Business ownership takes many forms, including sole proprietorships, partnerships, joint ventures, corporations and self-employment through consulting or contracting. However, all business owners are united in their need to think and plan ahead to ensure that they have the appropriate types of insurance in place to protect their business interests, ownership investment and the people whom they support. We discuss several common uses for insurance below.
Key person
Very often, businesses are heavily reliant on one or more key persons whose special talents, relationships or experience make them invaluable to the business’s success. If such an individual’s death or severe illness could seriously disrupt a business’s team members, customers, creditors, suppliers, finances, intellectual property or other competitive advantages, then protecting the business with key person coverage is worth considering.
Key person insurance coverage might include disability, critical illness and/or life insurance for specific individuals. Unlike policies designed as benefits for team members and families, key person insurance is typically structured to pay funds to the business itself for its immediate financial needs and/or to recruit, onboard and retain the replacement skills needed to mitigate the short or long-term impact resulting from the loss of a key person.
Business loan protection
Another potential concern is the exposure of a business owner’s personal assets to creditors in the business. Business bankers often require personal guarantees and/or personal collateral for business loans, and an owner’s death or incapacity could trigger loan demands that impact personal assets (or the owner’s estate). This can be problematic. For example, in some cases the call by lenders may occur before the business completes valuable work (e.g., a real estate project).
By planning ahead, business owners may be able to arrange disability and critical illness insurance coverage that can provide cash if a covered health event occurs. The cash could assist with loan payments, income replacement or in some cases even cover the overhead or operating costs of the business. Life insurance could provide additional help as a source of tax-free funds for the business – useful to repay business debts following an insured person’s death.
Shareholder or partnership agreements
Often referred to as buy-sell arrangements, such agreements should – but may not always – include clauses that address how a business is to be valued upon certain triggering events, such as an owner or partner’s untimely death, disability or critical illness, and how the subsequent transfer of ownership between parties should be conducted. Problems frequently arise when such agreements have not been formally drafted or executed (e.g., they are unsigned) or when funds to execute the agreement are lacking.
To address this latter concern, insurance products can be a useful source of capital to support fulfilling the agreement as intended if a critical illness, disability or death of an owner or partner occurs. The use of insurance can provide planning predictability for the business, avoid eroding its capital and provide financial support to the owner (or their family or estate) through timely payment for an ownership stake transfer.
Other purposes
Business owners may have a variety of other worthwhile uses for disability, critical illness and life insurance. For example, such insurance could provide funds to pay capital gains taxes that may arise upon a business transition, funds for executive compensation plans, or funds to equalize assets being left to other individuals or beneficiaries when a family business is changing hands.
Whether your business is a start-up or at a more mature stage, a well-designed insurance strategy can help both safeguard the money and time that you’ve invested into building your business and help it to fulfill its financial obligations. As well, an effective strategy preserves the legacy you’ve worked hard to achieve.
If you would like more information on the insurance options available through Odlum Brown Financial Services Limited, contact us through your Odlum Brown Investment Advisor or Portfolio Manager.
Odlum Brown Financial Services Limited (OBFSL), a wholly owned subsidiary of Odlum Brown Limited, can offer Odlum Brown clients a variety of coverage options from many of Canada’s top insurance companies tailored to suit their individual needs. Our licensed professionals are here to help you assess your position and then implement customized recommendations to meet your individual circumstances and needs. For more information, please contact your Odlum Brown Investment Advisor or Portfolio Manager.