5 - Do I Need Business Insurance

Question 1

What are the 3 business structures?

Answer 1

1. Sole Proprietorship
2. Partnership
3. Corporation

Question 2

What is the main risk faced by Sole Proprietorships?

Answer 2

To find a buyer who will pay a fair price for the business.

Question 3

What are the risks faced by Partnerships?

Answer 3

1. That when a partner leaves, they will not receive a fair price for their partnership interest.
2. That there will not be enough cash on hand to pay a fair price to the partner who is leaving or his heirs.

Question 4

What are the risks faced by Corporations?

Answer 4

1. Shareowners need to sell their shares to recoup value of the business.

Question 5

What is the difference between partnership interest and partnership property?

Answer 5

Partnership interest is the portion of the partnership owned by the partner.
Partnership property is the financial, intellectual, or other property brought into the firm by each partner.

Question 6

What are 2 more business risks?

Answer 6

1. Risk of Creditor Seizures

2. Loss of Key Employee

Question 7

What is the difference between a buy-sell agreement and a cross-purchase agreement?

Answer 7

A buy-sell agreement specifies the terms that a buyer and seller must meet for the purchase of a business.
A cross-purchase agreement is a funded insurance that names the buyer of the business as the policy owner and beneficiary (the money from the policy is used to pay the heirs of the deceased).

Question 8

What is Key Person insurance?

Answer 8

It is life insurance on the “Key Employee” with the policy owner and beneficiary being the company. Should the employee die, it provides the company with funds to offset losses, and to find a replacement.

Question 9

What are the 4 advantages of life insurance over other types of insurance for business?

Answer 9

1. The funds will be available when needed
2. Cost of life insurance is lower than other alternatives
3. New owner has no debt from acquiring the business
4. Unlike loans, policy premiums are not repaid

Question 10

What are the 3 uses for disability insurance in business?

Answer 10

1. Key person disability insurance
2. Business overhead expense insurance
3. Business disability buy-out insurance