Past Issues
-October 2006Contact us:
Edward Bates
952.944.5044
Peter Thoresen
952.225.0344
Mary Bates
952.942.8355
Jereme
Bates
952.944.2919
Business
Income with Extra Expense—What’s enough?
Written by Jereme Bates
I recently attended a Property Casualty seminar where we learned that many businesses are underinsured on their Business Income (or Interruption) with Extra Expense coverage. (Or it may appear BI w/ EE) That is alarming to me as there are usually penalties involved at the time of a loss, in this particular coverage, if you are under insured. In this article I will briefly define these coverages as well as provide some basics to consider when you are faced with making this particular coverage limit decision. Business Income w/ Extra Expense is actually two separate coverages.
Business income is loss of income protection, replacing your operating income during the period of restoration or interruption of commerce. This is a little like disability insurance only for your company. Extra expense coverage is designed to protect businesses in the event of an unforeseen additional expense, in order to continue operations. An example would be paying employees overtime to come in on a weekend to set up the office so it can functional again on Monday. Those additional wages are an additional expense to your company and are therefore covered.
Many insurance professionals would say that BI is simply Net Income + Operating Expenses. That is a good starting point, but to really analyze your exposure, a more in depth formula of Net Annual Sales + Cost of Goods Sold + Utilities + Ordinary Payroll, might provide more accurate results.
Net Annual Sales is the Gross Annual Sales less discounts, returns, allowances, bad debt, collection expenses, prepaid freight, plus any other earnings from your business operations, such as rents, commissions, cash discounts received and interest or service fees. Cost of Goods Sold is raw stock used in production, materials directly consumed in production, merchandise sold including packaging materials, services purchased from subcontractors, minus the cost of non– continuing outside services. Utilities are any Power, Heat and Refrigeration obligations that must be continued by contract and will need to be added with endorsement CP 15 11. Ordinary Payroll, which also needs to be added through endorsement CP 15 10, will include the payroll for all employees, even if production has been stopped. These four items together give you 100% of your BI exposure.
Once you have your full exposure calculated, you will need to apply your Co-Insurance factor which will let you know how much coverage you must have, to remain within your insurance company’s acceptable boundaries. For example if you have an 80% co-insurance factor you can carry 20% less coverage than 100% of your BI exposure. Please note, that if you are insured for less than what is required, you will be penalized at the time of loss, regardless of the size of the loss.
Finally, you will need to come up with what you feel is an appropriate amount of Extra Expense coverage that might be needed. Some things to consider are: increased rent, advertising costs, moving expense, additional hourly wages/ overtime, increase utilities, computer equipment rental and reproduction, etc....
Once you have these limits you can choose to add some cushion for “margin for error”. Otherwise you have accurately calculated your business interruption needs.
Like any insurance coverage there are complexities that cannot be fully described in a newsletter article, so if you have further questions please do not hesitate to contact us. Additionally we have posed a sample business income worksheet for your use on our website at www.bates-inc.com.
Jereme
Informational Credit Given too: CNA Insurance Company; Business Income Worksheet.
The right to control your healthcare
Written by Mary Bates
Do you have a health care directive? A health care directive is as important, or maybe more, as a will or assigning a power of attorney. Both of these instruments direct assets and financial decision making. A health care directive, or living will, directs health care decisions when you are not able to communicate or make these decisions yourself. “Adults have the right to control their own medical care by consenting to or refusing medical treatment.” Putting your wishes and thoughts in writing takes away the burden of difficult decision making and even regrettable choices, from our family members, health care providers, friends, or strangers. Some of us may have gone through this exercise through a clinic when placing a parent in long term care or dealing with a terminal illness. However, “adults of all ages are at risk as a result of an injury or illness. Nearly 44 percent of people receiving long term care services are adults between 18 and 64. At age 35, one has a 50/50 chance of being unable to work more than three months due to a disability before turning 65.”The statistics go on and on to show that disabilities are not elderly exclusive.A health care directive does not require an attorney, and it can be changed or revoked as long as you have the capacity. The University of Minnesota Extension Service has a web site which offers a wealth of information on this topic, and other related issues. This site also has “The Minnesota Health Care Directive” form and for your convenience, we have posted a copy on our website along with the U of M link. Our web address is www.bates-inc.com.
The laws are different in each state, so you may need to check on each state’s requirements if you live outside Minnesota. Be proactive and in control of your own health care, now and in the future.
Mary
Sources: The U of MN Ext Service, Society of Actuaries, Money Magazine 4/00, BCBS
The Do’s and Don’ts of Life Insurance
Written by Pete Thoresen
We all have life insurance – somewhere – right? Maybe it’s filed away deep in the file cabinet, or in the portable fire box that you haven’t opened in a long time. Let’s face it – who likes to review their life insurance needs? Well – here are couple of reasons why you should, and a couple of do’s and don’ts when doing it.Reasons:
Life Insurance is cheap. Like computers…life insurance costs have come down over the years – mainly because we are living longer. Thus, you may be able to buy more than previously affordable, or may be able to replace what you have – and save money!
If your income has changed (hopefully up) since you purchased you last policy, or your family has grown or you are closing in on retirement – stop, and review your life insurance. Each of these major life events warrants a review of needs.
Beneficiaries: when is the last time you verified your beneficiaries are current, and up to date with your wishes. If you don’t do it…no one will. If you do not list any beneficiaries then a state judge will decide for you, and Uncle Sam may benefit from your lack of choice.
DO’s:
A professional needs assessment. Don’t just go with the slick salesman formula of 10x income. Your situation maybe different than that. Take into account your debts, your wishes for family – college, lifestyle, legacy, etc.
Keep life insurance assets out of your estate – minimize taxes. While trusts accomplish this, and may be appropriate, a simple cost effective technique is to simply not own your own life insurance. Rather – have your beneficiary (spouse or kids, etc.) own the policy on you (the insured).
Consider future possibilities: it’s hard to imagine needing life insurance when we are young / single, but if we had bought it then, think of the lower premium. The same may be true of future needs when kids are grown and gone.
DON’Ts:
When buying replacement coverage, never cancel an old policy until your replacement is effective.
Don’t rely solely on “group” term insurance through your employer. Unless you have health issues, you may find buying your own private policy is cheaper. Also, group rates go up every year or 5 years – check it out with your HR dept. Also, if you ever lose your job – your group insurance either goes away, or gets really expensive.
Don’t buy permanent life insurance solely for an investment. While some policies have good investment features – they are dragged down by the cost of the insurance and / or company. Unless you are max’ing out your other tax deferred investments – permanent life insurance is not the place to invest first. Maybe last, but not first.
Pete
Pete Thoresen
Financial Advisor
Focus Financial Network, Inc.
1000 Shelard Parkway, Suite 400
Minneapolis, MN 55426
Securities offered through Royal Alliance Associates, Inc., Member NASD, SIPC. Advisory services offered through Focus Financial Network, Inc., a registered investment advisor.
Coinsurance—Understand your commercial property
Written by Ed Bates
One of the most complicated and most frequently misunderstood elements of commercial property insurance is the coinsurance factor and subsequent penalty.
Coinsurance can be described as a property insurance provision that imposes a penalty on an insured's loss recovery, on any size claim, if the limit of insurance purchased is not at least equal to the specified percentage (coinsurance percentage) of the value of the insured property.
Why is a coinsurance provision necessary? It is well established that most building property losses are partial in that they do not result in the total destruction of the structures involved. For an insured who recognizes this, there may be a tendency to play the odds and limit the amount of insurance purchased. Why pay the premium for full coverage when chances are the full amount may never be needed? Of course, when the property is pledged as security for a mortgage loan, the mortgage company usually requires that the property be insured for an amount that will at least cover the balance of the mortgage. Oftentimes however, the mortgage is less than the replacement cost of the structure.
Since it is true that most losses are partial, individuals who purchase full coverage ordinarily would pay an inordinately higher premium than those who play the odds and limit the amount of their insurance. Therefore, an insured with full coverage would pay an inequitable premium. In an effort to avoid this inequity and to encourage the insured to carry a reasonable amount of insurance in relation to the actual cash value (or replacement value) of their property, a coinsurance requirement is incorporated into almost all commercial property insurance policies. The insured receives the benefit of a reduced rate when the limit is equal to a specified coinsurance percentage (commonly 80% to 100%).
The rates ordinarily used for insuring commercial buildings and personal property are calculated with the assumption that they will be used with a coinsurance provision. When a policy contains a higher coinsurance percentage, the property rates are reduced to encourage the insured to purchase higher limits. Therefore, with 90% or 100% coinsurance, the insured must purchase a greater amount of insurance to comply with coinsurance, but the rate is reduced. When there is no coinsurance requirement, or when it is less than 80%, the rate is increased. If you think you need further clarification don’t hesitate to contact me.
Ed
In the News
TO KEEP HEALTH PLANS, MANY FIRMS SHIFT COSTS
HEALTH insurance premiums have been rising faster than the rate of inflation for years. Lack of health coverage has become a major issue in the presidential race. Yet somehow, 59 percent of small businesses provide some kind of insurance, according to a recent survey by the Kaiser Family Foundation. True, that percentage was down from 68 percent just six years ago, says the foundation, a health policy research group that conducted the study of more than 3,100 employers. But many businesses still offer coverage, especially professional firms, mostly because of competition for employees, said Gary Claxton, a vice president at Kaiser.How do they afford it? By cutting benefits and shifting more costs onto their workers. There are also newer insurance products geared to this market: HIGH-DEDUCTIBLE PLANS These are sometimes called ''consumer-driven plans,'' not because consumers are driving the demand, but because they must pay such a high share of the cost that, managers hope, they will use fewer services.
The main cost is a super high deductible. Where a standard deductible might be $1,000 a person, it could be $2,500, or even $5,000, in these plans. That reduces the employer's share of annual premiums down to an average of $5,770 a person, about $1,000 lower than for other plans, according to a survey of nearly 3,000 companies by Mercer Human Resources Consulting last year. Many employers then give back all or part of those savings to their staff by financing a secondary medical benefit. One is to put money into an employee-controlled health savings account, which works somewhat like a 401(k), with employees using the money for medical expenses rather than for retirement. Alternatively, Scott Martin, president of a benefits consulting firm in New York City that specializes in small professional firms, prefers a health reimbursement account, because the company controls it and keeps any unused cash. Managers at small businesses, he said, probably have a good idea as to how many employees will need expensive care over the year, based on history. So they can figure out how much they need to increase the deductible and how much to put into the reimbursement account to lower their premiums and still save money.
''The employer is taking on a calculated risk,'' Mr. Martin said. Employees may come out better with reimbursement accounts too. The Mercer survey found that deductibles tend to be about $300 lower per person and the benefits about $80 higher than in employee-run savings accounts.
Because they favor healthier employees, all these high-deductible plans are controversial. Less than 10 percent of small businesses use them...
To read more, please log on to www.nytimes.com
Author Unknown. “To Keep Health Plans, Many Firms Shift Costs” New York Times Company. 26 September 2007: Section H Page 7 Column O
Did you know?
On January 1, 2008 student status will no longer be a requirement for dependent health coverage for fully insured employers based in Minnesota.
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Our lives are not determined by what happens to us but how we react to what happens, not by what life brings us, but by the attitude we bring to life. A positive attitude causes a chain reaction of positive thoughts , events, and outcomes. It’s a catalyst, a spark that creates extraordinary results.- Anonymous