Business protection insurance will guard you and your partners against the worst-case scenario.
A business generally depends on its people to produce profits, provide capital or manage the business. If one of those people die or couldn't work for an extended period due to a serious illness or accident and there is no viable succession plan, there may be significant financial hardship for the remaining business owners and family members.
There are three core business protection insurance concepts to consider:
Buy & Sell insurance – Buying out the interest of a partner who has passed away to protect your business from partners you inherit.
“Buy/Sell” insurance allows you to buy out the interest of a deceased partner in the business and it is an important part of business succession planning.
If you were unprotected the death of this partner could mean you would be stuck in a compulsory partnership with one or more of the beneficiaries of their will. They may wish to withdraw their capital or not have the knowledge, experience to be involved in your business.
This form of life insurance will determine whether your business survives in the event of the untimely death of one of your key people.
Key Person insurance – Protecting the business from financial losses that would arise from the death or extended incapacity of an important member of the business.
A “key person” is anyone that makes a significant contribution to the profitability of your business. This might be through their experience, special knowledge, intellectual contribution etc.
It is easy to assess your need by simply doing the mental exercise of asking yourself what the business consequences would be if this person was suddenly not there.
There are two categories of loss for which key person insurance can provide compensation – Capital and Revenue. Identifying and documenting the purpose of the key person insurance is important to ensure that the taxation treatment of the premiums and end benefits are not compromised.
Below are some of the consequences of the death or extended incapacity of such a key person that this insurance can protect you from:
- The cost required to recruit or train a new employee over the inevitable time delay before they can have them making a full contribution to the business
- Loss of production and therefore customers
- Loss of credit rating
- Loans being called up
- Loss of credibility if orders cannot be filled
- Loss of goodwill
Business overheads cover – Keeps things ticking over by helping to pay the business’ regular fixed operating expenses while you’re unable to work.
“Business overheads” cover provides for 100% of fixed business expenses if the business owner becomes totally disabled due to sickness or injury. It is specifically designed for self-employed individuals or members of a small business who need to cover their fixed business expenses if they cannot work due to sickness or injury.
It is vital for sole proprietors, who are generally responsible for the 100 per cent of the fixed expenses of the business. It is equally important for small partnerships to ensure that each partner is covered for his or her share of business expenses.
The ongoing running of a business may be affected by the death or disablement of owners, partners or key staff within a business. It is therefore critical to the ongoing running of a business that owners proactively think through and plan how debt and the transfer of shareholdings will be dealt with through the appropriate use of buy/sell arrangements, funding of capital gains tax, stamp duty and other associated costs.
Call 1800 252 712 to discuss your situation with one of our specialists at Finsura Financial Planning & Risk Pty Ltd and find out how you can better protect your business.Contact Us