To an owner, a small business is everything for them. Small businesses often provide what large businesses don’t, such as goods and services at a more affordable rate, wholesome customer service, and direct growth to the community it serves.
In Canada, small businesses make up 37.5% of the private sector gross domestic product, and employ almost two-thirds of the private labour force; this accounts for a remarkable 7.7 million Canadians. According to bdc.ca, “Entrepreneurs are the engine of the Canadian economy”. Small businesses also contribute to their communities, supporting the local economy through taxes and sponsoring neighbourhood associations such as youth sports teams, social clubs, and fundraising events for charities.
The ongoing health of small businesses is vital to the economy. The right mix of insurance policies can help cushion businesses financially if the owner or another key decision-maker unexpectedly becomes ill or passes away.
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How Life Insurance Benefits Small Business Owners
The owner of a small business plays an essential role in its day-to-day operations; if they or another key decision-maker becomes critically ill or suddenly passes away, the viability of the business could be at risk. Among the things that could be threatened are:
- Key relationships with suppliers and customers
- The security of the business’s employees and their families
- Relationships with community organizations
- Relationships with creditors
- Succession planning
- The reputation of the business as a dependable supplier
By providing a financial safety net at a crucial time, life insurance and critical illness insurance can buffer these potential problems by ensuring the business can continue to operate, service debt, pay bills, hire and train new staff, and so on.
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Every small business should have a short-term continuity plan, and a long-term succession plan in place in order to ensure the business can continue to function under changes in leadership.
Short-Term Continuity Planning
A short-term continuity or contingency plan is a set of instructions that illustrates what to do if the owner passes away or becomes critically ill. The steps to setting up a continuity plan are as follows:
- Choose the right person to handle the business in your absence, ideally someone already on board, such as a partner or senior employee. If there’s no one readily available, consider hiring and training someone to take on the role.
- Carefully consider what will happen if the business owner is suddenly unable to run the business. What will need to be dealt with, and what can be put in place in advance? Consult with a lawyer, accountant, and other professionals in the same line of business for a complete picture.
- Draw up any agreements or contracts that might be needed.
- Purchase life insurance, disability insurance and/or critical illness insurance on the owner, their business partner(s) and key employees to cover additional business expenses and replace any lost income while they’re unable to work.
- Purchase separate business loan insurance if needed. This type of insurance can help pay off the business’s debts in the event of illness, disability or death of the owner(s) or key employees.
- Discuss the plan with key stakeholders and provide them with a copy.
- Test the plan if possible. Ensure that the instructions are clear and that the necessary documents and authorizations are in place.
- Put the plan in writing and schedule periodic reviews.
Long-Term Succession Planning
This plan enforces when and how a successor will take over running a business. Some of the same steps will apply, but the owner has a longer time to decide about the plan.
- Choosing a successor should be done five to ten years before the owner plans to retire. By the time the owner leaves, the successor should have the skills, experience, and legal authority to do all the same things their predecessor was able to do.
- The plan should also detail what will happen with the business or the owner’s share of the business. An agreement should be established if they plan to redistribute their share to their partners. Negotiations should start well in advance if they decide to sell the entire business to a third party.
- Buy-sell agreements cover sales of the owner’s share of the business or the entire business. They set out how the shares in the business will be distributed, how the purchase(s) will be financed, and other legal matters that make the transition smoother.
- Life insurance can be used as part of a corporate-insured retirement plan. With this strategy, the business purchases a whole life insurance policy on the owner or other key employees. When the cash value is high enough, the business borrows against it. The business can then generate income that’s paid out to the owner(s) in the form of dividends, providing them with retirement income. When the insured person passes away, the payout is used to pay off the loan in full.
Optimally, continuity planning is separate from succession planning. This would happen in the best-case scenario where the owner can choose a successor and retire according to their wishes. However, if they suddenly pass away, long-term succession planning has to take place in the short term; a solid overall plan covers this contingency.
Term vs Permanent Life Insurance
A business owner may choose to protect their business using term life insurance, whole life insurance, or a combination of both.
Term Life Insurance
This type of insurance provides coverage for a set number of years (typically 10, 20, or 30), after which it expires. The benefit is paid out if the insured person dies during the term, assuming payments are up to date. Typically less expensive than permanent life insurance, term life insurance is a good option for a newer business.
Permanent Life Insurance
This insurance covers the insured person for their entire life and has many benefits for an established business. Because it builds cash value over time, businesses can borrow against it or invest it, thereby diversifying their assets. When the insured person passes away, the payout can be used to help any surviving business partners purchase the deceased person’s share of the business.
What is business incorporation and how does it work? This article explains it all.
How Secure Is Your Business in Terms of Insurance?
For the last ten years, the insurance professionals at Group Enroll have been providing businesses and individuals alike with insurance products that not only cover required services and medications, but ones that provide access to preventative ones such as massage, chiropractors and mental health professionals. As well, we can also discuss the importance of having a life insurance policy as a small business owner. Let our professionals help you secure an insurance policy for you, your family or your business. Fill out our quick form and one of our experts will get back to you promptly. Prefer to speak to an agent right now? We can do that too. Call us at 1-877-600-5666.