ONE OF THE MOST IMPORTANT BUT OFTEN OVERLOOKED INSURANCES FOR BUSINESS
Running a successful business comes down to good planning. Questions often posed by business owners include… “Is my business profitable?”, “Do I have enough business in the pipeline?” and “Are debtors under control?”
When things are sailing along smoothly, owing your own business can be profitable, rewarding and enjoyable. However, things can very quickly take a turn for the worst when a key person dies or is unable to work for an extended period.
WHO IS A KEY PERSON?
A key person would be someone who is responsible for a key area in the business, for example an owner, a crucial sales person, a project manager or someone who has a unique or hard to replace skill set. Without that person the business will suffer financially or fail.
Consider those crucial to the continued viability of your businesses – how would their death or disablement affect the business?
How would the death of a key person in your business affect revenue and profits or the ability to get the task done? Would your business even survive?
Many individuals wisely put in place personal insurances such as income protection insurance, life insurance, total and permanent disability insurance or trauma/critical illness insurance to seek to ensure that their family is protected financially in the event that they are sick, injured or die.
Many businesses however, often overlook putting in place similar policies to guard against the financial consequences of significant people in the organisation becoming permanently disabled or dying.
CONSIDER THIS COMMON SCENARIO…
Consider this common scenario – 2 people go into business together and operate a very profitable real estate agency. One of owners dies unexpectedly and leaves a widow, a stay-at-home mum with 3 children. She has no experience in real estate and has no desire to return to the workforce. The owners didn’t anticipate this event occurring, so there were no insurance policies in place and as such, there was no way to adequately fund the buy-out of the business by the surviving owner. This problem could have been easily addressed with putting in place insurance policies on the lives of the owners and having in place a Buy/Sell Agreement.
WHAT IS A BUY/SELL AGREEMENT?
A Buy/Sell Agreement documents what happens if a co-owner dies or is forced to leave the business prematurely due to illness or injury and the insurance policies can wholly or partly funds the buy-out of the sick or injured co-owner. Key person insurance is crucial for business succession and business protection purposes.
WHAT DOES KEY PERSON INSURANCE COVER?
Key person insurance does not indemnify the actual losses incurred by a business. Rather, it compensates with a fixed monetary sum specified on the insurance policy. The insured amount can offset the costs (such as hiring temporary help or recruiting a successor) and losses (such as a decreased ability to transact business until successors are trained and the consequent reduction in profit) which the business is likely to suffer in the event of the loss of a key person.
OWNERSHIP OF THE POLICY
Policies can be owned in a number of ways depending on the needs of the business. It is common for a business to own the policy with any proceeds in the event of a claim being paid directly to the business. There is no requirement for a policy to be owned by a specific party or entity and there may be circumstances, be it for taxation or policy continuation purposes, where policies may be owned and paid for by the insured person directly or owned by another individual. If this is the case, it is important to ensure that there is an agreement in place with the business that ensures that the proceeds of the policy go to the business if a claim is paid out.
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Fionne McKillop is principal financial planner at McKillop Financial Planning and owns her own law firm McKillop Legal, which is expert in estate planning, business succession and commercial law.
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This article was prepared by Integrated Planning Systems Pty Limited ABN 21 051 429 184 trading as McKillop Financial Planning, an Authorised Representative of GWM Adviser Services Limited ABN 96 002 071 749 trading as MLC Financial Planning, Australian Financial Services Licensee, 105 – 153 Miller St, North Sydney NSW 2060, a member of the National Australia Bank Group of companies. The information is current as at 13 September 2016.
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