Seven Insurance Options to Help You Reduce Risk and Achieve Your Business Goals

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1 Seven Insurance Options to Help You Reduce Risk and Achieve Your Business Goals A Guide to Navigate Today s Complex Business Environment As a business executive, you understand that the current economic climate has never been more competitive or perilous. Far too often, it seems like one financial misstep can mean the difference between survival and failure, or expansion and contraction. Fortunately, you can safeguard your company from some of these dangers by taking a little precaution. We ve compiled a list of seven important types of insurance protection ones that are too often overlooked by businesses that can be essential to your company s growth and well-being. #1 - Key Person Insurance Protect your business during times of change As the name implies, this type of insurance centers on an important employee within your organization, such as a founding partner, a leading executive, or a top salesperson. Should that person die or, in some cases, become disabled and unable to work key person insurance provides your business with a financial buffer that helps absorb the loss of such a valued employee. Among other matters, this insurance can cover the possible decreased cash flow associated with the employee s departure, replacement recruiting and training expenses, and the purchasing of company shares from the deceased s estate. This financial protection is for your business only; it doesn t offer any type of benefits for the employee s family. The protection is provided through a

2 life insurance policy, with the business usually named as the beneficiary and paying the premiums. If necessary, your company can take out several policies to cover multiple employees. In a sense, key person insurance offers financial stability at a time of change, and can shield your company from the possible calamitous effects of the loss of an important employee. That s partly why this insurance is becoming increasingly popular with businesses. #2 - Buy-Sell Agreement Insurance Ease the ownership transition for your business A buy-sell agreement is a contract between business owners. It establishes the value of a company s assets, as well as the price to purchase an owner s share of the business following that person s death. These agreements facilitate an automatic transfer of the deceased s interest, avoid delays in probate, and make for a smooth transition for the surviving owners and members of the deceased s family. Using life insurance to fund the buy-sell agreement gives the surviving owners immediate access to the cash necessary for the transaction there s no need to scramble to put together the amount needed, or deal with the costs and time of taking out a loan. Also, you generally can receive these proceeds income tax-free. Dealing with the death of a business owner can be stressful and daunting. Buy-sell agreement insurance reduces the uncertainty during this difficult time, and allows your company to continue with minimized interruption. #3 - Non-Qualified Deferred Compensation Provide deserving personnel with the consideration they merit

3 Even in today s business climate, it s difficult to attract and keep top caliber employees that can make a meaningful difference to your company s performance. Non-qualified deferred compensation plans can help your business do so. These incentive agreements promise to pay key executives a designated part of their income either as salary or a bonus at a selected date in time, usually at retirement. The employee can advise on both the timing and amount. These plans can overcome the limits of qualified retirement plans, and allow the employee to avoid paying income taxes on these funds until later, when the tax implication should not be as severe. And, because these plans are exempt from the cumbersome tax requirements of qualified plans, they re much simpler for businesses to set up and execute. You can use a life insurance policy to financially fulfill deferred compensation agreements; your company pays the premiums, owns the policy, is the policy beneficiary, and can access the cash value. When the money is paid to the employee, your business receives a tax deduction. If the employee should die before the time indicated in the agreement, you can pay the amount due to the employee s family. Either way, your business has another tool to recruit and retain talented personnel. #4 - Supplemental Executive Retirement Plan (SERP) Help key executives with their retirement needs This plan shares most of the characteristics of a non-qualified deferred compensation plan and includes many of the same benefits for both employers and employees. However, as the employer, you have more control over this type of plan, and can implement restrictions that may reduce or eliminate its benefits if

4 the executive fails to meet the terms of the agreement such as by leaving your company early. As with similar plans, a SERP can be designed to meet the needs of the executive, who doesn t contribute to the plan. When funding the plan through life insurance, your company can access the cash value of the policy at any time, and will receive a tax deduction when the benefits are paid. Basically, these plans are another cost-effective way to strengthen the bond between your business and its upper-tier employees. # 5 - Professional Liability Insurance Shelter your company from expensive lawsuits Does your organization routinely provide advice, share its expertise, or offer any type of professional service? If so, your company could be vulnerable to a devastating financial loss or damaging lawsuit from a client or customer, due to errors in professional guidance or negligence. Sometimes known as malpractice or errors and omissions insurance, professional liability insurance provides a financial cushion against these types of situations. It pays for the legal costs of defending your company, as well as any damages awarded, up to your policy limit. It s a specialized protection, though, that usually isn t available through other policies, such as a general liability policy. While your company may strive to provide accurate information and deliver its services in a best practices manner, mistakes or lapses in sound judgment can occur. Having this insurance offers your business a sense of security, and the ability to withstand staggering legal defense expenses or an excessive financial judgment.

5 #6 - Directors and Officers (D & O) Liability Insurance Safeguard your executive team from legal damages Although it s related to professional liability insurance, D & O insurance carries an important distinction. Instead of providing financial protection against performance failures and negligence stemming from service issues, D & O helps defends against the actions of your executive team. It protects past, current, and future directors and officers from damages associated with alleged or actual wrongful acts, misstatements, omissions, and breaches of duty. With this coverage, if an employee, customer, or stockholder should decide to sue your directors or officers, your executive members would not have to risk their personal assets. And, like professional liability coverage, D & O pays your company s legal defense expenses, and any damages that may be awarded against your company, up to your policy limit. Even if your company is a private or non-profit organization, as long as it has a board or an advisory committee, it could benefit from having this type of coverage in addition to professional liability coverage. D & O insurance can mean the difference between being able to continue operating or being forced to close due to legal debts, along with providing some peace of mind. # 7 - Commercial Umbrella Liability Insurance Give your business an insurance safety net Like most companies, your business probably has at least a general liability policy to help protect it from unexpected losses. But, what would happen if those losses exceeded the limits on your company s policy?

6 Unfortunately, you know the answer: Your business would be stuck paying the extra amount. And, if the amount is excessive, it could curtail your company s ability to function effectively or to operate at all. Commercial umbrella liability insurance provides an extra layer of protection against this situation by picking up where your other liability policies leave off. It shields your business against exorbitant losses stemming from legal judgments, natural catastrophes, and bodily injury and property claims. Umbrella liability policies can even cover situations not included with your other policies, acting as a safety net for your company. However, it doesn t cover expenses associated with professional liability claims, which is another reason why it s smart to carry this insurance. As a business executive, you know it s important to have backup plans. Think of this coverage as a backup plan for your company s standard insurance protection. The Role of Insurance with Your Business We hope you ve learned some steps you can take to improve the quality and security of your company or at least triggered some thoughts about reducing risk for your business. While insurance can be difficult to understand and a chore to deal with it s served a vital role in the economic development of businesses for centuries. And, it will continue to do so for many years to come. So, if you d like more information about these options or would just like a review of your company s current insurance situation please contact The Meltzer Group at (301) Remember, together we can meet the challenges you face every day.