Property and casualty insurance protects against the loss, damage, or theft of physical assets such as buildings, equipment, and business personal property. The loss or damage of business assets could result in an interruption of the business process and maybe even a complete shutdown. The right combination of insurance coverage can mean the difference between a temporary shutdown while you repair or replace the losses and the permanent closure of your business.

For example, assume that a hurricane or tornado damages your business's main building and contents. Without insurance coverage, you could be out of business and possibly even personally responsible for any outstanding loans, leases, or contracts. However, if you carried property and casualty insurance on the building, your business could recover the cost of repairing or rebuilding the facility. Insurance coverage on the business's equipment would also provide funds to repair or replace damaged machinery. And business interruption insurance coverage would reimburse the costs of operating from a temporary location.

Through contact with the public and through personal injuries suffered on your business premises, your company could face liability claims and lawsuits. For example, retail outlets can be found liable if a customer is injured on the premises, and manufacturing firms can be found liable if a product is defective and injures someone. Service businesses can be found liable for providing improper care or advice.

Liability insurance can provide the funds to settle liability claims, sparing your business (or your own bank account) the expense. Liability coverage may also include legal representation in the event of a lawsuit.

Your business can protect itself against the loss of human assets, such as the loss of services of key employees due to death or disability, through the use of company-owned life and disability insurance coverage on key personnel and co-owners. If a covered owner or employee dies or becomes disabled, the policy provides payments to cover the loss of income generated by that person. Funds provided by the policy can help your business continue operations and remain competitive while a replacement is found. Business owners can also use life or disability insurance to provide funds for the purchase of an owner's interest under a buy-sell agreement after the disability or death of the owner.

Insurance can be used to help your business attract and retain quality employees. Group coverage such as life, health, disability, and long-term care insurance can be offered as part of your company's employee benefits package. In addition to salary, employees often seek benefits that will help them to improve their quality of life outside the workplace. By offering group insurance coverage as part of your company's benefits package, you may be able to attract and retain employees who might otherwise be hired by your competitors.

Businesses are specifically excluded from coverage under a homeowners policy. If you're involved in a business activity in your home, your homeowners policy will not cover you for liability or medical payments due other persons, even if the damage or injury occurred in your home. This means that your policy will not reimburse you for medical care required by a client who falls off his chair in your home office when you tell him how much tax he owes.

Other structures located on your premises that are used for business purposes are also excluded under your homeowners policy. For example, if you sell furniture and crafts out of your barn, and your barn burns to the ground, your homeowners policy won't cover the cost of rebuilding the barn because it was used by your business. It won't cover the replacement of your merchandise, either. Unless you have extremely large cash reserves to cover potential losses, you probably can't afford to leave yourself unprotected.

There may be a legal reason for your business to carry insurance. All U.S. states and the District of Columbia have workers' compensation laws designed to protect employed individuals who get sick, injured, or killed on the job. Each state has its own workers' compensation system and requirements. Depending on the size of your business, the industry in which it operates, and the state where your business operates, you may be required to carry workers' compensation insurance. Depending on the state, coverage is available through a state fund or private insurer. Make sure that you consult a qualified advisor who is experienced with the workers' compensation rules in your state.

Some states require disability insurance coverage for employees. In addition, some states require professional liability insurance (malpractice insurance) as a condition of licensing in the state. Check the rules of your state and consult an insurance advisor.

Failure to carry legally required coverage may be punishable by fines, civil penalties, criminal penalties, exclusion from public contracts, and cease and desist orders. The rules and penalties vary by state.

If you rent or lease your business facility, the contract with your landlord probably requires that your business carry its own insurance on the premises. The building owner's insurance will generally cover certain repairs to the facility, but it won't repair or replace your business's property, nor will it provide liability coverage to you or your business. Your business will need its own insurance for such protection.

If you or your business borrowed money to finance buildings, equipment, or operations, the loan agreement probably includes an insurance requirement. Equipment lease contracts also contain a provision requiring the lessee (you) to carry insurance against damages to the leased property.

Check all rental, lease, and loan agreements carefully, and make sure that your business is properly insured under the terms of the agreements.

Your business is situated somewhere--an office park, a warehouse, a barn. And just like your home, this structure (and all of its contents) is susceptible to damage from many causes. Property and casualty insurance provides coverage for losses due to the physical damage or destruction of your business. With the right policy, neither fire nor exploded boiler can put you out of business. Everything from your office building to your cabinets to your water cooler can be covered.

You can buy various types of insurance protection separately, or you can purchase one package that covers many potential hazards. Among the forms of coverage you can purchase are:

• Building and equipment insurance: This protects you if your facility or equipment is damaged or destroyed
• Valuable papers insurance: This protects you if the documentation supporting your accounts receivable (or other valuable business records) is lost or destroyed
• Crime insurance: This protects your business in case of theft
• Business interruption insurance: This protects you by replacing some or all of your operating cash flow if your business is unable to maintain its normal operations for a period of time due to a covered event

If you were to die prematurely or become permanently disabled and could no longer work, would your business survive financially? It's easy to believe that such a tragedy won't befall you. Consider, however, that accidents happen not only on the job but also at home, and illness can strike anyone. Though the death or disability of an owner may be a minor issue for large businesses, small businesses may find themselves in a bind. And if you're a sole proprietor, you're personally responsible for all of the debts of your business, so everything you own could be repossessed if you're unable to pay your bills.

To survive a money crunch, your business can purchase life insurance and disability insurance to cover you, with the business named as the beneficiary. Upon a triggering event (death or disability), the policy will pay your business a certain amount of money, which it can use to cover its normal operating expenses like rent, utilities, employee salaries, advertising, and maintenance costs.

Your business can also purchase life insurance and disability insurance on a key employee--someone who is key to the success of your business (i.e., this employee brings in substantial accounts or has specialized knowledge or talent). Again, on the triggering event, your business would receive a sum of money to compensate for the lost income generated by the event, or for the cost of replacing the employee.

Note: These types of policies are different from workers' compensation insurance, which nearly all states require businesses to have. Workers' compensation insurance provides compensation to your employees if they're injured at work or get sick from job-related causes. Once an employee opts to receive benefits under such a policy, he or she is usually prohibited from suing your business for the same injuries.

If your cabinet installation goes awry and your best customer (or so you thought) calls screaming at you on the phone, what will you do? With a liability insurance policy, the insurance company will pay (up to policy limits) third parties who claim they were injured or their property damaged by your product or service. If a lawsuit is threatened or filed, the insurance company will hire and pay (again, up to policy limits) a lawyer to defend you.

You can purchase general business liability insurance separately or as part of a commercial package policy, which combines this coverage with other types of coverages, such as property and casualty insurance. Certain small businesses, including retail outfits, can buy a business owners policy, which includes a general liability insurance line. If your business needs broader coverage or higher liability limits than these policies offer, you can purchase supplemental liability insurance with a commercial umbrella policy.

An important point: If you provide professional services (e.g., doctor, lawyer, accountant), a general liability policy doesn't cover you for losses incurred by third parties arising from your professional acts. In this case, you may need to buy professional liability insurance such as malpractice insurance, which protects you against liability for injury done to others due to your misconduct or lack of skill; or errors and omissions insurance, which protects you against liability for things that you did improperly or failed to do.

Nowadays, insurance is a crucial component of most employee benefit packages. In fact, the types of insurance that you offer (and pay for) might be a key factor in a person's decision to accept a job with you or an employee's desire to work for your business long term. Insurance helps employees feel secure, and this security can translate into loyalty and strong job performance. Here is a list of group plans that you might decide to offer as part of your employee benefits package:

• Health insurance
• Dental and vision insurance
• Life insurance
• Disability insurance
• Long-term care insurance

In each case, the employee receives all of the benefits under the policy.

Disability income insurance pays cash benefits in the event you are unable to work due to illness or accident. Disability income insurance:

• Protects your ability to earn an income
• Allows you to tailor the cost and policy terms to fit your own budget and needs

Disability income insurance is designed to provide for the essentials of daily life. As a result, disability income insurance does not:

• Replace your entire paycheck--most policies will replace 50 to 70 percent of your salary, although typically the benefits will be received tax free
• Pay benefits under any and all circumstances--policies contain a specific definition of disabled that must be met in order to qualify for benefit payments

As a self-employed individual, you don't have a large company providing you with long- and short-term salary continuation plans, group medical and disability plans, and other benefits. Your business may consist of you alone, or you and a few employees. If you become sick or disabled, there may be nobody else to carry on your business while you are unable to work. As a result, there is no income for the business or for you.

Unfortunately, just because you have become sick or disabled and cannot work, your personal and business obligations don't stop. You are personally liable for all of the debts of your business, because as a sole proprietor, there is no legal distinction between personal and business assets. So you could lose everything you own if you're unable to pay your debts. Adequate disability coverage can provide you with enough cash flow to prevent financial ruin for you and your business.

Another type of disability insurance, known as business overhead expense insurance, is also important. Because you're self-employed, you probably generate most of your business's income. This type of insurance provides funds to pay the normal operating expenses of a business when you suffer a disability and are unable to work. This allows you to keep the business open until you recover, replace yourself with another person to generate income, or sell the business.

Finally, you could use disability insurance to fund a buy-sell agreement. A buy-sell agreement is a binding agreement between you as the business owner and a second party. You agree to sell your business interest, and the second party agrees to buy it, on a specified triggering event. For example, your permanent disability could be a triggering event. When you become disabled, the purchaser will use the proceeds from the disability insurance policy to buy your share of the business from you.

One way to help protect against the financial loss associated with a disability is to purchase disability income insurance. If you pay the premiums, an individual policy can provide you with a tax-free income stream while you are unable to work.

When evaluating disability income insurance policies, it's helpful to consider the following.

• Definition of disability. You can typically choose between "own occupation" coverage and "any occupation" coverage. With "any occupation" coverage, you can claim disability only if you are unable to perform any type of job. This type of coverage is generally less expensive than "own occupation" coverage.
• Amount of monthly coverage. You can purchase disability insurance that will replace a certain percentage of your income — typically between 50% and 70% of your pre-disability income. You should purchase coverage that will enable you to meet your monthly financial obligations.
• Waiting period. The waiting period represents the amount of time that must pass between the date you become disabled and the date that disability income payments begin. The longer the waiting period, the less expensive coverage will be.
• Benefit period. The benefit period can range from several months to life. The longer the benefit period, the higher the cost of insurance.

A disability income insurance policy could make the difference between financial security and financial hardship. Don't wait to consider this protection until it's too late.

As long as you are alive and healthy, your income-producing capability is relatively secure, and you and your family can enjoy the lifestyle you have established. If you were to die, however, your family could face hard economic times. Your family's financial needs may include:

• Final expenses, such as burial and funeral costs
• Unpaid medical bills
• Income replacement
• Mortgage balance
• Debt repayment (credit cards)
• Education fund for children
• Emergency expenses

As a sole proprietor, you are personally liable for all of the debts of your business. Legally, there is no difference between personal and business assets. By definition, a sole proprietorship ends when the owner dies. So, any losses or financial obligations at your death become the responsibility of your estate. It is possible that personal assets may have to be sold or transferred to pay off business debts. Business debts may include:

• Business loans
• Mortgage or lease payments on business location
• Payments due to suppliers, vendors, consultants, employees, and so on
• Taxes due to local, state, and federal taxing authorities
• Fees to lawyers, accountants, and other advisors to settle business affairs

Life insurance can be used to cover these debts, as well as to provide for the ongoing needs of your family after your death.

Ask your financial professional or insurance representative to help you assess your need for life insurance and design a program to fit your needs.

Corporate-owned life insurance (COLI) is a life insurance policy that you take out on the life of one or more of your employees, whereby you are both the owner and the beneficiary of the policy. As owner of the policy, you're responsible for paying the premiums. As beneficiary of the policy, you retain all rights to the benefits under the policy. Other than being named as the insured, your employee has no interest in the policy. COLI can be used for a variety of reasons, and the use of COLI may or may not bear any relationship to the actual financial loss you may anticipate upon the covered employee's death. For example, COLI is commonly used as an informal funding vehicle for nonqualified deferred compensation (NQDC) plans. When used as an informal funding mechanism for a NQDC plan, you can borrow against the cash value that accumulates under the policy, and you can then use the borrowed funds to pay the COLI premium payments or to pay the NQDC plan benefits.

Typically, you (the employer) purchase cash value life insurance policies on individual employees and pay the premiums for the policies. You are the owner and beneficiary of the COLI policy. Thus, you retain all rights to the benefits under the policy, including the cash value buildup and the death proceeds. The employee has no interest in the policy (other than being named as the insured).

If structured properly, the cash value that accumulates under the policy will not be subject to federal income tax as it accumulates. You can also borrow against the policy. These borrowed funds then may be used to pay the policy premiums and/or to fund nonqualified plans. Furthermore, you may be able to deduct all or part of the interest you pay on a policy loan.

Caution: In general, you must have an insurable interest in your employee in order to purchase life insurance on his or her life. This is a matter of state law, which varies widely. Some states prohibit so-called "janitor" or "dead peasant" COLI insurance, where an employer buys a COLI policy that covers many of its rank and file employees. Other states require that you notify employees, or that employees specifically consent to the COLI purchase.

Caution: The Pension Protection Act of 2006 contains rules that limit the amount an employer can receive from a COLI policy as a tax free death benefit in certain cases. See "Federal Income Tax Treatment" below.

There are a number of reasons why an employer might wish to purchase COLI to informally fund a NQDC plan. COLI is attractive because it does the following:

• Provides psychological assurance to NQDC plan participants that their benefits will not be endangered by your cash flow demands
• Enables you to match assets to liabilities, thereby reducing or eliminating a financial strain on you when it is time for distributions to occur
• Provides potentially tax-free buildup of cash value
• Enables you to recover all or part of the cost of the nonqualified plan

There are a number of risks that are associated with using COLI to informally fund a NQDC plan. First, if the insurance company experiences severe financial difficulties, you may be unable to access the policy's cash value to pay the plan benefits. In addition, the disparity between the estimated earnings (earnings projected when the policy is issued) and the actual earnings may leave you with insufficient cash value to pay plan benefits when due. As a result, you should evaluate an insurance company's financial stability and earnings history before purchasing COLI.

Be aware, also, of the alternate minimum tax (AMT). If a corporate employer is the owner of a life insurance policy, the annual inside buildup (cash value) and death proceeds are among the factors that may subject the employer to the AMT.

No. If properly structured, use of a COLI policy to informally fund a NQDC plan will not subject the plan to extensive ERISA provisions. The Employee Retirement Income Security Act of 1974 (ERISA) imposes participation, vesting, funding, distribution, fiduciary, and reporting rules on employer qualified plans and other funded plans. For the most part, these rules do not apply to unfunded NQDC plans.

Using COLI to informally fund a NQDC plan will not cause the plan to be funded for ERISA purposes. More specifically, if the employer is the owner and beneficiary of the policy, and the NQDC plan benefits are paid directly out of the employer's general assets, and the employee participants do not have any contractual rights under the policy, the plan should be considered unfunded for ERISA purposes.

Deduction for payments made under a NQDC plan

You can deduct amounts paid to an employee under a NQDC plan that is informally funded by COLI. In general, you receive the deduction in the taxable year your contribution is included in your employee's gross income. This means that you receive the deduction in the year your employee actually receives the NQDC plan benefits. You can deduct the total amount paid to your employee, including any earnings on your contributions. The fact that the source of the funds used to pay the deferred compensation is indirectly a COLI policy does not change this result.

Deduction of premiums paid

Premiums are not deductible when they're paid on any life insurance policy that covers any officer or employee of the employer when the employer is directly or indirectly a beneficiary under the policy. Since you are the direct beneficiary of a COLI policy, you can't claim a deduction for the premiums paid.

Deduction of interest paid on loans

If you borrow against the cash value that accumulates in a COLI, you may be able to deduct the loan interest. If four of the first seven years' policy premiums have been paid without borrowing from the policy, any interest you pay on the loans is, to a certain extent, deductible. However, if a policy was purchased after June 20, 1986, no deduction is allowed for interest on loans that total more than $50,000 per insured individual under policies covering the lives of officers, employees, and other financially-interested parties. In other words, you can purchase separate COLI policies on any number of employees and deduct the interest on a loan of up to $50,000 from each policy.

Treatment of cash value buildup

Generally, the COLI policy's accumulated cash value is not currently taxed. You, as policyholder, can accumulate cash value in the policy free of taxation as long as you allow the cash value to accumulate inside the contract. Note: The accumulation of cash value in the policy may be subject to the AMT.

Treatment of policy withdrawals and loan proceeds

If you withdraw the cash value that accumulates within a COLI policy, the IRS treats the withdrawal as a nontaxable recovery of investment in the contract (i.e., premiums paid minus dividends and prior cash distributions). However, withdrawals that exceed your investment in the contract will be treated as income to you, the employer. Loan proceeds borrowed against the cash value that accumulates within the COLI policy aren't treated as distributions under the policy, and therefore aren't subject to taxation.

Caution: It's sometimes possible for a COLI policy to be treated as a modified endowment contract. If a COLI is treated as a modified endowment contract, it doesn't receive the tax benefits that usually are afforded to life insurance contracts. As a result, you should try to avoid modified endowment contract status whenever possible.

Death benefits

In general, the death benefits you receive from a COLI policy are free from federal income tax. However, Internal Revenue Code Section 101(j), enacted as part of the Pension Protection Act of 2006, limits the amount you, as an employer can receive as a tax free death benefit in certain circumstances. In general, unless an exception applies, the amount you can exclude from income as a death benefit from an employer-owned life insurance contract can't exceed the premiums and other amounts you've paid for the contract. Any death benefit in excess of this amount is included in income. These rules apply to contracts issued after August 17, 2006 (except for a contract issued in a section 1035 exchange for a pre-August 18, 2006, contract.)

Tip: The IRS has issued Notice 2009-48, which provides guidance on IRC Section 101(j) in question and answer format.

An employer-owned life insurance contract is defined as a life insurance contract (including a split dollar life insurance contract) which (1) is owned by a person engaged in a trade or business and that person (or a related person) is directly or indirectly a beneficiary under the contract, and (2) covers the life of an individual who is an employee with respect to the trade or business on the date the contract is issued.

The Act provides several important exceptions to the general rule:

• If notice and consent requirements are met, the income inclusion rule doesn't apply if the deceased individual was your employee at any time during the 12-month period before his or her death, or, at the time the contract was issued, the individual was a director or "highly compensated employee" or "highly compensated individual."

Technical Note: A "highly compensated employee" is defined under the rules relating to qualified retirement plans, determined without regard to the election regarding the top-paid 20 percent of employees. A "highly compensated individual" is defined under the rules relating to self-insured medical reimbursement plans, determined by substituting the highest-paid 35 percent of employees for the highest-paid 25 percent of employees.

• If notice and consent requirements are met, the income inclusion rule doesn't apply to death benefits to the extent the amount is (1) paid to a member of the family of the decedent, to an individual who is the designated beneficiary of the decedent under the contract (other than the employer), to a trust established for the benefit of any such member of the family or designated beneficiary, or to the estate of the decedent; or (2) used to purchase an equity (or partnership capital or profits) interest in the employer from such a family member, beneficiary, trust or estate.

The Act's notice and consent requirements are satisfied if, before the contract is issued, (1) you notify the employee in writing that you intend to insure the employee's life, and inform the employee of the maximum amount of life insurance that you might take out on his or her life, (2) the employee provides written consent to being insured under the contract and that such coverage may continue after the insured terminates employment, and (3) you inform the employee in writing that you will be a beneficiary of any proceeds payable on the death of the employee.

You can deduct amounts paid to an employee under a NQDC plan that is informally funded by COLI. In general, you receive the deduction in the taxable year your contribution is included in your employee's gross income. This means that you receive the deduction in the year your employee actually receives the NQDC plan benefits. You can deduct the total amount paid to your employee, including any earnings on your contributions. The fact that the source of the funds used to pay the deferred compensation is indirectly a COLI policy does not change this result.

Premiums are not deductible when they're paid on any life insurance policy that covers any officer or employee of the employer when the employer is directly or indirectly a beneficiary under the policy. Since you are the direct beneficiary of a COLI policy, you can't claim a deduction for the premiums paid.

If you borrow against the cash value that accumulates in a COLI, you may be able to deduct the loan interest. If four of the first seven years' policy premiums have been paid without borrowing from the policy, any interest you pay on the loans is, to a certain extent, deductible. However, if a policy was purchased after June 20, 1986, no deduction is allowed for interest on loans that total more than $50,000 per insured individual under policies covering the lives of officers, employees, and other financially-interested parties. In other words, you can purchase separate COLI policies on any number of employees and deduct the interest on a loan of up to $50,000 from each policy.

Generally, the COLI policy's accumulated cash value is not currently taxed. You, as policyholder, can accumulate cash value in the policy free of taxation as long as you allow the cash value to accumulate inside the contract. Note: The accumulation of cash value in the policy may be subject to the AMT.

If you withdraw the cash value that accumulates within a COLI policy, the IRS treats the withdrawal as a nontaxable recovery of investment in the contract (i.e., premiums paid minus dividends and prior cash distributions). However, withdrawals that exceed your investment in the contract will be treated as income to you, the employer. Loan proceeds borrowed against the cash value that accumulates within the COLI policy aren't treated as distributions under the policy, and therefore aren't subject to taxation.

Caution: It's sometimes possible for a COLI policy to be treated as a modified endowment contract. If a COLI is treated as a modified endowment contract, it doesn't receive the tax benefits that usually are afforded to life insurance contracts. As a result, you should try to avoid modified endowment contract status whenever possible.

In general, the death benefits you receive from a COLI policy are free from federal income tax. However, Internal Revenue Code Section 101(j), enacted as part of the Pension Protection Act of 2006, limits the amount you, as an employer can receive as a tax free death benefit in certain circumstances. In general, unless an exception applies, the amount you can exclude from income as a death benefit from an employer-owned life insurance contract can't exceed the premiums and other amounts you've paid for the contract. Any death benefit in excess of this amount is included in income. These rules apply to contracts issued after August 17, 2006 (except for a contract issued in a section 1035 exchange for a pre-August 18, 2006, contract.)

Tip: The IRS has issued Notice 2009-48, which provides guidance on IRC Section 101(j) in question and answer format.

An employer-owned life insurance contract is defined as a life insurance contract (including a split dollar life insurance contract) which (1) is owned by a person engaged in a trade or business and that person (or a related person) is directly or indirectly a beneficiary under the contract, and (2) covers the life of an individual who is an employee with respect to the trade or business on the date the contract is issued.

The Act provides several important exceptions to the general rule:

• If notice and consent requirements are met, the income inclusion rule doesn't apply if the deceased individual was your employee at any time during the 12-month period before his or her death, or, at the time the contract was issued, the individual was a director or "highly compensated employee" or "highly compensated individual."

Technical Note: A "highly compensated employee" is defined under the rules relating to qualified retirement plans, determined without regard to the election regarding the top-paid 20 percent of employees. A "highly compensated individual" is defined under the rules relating to self-insured medical reimbursement plans, determined by substituting the highest-paid 35 percent of employees for the highest-paid 25 percent of employees.

• If notice and consent requirements are met, the income inclusion rule doesn't apply to death benefits to the extent the amount is (1) paid to a member of the family of the decedent, to an individual who is the designated beneficiary of the decedent under the contract (other than the employer), to a trust established for the benefit of any such member of the family or designated beneficiary, or to the estate of the decedent; or (2) used to purchase an equity (or partnership capital or profits) interest in the employer from such a family member, beneficiary, trust or estate.

The Act's notice and consent requirements are satisfied if, before the contract is issued, (1) you notify the employee in writing that you intend to insure the employee's life, and inform the employee of the maximum amount of life insurance that you might take out on his or her life, (2) the employee provides written consent to being insured under the contract and that such coverage may continue after the insured terminates employment, and (3) you inform the employee in writing that you will be a beneficiary of any proceeds payable on the death of the employee.

A business can deduct certain business expenses that it has properly paid. To be deductible, business expenses must be both ordinary (i.e., common and accepted in your field of business) and necessary (i.e., appropriate and helpful for your business). Your company may be able to deduct--as a business expense--insurance premiums paid for a variety of coverages. These include:

• Fire, theft, flood, or other casualty insurance
• Employee group medical insurance
• Life insurance provided for the benefit of employees
• Business liability insurance
• Professional malpractice insurance
• Business interruption insurance (pays for lost profits in certain cases if your business is shut down)
• Auto and other vehicle insurance used for business (unless the standard mileage rate is used to figure car expenses)
• Credit insurance (covers losses from unpaid debts)

However, if your business is the beneficiary of a life insurance policy (either directly or indirectly), it can't deduct the life insurance premiums it pays on behalf of an owner, employee, or any person who has a financial interest in the business. This also applies to split dollar life insurance coverage on key employees--the business can't deduct the premiums.

If your business suffers a property-related loss, you should read your business insurance policy carefully to find out what is and isn't covered. Your policy should explain the types of property coverages, list the specific perils that your business is insured against (e.g., damage caused by fire, theft, and hail), describe the exclusions from coverage (e.g., damage caused by a flood or earthquake), and detail any conditions you must meet for coverage to apply.

In many cases, your business insurance policy will reimburse your business for a given loss. Sometimes, though, you'll be only partially reimbursed or not compensated at all. In such cases, your business may be entitled to some tax relief. In general, a reasonable insurance reimbursement is not taxable. If you receive reimbursements, subtract them from your total loss. The unreimbursed portion of your loss may be deductible. But if the amount of your reimbursement exceeds the loss, you may have to report taxable income (see a tax professional for exceptions to this rule).

If your business property is damaged or destroyed in an accident, by an act of nature (e.g., storm), or through theft or vandalism, and your policy does not completely reimburse your business for the loss, your business may be entitled to claim a casualty loss tax deduction. (A casualty is direct damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual.)

If there's a casualty loss, a company can deduct 100 percent of the loss against business income (assuming there's no insurance reimbursement). To compute a business casualty loss deduction, you've got to know three things:

• The decrease in the fair market value (FMV) of the property as a result of the loss
• Your adjusted basis in the property before the casualty or theft (adjusted basis is usually the property's original cost, plus the cost of improvements, minus depreciation)
• The amount of the insurance reimbursement that you receive (or the salvage value)

If your property was damaged but not destroyed, the casualty loss equals the decrease in the property's FMV as a result of the damage, minus any insurance reimbursements. If your property was completely destroyed, ignore the FMV and compare the adjusted basis of the property before the incident to the insurance reimbursement. You can deduct the amount by which the adjusted basis exceeds the insurance reimbursement.

Remember, if your property is covered by insurance, an insurance claim must be filed; otherwise, the casualty loss deduction is not allowed. Use IRS Form 4684 to calculate and report all casualty losses or gains.

Business interruption insurance pays for lost profits if your business is shut down due to a fire or other covered cause. You should report any insurance proceeds as ordinary income. Any credit insurance proceeds should also be reported as ordinary income.

If you own your own business, you can also deduct most ordinary and necessary business expenses against business income. However, different rules may apply if you're self-employed and your business provides group insurance benefits to its employees. Although a business can generally deduct the cost of group insurance premiums, you may be unable to deduct those insurance premiums that benefit you personally. Alternatively, your deduction may be limited. This is true even if you provide similar benefits to your employees and are able to deduct the cost of those benefits.

For example, assume you are a sole proprietor and maintain a group health employee benefit plan. Your business deducts the costs associated with the plan. However, any expenditures (e.g., premiums) made for your own benefit are generally not deductible as a business expense. You can get around this, though, if your spouse is an employee of your business, participates in the group health plan, and covers you under a family plan.

If you're self-employed and can't deduct your health insurance premiums and other medical costs as a business expense, you may qualify for the self-employed health insurance deduction. This deduction enables you to deduct 100 percent of the cost of health insurance that you provide for yourself, your spouse, and your dependents. If some of your health insurance premiums do not qualify for the self-employed health insurance deduction, you may still be able to deduct them on Schedule A of your Form 1040, assuming that you itemize and meet all other requirements. (The definition of self-employed for this purpose includes sole proprietors, partners, and owners of more than 2 percent of an S corporation.)

Homeowners policies generally cover business property on your premises only to a certain limit, usually about $2,500. Coverage for business property away from your premises is even more limited, with most policies having a $250 maximum. That is the extent of insurance coverage for your business in the typical homeowner’s policy. You are not covered for business liabilities, including such things as a delivery person or a client injuring themself while on your property.

For a higher premium, some insurance companies offer an endorsement that you can add to the standard homeowners policy. An endorsement allows you to increase the liability limit for business property and add a small amount of general liability coverage. The endorsement is designed for very small businesses. However, even with an endorsement, your business is left with uncovered exposures.

Many insurance companies now offer the home office policy, which is a combination of a homeowners policy and a business owners policy. This policy provides adequate business liability coverage, business interruption coverages, and increased limits for your business property, along with the traditional coverages found in a homeowners policy.

The business property limits typically begin at $10,000. Depending on the policy, the business liability limits may range from $300,000 to $1 million. The policy covers lost income and continuing expenses for up to one year in the event your home is damaged and you're unable to work. The policy also covers loss of valuable papers and accounts receivable, while offering higher limits for equipment breakdown coverage and business property used off-premises.

This type of commercial policy is designed specifically for small businesses. Traditional business owners policies (BOPs) are very comprehensive because they cover buildings, business property used on- and off-premises, and liability. Also covered are computers and other business equipment, software, data, loss of income, continuing expenses, and professional liability for certain occupations.

Some insurance companies have created a new kind of BOP designed specifically for the at-home business. This policy is less expensive, and it provides broad-enough coverage for a larger business without duplicating your coverage. For example, the new BOP would not cover your home structure, because it is already covered by your homeowners policy.

An umbrella policy provides increased liability limits beyond those in separate policies. For example, say you have a BOP with a general liability limit of $3 million. If you think you'll need more than $3 million for your business, an umbrella policy will pick up where the BOP leaves off. If you purchase an umbrella policy with a $5 million limit, your total limit of liability would be $8 million.

For those in occupations that are particularly vulnerable to professional liability, a separate professional liability policy, usually called malpractice coverage or errors and omissions coverage, is a must. Examples of such professions include law, medicine, architecture, day care, and personal beauty.

If you use your personal automobile extensively for your own business, you'll probably need to purchase a commercial automobile insurance policy. Examples of such small businesses are painters, caterers, and contractors. If you use your automobile as part of your business (e.g., a taxi service), you definitely need a commercial policy.

If you rent automobiles in the course of traveling for your own business, check your personal auto policy to see if it covers non owned autos. Your auto insurance provider can help you determine the extent of your coverage and fill in any gaps.

Even if you have only one employee, you need workers' compensation insurance. Each state has its own minimum requirements for this type of coverage--contact your insurance agent or state insurance department for details.

Chances are, you already have a life insurance program in place. Though your individual life insurance needs may not change when you start an at-home business, the amount of insurance you have may change. For example, if you lost employer-sponsored coverage when you left your previous job, you may want to make up the difference so that you're still adequately protected. You may also need more insurance to cover any debts or liabilities you took on to develop your business.

Key person life insurance covers financial loss to your business due to the death of your partner or a key employee. If the covered individual dies, your company receives a death benefit. There are several creative ways you can set up a key person life insurance plan. Contact your financial professional to set up the best arrangement for your business.

This type of insurance is very important to consider when you have your own business. Ask yourself if you have enough resources to support your family if you became disabled and could not work. If you do have some savings, how long would they last? Would you be depleting savings that are earmarked for your retirement or your kids' college education? Most people need disability insurance to protect against the loss of income that can result from disability. Your ability to produce an income is an asset that should be covered like your house and your car.

Health insurance for the self-employed can be expensive and difficult to find. One affordable alternative may be to join a professional association that offers group health insurance to its members. Chances are, your profession has its own specific association in your area or state. If not, there are associations for small-business owners in general. Finally, your local chamber of commerce may have a health insurance program for its members.

Individual health insurance is awfully expensive. What's more, some states have made the laws so restrictive for individual health insurance that many insurance companies in those states no longer offer them. However, one way to buy yourself protection before finding a permanent health plan may be to purchase short-term health insurance, if these policies are allowed in your state. These policies run from one to six months and are relatively inexpensive. Contact your insurance professional to find out how you can get short-term medical coverage.

Your key employees are those special people with such unique skills and talents that they contribute greatly to the financial success of your business. If a key employee were disabled and out of work, or were to die, your business would suffer a financial loss. Here are some possibilities:

• While the employee is out of work, the revenue that he or she generates may substantially decrease
• You'll incur unexpected expenses recruiting and training a temporary or permanent replacement
• Less capable or inexperienced employees trying to fill in can make mistakes or cause delays that cost you money
• If a key person dies, a business loan may come due
• Customers or even other employees may look elsewhere, concerned for the future of the business after the loss of a key employee

Key employee life and disability insurance policies can help soften the impact of these blows. Generally speaking, these policies are sold to small or medium-size businesses; it's in those operations that a single person can make the most difference to the bottom line. If you own a large company that's better able to absorb the financial losses caused by losing a key employee, you may have difficulty buying the coverage you desire.

Typically, your business purchases a life insurance policy on a key employee, pays the premiums, and is the beneficiary in the event of the employee's death. As the owner of the policy, the business may surrender it, borrow against it, and use either the cash value or death benefits as the business sees fit.

In determining how much insurance you'll need, putting a dollar value on a key employee's economic worth may be difficult. Although there are no rules or formulas to follow, several possible methods to determine the insurance amount may be used. The appropriate level of coverage might be the cost of recruiting and training an adequate replacement. Alternatively, the insurance amount might be the key employee's annual salary times the number of years a newly hired replacement might take to reach a similar skill level. Finally, you might consider the key employee's value in terms of company profits; the level of insurance coverage might then be tied to any anticipated profit loss.

The premiums you pay for key employee life insurance are not a tax-deductible business expense for federal income tax purposes, since your business is the recipient of the benefits. Prior to August 16, 2006, the death benefits your company receives as the beneficiary of the policy aren't considered to be taxable income. But for policies issued after August 16, 2006, proceeds from a life insurance policy insuring the life of an employee and payable to the employer-policy owner may be subject to income tax, unless an exception applies. Also, if your business is a C corporation, the death benefits may increase the corporation's liability for the alternative minimum tax. You should consult a tax professional for information on your circumstances.

The death of a key employee isn't the only threat to your business. Suppose a key employee is injured or becomes ill, and is out of work for an extended period? Disability insurance on such a key employee is another way you can protect your business against any resultant financial loss.

A critical part of key employee disability insurance policies is the definition of disability. Usually, these policies define disability as the inability of the employee to perform his or her normal job duties due to injury or illness. As with life insurance, your business buys a disability insurance policy on the employee, pays the premiums, and is named as the beneficiary. When the employee is disabled, the insurance coverage pays monthly disability benefits to your business. These benefits can equal a certain percentage of the key person's monthly salary, up to either a maximum monthly limit or 100 percent of that salary. The benefits may be used to pay the operating expenses of the business and to cover the expense of finding a temporary or permanent replacement for the key employee.

The policies typically offer elimination periods (i.e., the waiting period between the disability and when the benefits begin) ranging from 30 to 180 days. Depending on the policy, your business may receive the benefits for 6 to 18 months--long enough to allow the key employee to return to work or to allow the company to replace the key employee. The policy is normally a noncancelable contract, guaranteeing the premiums and the coverage amount. A waiver of premium option can be an important part of these policies. This option provides that, once the elimination period has been satisfied, the insurance company will pay the premiums as long as the disability lasts or until the benefit period ends.

Sometimes included in the base disability policy coverage (or available as an optional benefit for an additional premium) is personnel replacement expense coverage that pays for the cost of finding and hiring a replacement for the key employee. These benefits are usually payable after the key employee's disability has lasted at least 6 months. Your business will be compensated for actual replacement expenses incurred, including advertising costs, employment agency fees, and the first 3 months of the new employee's salary.

As with key employee life insurance, the premiums you pay for the key employee disability policy are not a tax-deductible business expense. As a result, the benefits your business receives are not generally considered taxable income.