3) Errors and omissions insurance. If a client runs an advice-driven business, like a consulting practice of any kind, a marketing firm or offers another set of intellectual capital-based services, they will need coverage that keeps operations up and running in the event of negligent acts, including data theft and other cybersecurity lapses.
The risks tend to vary depending on the business type, so the level of coverage will be different in almost each case. Some industries, like our own business of financial advice, will have their own regulatory authorities that require a baseline level of coverage. Other industries, however, operate more in a grey area. But just because an industry may not mandate coverage, doesn’t mean your client can afford to go without protection.
A good rule of thumb: An effective errors and omissions policy should cover losses equal to at least the value of the client's total personal and professional assets. That way, they won’t get wiped out as a result of a lawsuit. While it’s a best practice to review business and personal insurance policies on annual basis, it’s especially critical here. As a small business owner, their net worth will likely fluctuate year-to-year, and it’s imperative to confirm that they will continue to have enough coverage at all times.
4) Life insurance on a business and personal basis. Obviously, this is a concern for people in all walks of life, not just small business owners. If someone has a family and a job, they need life insurance. (What type of policy is highly situational, depending on a client’s age, health, level of income, among many other factors.) But what many people don’t know is that life insurance policies are a common way to fund buy-sell agreements, a key transition and succession-planning tool for small businesses with multiple partners.
There are many ways to accomplish this. For example, partners can take out policies on one another based on the value of the business. Then, if something should happen, not only is the transition smoother and more seamless, but the remaining business partners have the capital to finance a buyout. A disability policy is another option. This approach ensures that if a partner becomes disabled or incapacitated, businesses will have the cash flow to fund a buyout.
Another thing to consider is the purchase of a "key man" policy, which is exactly what the term suggests—coverage that protects the business in case an irreplaceable employee or key man dies. This is typically the owner, with the beneficiary being the business, but such policies are sometimes applicable to other valuable employees, like a top salesperson.
The first few years for almost any small business can be a fight for survival, a grueling uphill climb just to keep your head above water. When fortunes start to turn, however, it can be a bit like finishing a marathon: It’s an exhilarating and, in many cases, life-defining evolution.
But when that happens, it can be easy to relax, pat yourself on the back and forget about potential landmines lurking around the corner, whether it’s a personal medical emergency, a lawsuit or some other event that could upend or, worse, spell a permanent end for the business. Take the step today to make sure that doesn’t happen to your clients.
Michael Rousseau, CFP, is a financial planner with CCR Wealth Management, an independently managed wealth management firm with over $1 billion in client assets.