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Business Income – Can Your Business Weather the Worst?
By Dan Weedin, CIC
What would happen if, all of a sudden, your business were wiped out by a disaster? Your buildings, your inventory, your furniture, computers, records, and vehicles – all gone.
The Business Income portion of your commercial insurance policy is designed to handle your loss of income, pay for continuing expenses, and cover the payroll for key employees if your operations cease. Think of it as a disability policy for your business. But does your policy have adequate limits of insurance in the event of such catastrophic loss? Lack of adequate Business Income protection is the number one reason businesses fail to reopen after a loss. You need to know about the limitations and exclusions to this essential coverage. You should familiarize yourself with your policy now, before you find out the hard way.
Business Income coverage is specifically set up to address three things:
- Continuing expenses, such as your mortgage or rent, advertising, car payments, and equipment leases. These obligations will be due whether you are open for business or not. Examine how much you spend every month on these types of expenses and what impact an inability to pay them would have on you and your business.
- Payroll for key employees. Your business may have key employees you could not afford to lose if forced to shut down after a loss. Business Income coverage includes provisions to make payroll for these employees, so that they’ll be there when you reopen. Every business has key people – they could be controllers, office managers, supervisors, or computer specialists – and your recovery may hinge on their contributions. Don’t allow yourself to lose them because you had inadequate coverage.
- Loss of income, which is critical for you as the owner. You’ve devoted your life to building a business that will offer a stable lifestyle and future, so don’t risk losing valuable income for a prolonged period of time because you didn’t know what your insurance policy covers. Dedicate as much effort to this area as you would to your life insurance (you did that, right?). The coverage is intended to make you whole, as if your business were still operational. But be careful: dollar and time limitations probably apply. Don’t allow either to run out before you’re done needing money.
So how do you figure out how much insurance you need? Does it feel like you’re throwing darts at numbers? Worksheets are available that can make the process easier (notice I didn’t say “simple”), but the reality is that you may need to break out your financial statements and talk to your accountant. Get help from your insurance consultant and agent, too. The limit you choose for business income coverage may be more critical to your business survival than insuring the value of your furniture and fixtures.
Take the time now, before something bad happens, to prepare. It’s easy to say, “It won’t happen to me,” but you know there’s no guarantee. The life you save by acting now may very well be your life’s work.
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