Many small businesses have been devastated by the coronavirus pandemic. Unlike their larger brethren, small companies typically lack the cash cushion or access to funds that bigger businesses enjoy. Even with new programs to help small businesses out, such as the Paycheck Protection Program, many are seeing their resources run dry. A large number of them will not survive.
Those that do make it may want to look into their insurance coverage. Business insurance can cover a wide variety of issues, including property damage, liability, lawsuits, loss of key employees – and especially important today – loss of business income.
If it has been some time since you last reviewed your business’s insurance coverage, now may be a good time to conduct an in-depth review of your policies. A review can help detect shortcomings in coverage and help you protect your livelihood from financial harm.
What’s the “Right” Amount of Coverage?
It’s likely that you have commercial property and general liability coverage as well as additional policies. However, it may be that things have changed in your business since you last reviewed your policies — new locations, updated equipment, or other changes. The right amount of coverage should reflect the current status of your business. You may also consider reviewing your deductibles. Raising deductible amounts to reduce policy premiums is considered a fiscally sound strategy — but only up to a point. The bottom line is that if you cannot afford to pay the deductible, it is too high.
Look for Gaps in Your Coverage
Review your policies thoroughly before you renew them. In particular, look for new exclusions, since these can potentially expose your business to risks you assumed were covered. The review period is also a good time to dig deep into the financial soundness of your insurance carriers. Various insurance ratings agencies, such as A.M. Best, Moody’s Investors Service, Standard and Poor’s, and Fitch Ratings, measure the financial health of insurance companies and their ability to pay policy holders’ claims. Each ratings agency employs its own ratings system, though these are generally similar to letter grades used in education.
Take the time to investigate new areas of potential vulnerability that could harm your business. For example, what if there are repeated waves of coronavirus infections, resulting in more lockdowns and closures? Or what if another pandemic hits? Business income insurance may help cover your costs until your business is up and running again, helping you to continue to pay expenses, such as payroll and monthly bills, until the crisis has passed. But you’ll want to make sure crises such as a pandemic are covered, and the specific terms of coverage.
Insure Your Most Valuable Resources
Who is essential to your business’s success? Most likely, it’s you, your partner, or your most productive salesperson. Think what might happen if you or that person were to die unexpectedly. Your revenues could fall, your operations could be disrupted, and the future of your company could be placed in danger. A key person life insurance policy can provide the funds to carry on with operations as usual.
With a key person life insurance policy, the business buys the policy, pays the premiums, and is the beneficiary. If you or the other insured person were to die, the proceeds from the policy would be available to help your business make up for lost sales and interrupted cash flow. The proceeds also could help hire and train a replacement or permit the business to move on with any business or expansion plans. This calculator can give you an idea of the factors that determine how much personal life insurance coverage is typically called for.
It can be time consuming and somewhat difficult to conduct a thorough insurance review. But as recent history shows, bad things can come out of nowhere and devastate your business. That’s why it may make sense for you to work closely with your financial professional to see if your business’s insurance coverage continues to meet your needs.
BGMF CPAs is not an insurance provider, but we do work with directly with them and our clients to obtain proper insurance. Contact us to discuss this complex subject further along with other strategies to protect your business and wealth.