What would happen to your business if you or another employee were injured and unable to work? What would happen if you were unable to meet your business expenses or provide an income for you and your family?
I know I’m sounding a bit gloomy but both of these scenarios are something you may have to face as a business owner (Read the case studies below which show why you may need to look at business protection).
Most business owners insure their physical assets such as motor vehicles, premises and equipment, however, they often overlook the importance of insuring themselves or other key people in the business in the event of death, disability, illness or injury. Not ensuring your business has the right level of protection is potentially an expensive oversight.
The first step on the road to water-tight business protection is to talk to a financial planner. Make sure the planner tailors a strategy specifically for your business needs rather than just selling you a standard product.
Here is a simple checklist of protection scenarios to go through with your planner. Do you need to:
- protect your physical assets
- protect your business revenue
- protect your business ownership
- protect your personal income
- meet your business expenses
- treat your beneficiaries equitably
- purchase life and total & permanent disablement insurance tax-effectively
- reduce the long-term cost of your insurance?
Once you have chosen the type of insurance you need you can choose which premium structure best suits you. You can make different selections for different types of insurances and can also choose to split your cover between different premium structures for a single type of insurance. With a stepped premium your benefits remain the same and your premium will increase each year depending on your age. With a level premium your premiums remain the same and your premium will be based on your age at the start date of your insurance. When you renew your insurance, your premiums will only vary if a change is made to premium rates.
In some cases, business protection premiums may be tax deductible, so check this with your accountant.
Do the right thing by your employees and your family and give business protection the proper consideration in 2014.
Case study 1 | Brad protects his young family from his business liabilities
Brad, aged 41, is married to Beth, aged 36. They have a young family and own a home worth $650,000.
Brad wants to expand his cleaning business and to do this he needs to raise some capital. After assessing his options, he borrows $250,000 from a bank and, as part of the loan agreement, he signs a guarantee using the family home as security.
One of the conditions of the loan is that the debt must be repaid immediately if he dies or becomes totally and permanently disabled. His financial planner explains that, if either of these events occur, the only way he’ll be able to repay the loan is to sell either the business or the family home. Both these options would have significant drawbacks.
- Selling the business assumes there will be a willing buyer prepared to pay a reasonable price, unlikely given how much the business relies on Brad.
- Selling the family home can present similar challenges, compounded by Brad’s family having to find somewhere else to live.
Brad could also face problems if he suffers a critical illness and is unable to meet the loan repayments ‚Äì particularly if he takes a while to recover or is unable to return to work.
After assessing Brad’s goals and financial situation, his financial planner recommends he takes out $250,000 in life, TPD and critical illness insurance. If the unthinkable happens, he (or his estate) will receive the necessary cash to repay the loan and extinguish the guarantee.
Case study 2 | Jill protects her business income from unexpected difficulties
Jill, aged 43, has owned and operated a large and successful garden nursery for many years.
As she wanted to maintain ownership while freeing up some time to concentrate on other commitments, she employed Anna to manage the day-to-day operations. Anna’s management and sales skills, as well as her extensive horticultural knowledge, greatly increase the nursery’s revenue and customer base.
A year later, Anna was diagnosed with cancer and her doctor advised her to retire. This resulted in an immediate reduction in business revenue and Jill incurred significant costs to recruit and train a suitable replacement.
Fortunately, Jill had spoken to a financial planner and, as a result, had taken out a life and total and permanent disability and critical illness policy on Anna’s life before she was diagnosed with cancer.
As a result, Jill received a critical illness benefit and was able to use the money to find a suitable replacement and offset the drop in revenue and profits experienced during this period of upheaval.
Case study 3 | Holly protects her income from illness or injury
Holly is a self-employed architect and receives an income from her business of $120,000 pa. She owns a home worth $575,000 and has a mortgage of $375,000.
If she is unable to work due to illness or injury, she would like to be able to meet her living expenses and mortgage repayments without having to eat into her limited savings.
After assessing her goals and financial situation, Holly’s financial planner recommends she takes out income protection insurance to cover 75 per cent of her monthly income.
Unfortunately, after taking out the insurance, Holly is involved in a bad car accident and is unable to work for six months. Because Holly had income protection insurance, she receives the full benefit of $7,500 per month for five months after her initial one month waiting period. As a result, she receives a total income of $37,500 during the six months which means she can spend that time recovering without worrying about her income.
If Holly had not taken out income protection insurance, she would have received little (if any) income during this period and would have struggled to meet her living expenses, mortgage repayments and out-of-pocket medical costs.
Stephen Skujins is the Senior Manager, Business Banking at the Greater Building Society.