As financial advisors, we've all encountered small business owner clients who are living the American dream: After years of saving and strategizing, all while working very long hours, their small business is finally starting to take off, and the entrepreneur now serves as the primary or sole breadwinner in his or her household.
Now, here’s the bad news: Many other entrepreneurs before them have experienced similar triumphs, only to see all their hard work go up in smoke because they didn’t take the necessary steps to properly insure their success against a range of unexpected turns, from medical emergencies, to acts of God, to, in some instances, just plain bad luck.
So when advising the successful entrepreneur who’s married with children and serving as the primary or sole breadwinner, what are the best ways to help them insure themselves and their business across an array of worst-case scenarios?
The following are the top four areas of insurance each advisor should explore with their small business owner clients:
1) Health insurance. Most people appreciate the importance of having medical insurance. Without it, of course, there’s a tax penalty, but aside from that, a large and unexpected personal medical bill can decimate the finances of even the most successful small business owner, and, thus, their business. But there are specific ways to make the expense of health insurance happen in a tax-savvy way.
For most small businesses with predictable revenues, it probably makes the most sense to pursue a group medical plan. Such plans not only allow the owner to gain coverage for themselves and their family but typically offer money-saving tax incentives as well.
Also, as we all know, even with insurance, prescriptions for medication, visits to the doctor and hospital stays aren’t free. A health savings account (HSA) is a good way to complement existing insurance coverage, particularly for those enrolled in a high-deductible plan, which are less expensive but cover fewer costs.
HSA contributions are tax deferred, and though they have yearly caps of approximately $3,350 for individuals and $6,650 for families depending on the plan, the balance rolls over, year over year, and can be invested in market-based solutions like ETFs and mutual funds to maximize growth. Because of this, HSAs are an ideal vehicle for both tax planning and preparing for future medical costs.
2) General liability insurance. If clients rent commercial space, have them check their lease agreement because the property owner may cover minor injuries resulting from slips and falls. But even if that’s the case, every business needs a general umbrella liability policy, whether it utilizes a commercial space or is home based. It’s far from a guarantee that a personal home policy will cover business-related liabilities if the owner or any of their employees are injured in a work-related accident—even if the accident happens in one's garage or basement.
Also, as part of any umbrella liability policy, consider business interruption insurance. Large snowstorms, earthquakes, floods and other acts of God can shut down operations for an extended period, robbing the business of revenue and endangering employee pay. Think of the destructive flooding that occurred in Houston earlier this year. How would your client be compensated if something similar happened in their area?