult to pay off if a key individual died or became disabled.
  • Your business plans to seek a loan or investors. A bank or investment firm may refuse to extend a loan or make an investment in your firm unless it has key person coverage in place.
  • Your company plans to merge or go public. Your firm may need key person coverage for top executives and board members before it can proceed with a merger or IPO.

Key Person Life Insurance
A business purchases key person life insurance to protect itself against the death of an important individual. The business is both the policy owner (buyer) and the beneficiary. The key employee is the insured. The insured person does not receive any benefits from the policy.

Key person life insurance is usually written as either a term policy or a permanent policy. A term policy is the cheaper of the two. It applies for a specific period of time, which may be as short as one year or as long as 20 years. Coverage ends when the term expires or the insured person dies, whichever happens first. If the insured dies the firm collects a death benefit. The company can use the money to hire and train a replacement, to pay off debts, or for some other purpose.

Permanent key person life insurance applies for the life of the insured individual. It serves two purposes: it is an asset that can be used as collateral for a loan and it pays a death benefit. A permanent policy can be transferred to the insured, say at the worker’s retirement, if the firm no longer needs the coverage.

A firm may have more than one key person. For example, suppose that XYZ is a corporation with five executive officers, all of whom are essential to the company’s success. To save money XYZ could purchase a key person life policy that includes a “first to die” provision. The policy will pay a death benefit to the company if any of the officers dies. The policy will then cover the remaining officers.

Key Person Disability Insurance
Key person disability insurance protects a company against the risk that a key employee will become disabled to the extent that he or she is unable to perform his job. Benefits may be payable on a monthly basis or as a lump sum. Benefits are paid after a specified waiting period. This period might be 30 or 60 days for monthly payments and 12 or 18 months for a lump sum payment.

There is no “standard” key person disability policy. Rather, each policy is typically designed to meet the needs of the company.

Amount of Insurance Needed
How much life or disability insurance should you purchase on a key person? To answer that question, you will need to estimate the economic loss (lost revenue or profit) your firm will suffer when a key person dies or becomes disabled. You will also need to consider the cost of recruiting, hiring and training a replacement employee. An insurance agent or broker can help you calculate the amount of insurance you need.

Cost of Coverage
The cost of key person insurance depends on the age, health, and sex of the insured individual as well as the size and nature of the business. Two other factors are the type of policy you purchase (term or permanent) and the limits you choose.

The premiums you pay for key person coverage are generally not deductible for tax purposes. However, the death or disability benefits your company receives generally are tax-free. Consult your tax professional to determine how the purchase of key person insurance will affect your firm’s taxes.

Read the full article here.

The partners at Flagship Financial are here to help you and advise you on Key Person Insurance. Click here to learn more!

10 Finance Tips for Small Business Owners

Use these tips to better manage your business finances.

Small business owners have a lot of work cut out for them when it comes to managing finances. Not only do you have to keep your personal finances on track, but you also have to manage and maintain the financial health of the small business you own! Sometimes it may be a struggle, but there are certain guidelines you can follow to better align the two financial areas.

Remember: it may be a little extra work to follow these tips and get a better handle on your finances, but it will most definitely pay off in the long run. Below are ten pieces of advice for managing your finances as a small business owner.

By Georgia McIntyre

1. Set Up a Retirement Fund
When it comes to personal finance tips for entrepreneurs—and anyone, for that matter—this first tip is an absolute basic.

You, like all other workers, need to be prepared for retirement—and setting up a retirement fund will help you get there.

You don’t have to funnel a ton of money towards the fund, but what’s saved now will help curb your tax bill and grow tax-deferred until you decide to use the funds for retirement.

There are a few different retirement plan options for small businesses: a SEP-IRA, a SIMPLE IRA, a Solo 401(k) and a SIMPLE 401(k). All but the SEP-IRAs work for sole proprietorships, partnerships, LLCs, or corporations.

Before choosing any one of these retirement plans, do your research on what each offers and how that plan can help you meet your retirement goals.

But here’s a general overview of each:

A SEP-IRA is a tax-deductable plan much like a traditional IRA. This plan works well if you’re the only employee of your business. If you do have other employees, you must fund SEP-IRAs for them, too. For 2017 tax returns, you can contribute up to 25% of your pay or $54,000.

A SIMPLE IRA works as a retirement plan for businesses of less than 100 employees. Contributions work similarly to a 401(k), where the funds you allocate towards the plan are set aside pre-taxed and taken directly out of paychecks. In 2017, contributions cannot exceed $12,500.

A Solo 401(k) is meant for the self-employed without employees (including self-employed people with just a spouse). The IRS allows for elective deferrals of up to $18,000 in 2017 ($24,000 if you’re older than 50), or an employer non-elective contribution of up to 25% of your compensation. Your total contribution can’t exceed $53,000.

A SIMPLE 401(k) is meant for businesses with 100 or fewer employees. The business owner and employees can contribute up to $12,500 in 2017 and $15,500 for people 50 and older.
If you’re unsure how to set up a retirement plan yourself, consider going to a financial adviser for help navigating the process. A Certified Financial Planner (CFP) can help you determine what your investing goals are and how to choose the right fund to get you there.

2. Diversify Your Investments
Another important personal finance tip for small business owners to live by is to diversify your investments.

Diversification is one of the most important tenets of investing.

Diversifying is an especially important tip for small business owners because entrepreneurs tend to reinvest their personal capital totally in their business.

While investing in your business will absolutely help you grow—you shouldn’t put all of your personal assets towards one bet. (Especially considering how risky a owning a small business really is—only about 50% of small business survive 5 years.)

By allocating funds into other types of businesses, side business, alternative investments, or just putting aside cash in a savings account, you’re giving yourself some breathing room. If you need to close up shop for some reason, not all your personal assets will have been funnelled into a failed business.

3. Plan for the Off-Season With an Emergency Fund
As an adult, you’ve probably been told to have an emergency fund for rainy days.

This is a personal finance tip that small business owners should follow, too.

Odds are, business won’t be booming month after month. As a business owner, you’ll likely have to deal with irregular income earnings throughout the year.

As a small business owner (especially as one of a seasonal business), it’s important to budget for those down months. Make sure that you have enough “emergency” savings on hand so you can weather any down months of business.

Like anyone else, you need to cover the expenses of housing, food, insurance, utilities, and the welfare of any dependents, so always keep those personal financial needs in mind.

4. Keep Your Business and Personal Finances Separate
As a small business owner or startup entrepreneur, this next personal finance tip is especially hard.

You are so invested and inter-connected with your business that it might feel like you are your business and your business is you.

While that enthusiasm is a key trait of successful entrepreneurs, it shouldn’t apply to your financials.

Keeping your business and personal finances separate is important for a lot of reasons, namely:

  • Saving you from headache during tax season when you’re deducting your business expenses.
  • Giving your business more credibility and legitimacy as a business.
  • Removing personal liability when something negative happens to your business down the road.
  • Making sure you’re not putting the burden of your business’s financials on your personal accounts.
  • When you start your business, open a business banking account and apply for a business credit card to use for your business expenses. This is a great start towards separating your business and personal accounts. (Plus, doing so will help you build business credit, separating you from your business even more clearly.)

5. Automate Your Bill Payment Schedule (for Both Your Personal and Business Accounts)
If you’re looking for personal financial tips, one that you’ll absolutely come across is to automate your bill payment schedule.

This is an easy time-saver that entrepreneurs should follow, too.

You’re spending lots of your time managing your business’s financials, so it’s easy to overlook your own personal financial obligations. If you’re making payments on business loans, business credit cards, personal credit cards, a mortgage, and so on, you have a full plate of financial responsibility.

If your bank allows it, set up specific rules to pay bills of fixed amounts, and set up alerts for those accounts you need to review before paying.

Doing so will help you stay on top of all your accounts—avoiding steep late-payment fees and hits to your credit score.

6. Keep Your Personal Finances in Mind During Business Succession
Whether you decide to sell, pass on, or simply end your business, you’ll need a strong business succession plan.

A variety of parties are involved in a business and affected by its succession: the owner, employees, contractors, clients, landlords, investors, and so on.

Creating a sound business succession plan will ensure that every party’s financial interests are met during the process of discontinuing or passing on your business. The act of ending or succeeding a business has many tax and financial considerations that come with it, so you might consider consulting a lawyer who specializes in the subject while you create the financial side of a succession plan.

7. Seek Out Professional Tax Advice
One of the most followed personal financial tips is to consult a good accountant when tax season rolls around.

This personal financial tip rings true for entrepreneurs, too.

Depending on your business entity, there are a variety of a correct ways you should be filing your business taxes. The current U.S. tax law for individuals and small business owners is very complex. And getting it right can be hard for busy entrepreneurs.

Sole proprietors have different taxation rules from C Corporations, for instance.

Speaking to an accountant or tax professional can help you figure out what your obligations are in your state, and based on your business entity.

And if you choose to go about the tax process yourself, make sure to start preparing early. Keep an organized, clear record of all your business expenses to save the headache of sorting your expenses during tax season!

8. Keep Your Expenses Low and Stick to a Budget
You probably have been told to keep to a budget for a business before.

There’s no reason to not translate this advice into a personal financial tip, too.

It can be hard to manage your day-to-day personal spending when sticking to a budget for your business is more top of mind. But don’t let managing your own money fall through the cracks while you focus on growing your business.

You can set up your own budget based on your monthly expenses, or make it even easier on yourself and use a budgeting app. Mint is one of the most popular budgeting apps out there, but You Need a Budget and Wally are also good options.

9. Check Your Interest Rates
If you’re a savvy business owner, you’re hyper aware of the interest rates you’re paying on all your small business financing. If you crunch the numbers and can’t afford a loan you’re offered, then that product isn’t for you.

Checking your interest rates is a personal financial tip entrepreneurs need to do for their own money, too.

If you have student loans or personal loans, consider your refinancing options. Or, think about which loan you should pay off first based on how steep the interest rates are. The same goes for credit card balances: pay off the balances that come with the highest interest rates first.

The bottom line: paying attention to each account’s interest rates will help you pay off debt and managing your personal finances smartly.

10. Build and Track Your Credit Score Regularly
Monitoring your credit is a personal finance tip that is important for both your personal and business finances.

As an entrepreneur, you’ll find that your personal credit score follows you into the realm of your business. Many small business lenders, creditors, suppliers, etc. will look at your personal credit score to determine whether or not to work with you.

Why will your personal credit score matter so much for your business?

Well, it comes down to the fact that you’re a small business. Whereas corporations can have business credit scores that speak to the responsibilities of the business and not the founders or executive team, lenders don’t have much business history to go off of with a small business.

Because it’s likely just you and a small team of employees at the helm, the best indication of your business’s ability to pay off its debts is how well you’ve been able to handle your personal debts and financial accounts.

Practicing good borrowing behavior with your personal credit accounts (and regularly monitoring where your score lies) will save you and your business money in the long run, so don’t turn a blind eye to your credit health.

Read the full article here.

So what finance tips do you live by with your business? Leave a comment below!

13 Types of Insurance a Small Business Owner Should Have

Is your business adequately covered?

If you’re confused and intimidated by the complex subject of business insurance, you’re not alone! Business insurance is used to protect the business and the business owner when unforeseen events occur. For many small business owners, it can be tough to determine what types of insurance and levels of coverage are needed. For this reason, anyone considering business insurance should seek the advice of a reputable insurance agent. Flagship Financial Partners can get you on the right path and set your business insurance worries at ease!

Below are the different types of insurance that a business owner should have.

By Newtek

1. General Liability Insurance:

Every business, even if home-based, needs to have liability insurance. The policy provides both defense and damages if you, your employees or your products or services cause or are alleged to have caused Bodily Injury or Property Damage to a third party.

2. Property Insurance:

If you own your building or have business personal property, including office equipment, computers, inventory or tools you should consider purchasing a policy that will protect you if you have a fire, vandalism, theft, smoke damage etc. You may also want to consider business interruption/loss of earning insurance as part of the policy to protect your earnings if the business is unable to operate.

3. Business owner’s policy (BOP):

A business owner policy packages all required coverage a business owner would need. Often, BOP’s will include business interruption insurance, property insurance, vehicle coverage, liability insurance, and crime insurance . Based on your company’s specific needs, you can alter what is included in a BOP. Typically, a business owner will save money by choosing a BOP because the bundle of services often costs less than the total cost of all the individual coverage’s.

4. Commercial Auto Insurance:

Commercial auto insurance protects a company’s vehicles. You can protect vehicles that carry employees, products or equipment. With commercial auto insurance you can insure your work cars, SUVs, vans and trucks from damage and collisions. If you do not have company vehicles, but employees drive their own cars on company business you should have non-owned auto liability to protect the company in case the employee does not have insurance or has inadequate coverage. Many times the non-owned can be added to the BOP policy.

5. Worker’s Compensation:

Worker’s compensation provides insurance to employees who are injured on the job. This type of insurance provides wage replacement and medical benefits to those who are injured while working. In exchange for these benefits, the employee gives up his rights to sue his employer for the incident. As a business owner, it is very important to have worker’s compensation insurance because it protects yourself and your company from legal complications. State laws will vary, but all require you to have workers compensation if you have W2 employees. Penalties for non-compliance can be very stiff.

6. Professional Liability Insurance:

This type of insurance is also known as Errors and Omissions Insurance. The policy provides defense and damages for failure to or improperly rendering professional services. Your general liability policy does not provide this protection, so it is important to understand the difference. Professional liability insurance is applicable for any professional firm including lawyers, accountants, consultants, notaries, real estate agents, insurance agents, hair salons and technology providers to name a few.

Read the full article here.

So is your business covered with all the insurance needed to protect what you have? Contact Flagship Financial Partners today for help.