Business owners are usually aware of the need to protect assets such as the business premises, plant and equipment, vehicles and stock via general insurance. However, few owners consider the risks to the future of the business by not appropriately covering its most important asset – the people within the business!
Business owners should also contemplate the financial loss if personnel responsible for the equity, credit or ongoing revenue exit the business unexpectedly due to sickness, accident or death.
Business risk protection strategies for key personnel within a business include:
- Buy/sell protection; also known as partnership protection. Allows shareholders in a business to insure for the value of their equity to cover death, total & permanent disability or serious medical conditions such as heart attack, cancer stroke etc. If a partner suffers from an insurable event, and exits the business, the proceeds of a claim will be paid to the disabled owner, or their family in the event of death. The cover will ensure that the departing owner or family receives fair value for their share. In addition to the insurance, a legally binding buy/sell agreement should be completed by the shareholders. The buy/sell agreement or ‘business will’ provides the legal mechanism by which the shares of the deceased/disabled owner can be acquired by the surviving shareholder. Buy/sell cover is a vital part of your business succession planning, as it ensures that the ongoing ownership and control of the business remains in the hands of the original shareholders.
- Business loan cover; in order to obtain a loan or credit facilities from a bank, business owners will need to provide guarantees, and may use business and/or personal assets to secure the debt. The debts are usually ‘at call’ and the bank can request payment in the event of the death or incapacity of the guarantor. By obtaining adequate cover, their guarantees/securities are protected, and the surviving business owner(s) and/or family will not have to sell off assets to clear the debt.
- Revenue protection cover; also known as key person cover. The loss of a key person due to disability or death may create costs to locate, recruit and train a replacement, and result in a loss of revenue until the new staff member is operating at the capacity of the disabled or deceased employee. This cover will offset the replacement costs and the expected reduction of revenue until the business can recover from the loss of the key person.
- Business overheads cover; provides the replacement of the fixed operating costs of a business if the owner is unable to work due to sickness or injury. Overheads which are covered include loan repayments, rent, utilities and salary costs.
Scott Plunkett holds an Advanced Diploma in Financial Planning, and has worked in financial services since 1992. He has specialised for over 14 years in providing superannuation and risk protection advice to individual and business clients.
Please note: The information provided in this article is general advice only. It has been prepared without taking into account any person’s individual objectives, financial situation or needs. Before acting on anything in this article you should consider its appropriateness to you, having regard to your objectives, financial situation and needs.