Imagine sitting down with your partner on a Friday night with a glass of wine or your favourite beer and your conversation begins.
What would you do if I died, or was unable to work? Would you continue running the business? Would you sell the business? What if you couldn’t get the value we think the business is worth? How will you cope financially?
This is not really the type of conversation most people would have, regardless of whether it is a Friday night or not. This is however, an important conversation that people need to have, to at least think about the consequences of certain events.
This is the basis of managing risks. Understanding and identifying how certain events/risks will impact on your circumstances and then taking steps to deal with these impacts.
When applying this to your financial circumstances, once the risks have been identified you need to determine what financial impact that risk will have on your circumstances. When the financial impact is known you are in a better position to make a decision on how you will deal with that risk.
If you feel the risk does not have a material impact on your circumstance you may be willing to accept the risk, but at least you have thought about it and made a conscious decision on how you will deal with it.
A more drastic solution may be to avoid the risk altogether, which for many business owners may not be a practical solution. You could also take steps to modify the risk, by implementing systems or other plans to reduce the likelihood of the risk occurring.
Finally you may want to transfer the financial impact of the risk to someone else ‚Äì this is where insurance is valuable. For a premium, that is usually a relatively small portion of the sum insured, you can receive an amount of money, providing options to help deal with the risk.
As more people are setting up their own self managed superannuation funds, we are witnessing a growing issue where the fund is also being used to purchase properties. There is a risk associated with the potential death of a member of the fund and the requirement to pay out the death benefit. Where the bulk of the fund is invested in the property the trustees need to consider how the fund will get enough cash to pay the death benefit.
There are strategies to deal with this circumstance, one being obtaining life insurance within the fund to provide the liquidity needed to fund the death benefit ‚Äì but care needs to be taken as to how the life insurance is structured within the fund. If not structured correctly you may find all the insurance has done is made the problem bigger. Getting advice from specialists that understand risk and self managed superannuation funds is crucial in this case.
Risk management is not always about insurances ‚Äì more importantly it is about taking the time to think about your situation.
Insurances are simply one way of dealing with the risk.
Make time to talk about your circumstances with your advisor, who can help identify the risks and provide strategies to address these risk. It might not be a pleasant conversation to have but it is better to have it now whilst you are able to think about the impact rather than leave it until you have no choices.
Matt Kerr is a Chartered Accountant, Certified Financial Planner and SMSF Specialist Advisor. For more than 20 years Matt has helped people gain a better understanding of their financial options, giving them control to make decisions that will have a lasting impact on their lives. Matt sees the extra time he can give back to clients to focus on what is important to them as one of the key reasons he is an adviser.