What do you want to happen, if you, your business partner or a key employee stopped working tomorrow?
Protect your assets
If you have taken out any loan to start up or grow your business, that is secured by business or personal assets, you can insure yourself and/or other business owners against unexpected life events such as death, total and permanent disability or serious illnesses. In one of those events, your business could have difficulty meeting its loan commitments. The lender could also have concerns regarding the business’ cashflow and credit position and may require the outstanding loan to be repaid immediately.
However, insuring yourself as the business owner or another business partner, in any of the above circumstances you can
- reduce or pay off any debt
- release any loan guarantee or security provided
- protect your business and personal assets
- ensure the business continue its operations
Protect your business’ revenue
Many growing and established businesses still depend heavily on the skills and talent provided by the owners and other key people in the business. Where this is the case, the temporary or permanent loss of a key person could have a significant impact on a business revenue and profit. Moreover, if another suitable person isn’t available within the business, significant costs can be incurred recruiting and training a replacement. This might put a tremendous pressure on the business and its management.
Therefore, there is a cost-effective solution to this problem which is to insure the key people in your business so in the event of death, total and permanent disability and serious illness, you can have the needed injection of cash to stabilize and protect the business.
While it may be possible to absorb the reduction in revenue into your business’ current year profits, or accumulate a reserve beforehand for emergency needs however, insuring the key people in your business could be a less expensive and more convenient alternative. In doing so, you can
- provide a cash injection into the business
- meet your financial commitments at a time when revenue may drop sharply
- hire an appropriate replacement key person
- train a replacement key person to bring your revenue to normal level
Protect your business ownership
If you are in a business with other people and one of the business partners dies in the absence of any specific arrangement, their interest is likely to be distributed in accordance with their Will for instance to their surviving spouse. The deceased surviving spouse might hold the position of the deceased person even though the deceased surviving spouse might not have the required skills and talent. Furthermore, the remaining owners may not be able to raise enough money to buy the departing owner’s equity in the business, not agree on the price.
Hence, in order to protect the business and ensure a proper transfer of ownership, a Buy Sell agreement should be considered as part of the broader succession planning process.
A Buy Sell agreement between business owners is a plan to protect each of the business owners’ interest in the business while keeping outsiders out of the business in the event of one of them dies. Funding a Buy/ Sell agreement with insurance can ensure an orderly transfer of ownership to the surviving business partner in the event of you or another owner dies or become disabled. This type of insurance policy is very cost-effective way for your business contingency planning.
Meet business expenses
If you’re a small business owner, business expenses insurance can enable you to cover eligible business overheads if you are unable to work due to illness or injury. The claim payment would be up to 12 months. Expenses that can be covered include office rent, most loan payments, equipment or vehicle leasing costs and utility bills for instance electricity, gas, water.
With a business expense insurance, you can
- cover 100% of your eligible business overheads in case you become ill or injury yourself that prevents you from working
- help keep your business until you recover or sell it out at the right time
Treat beneficiaries of your estate equitably
If you have a family business, and you might want to leave it to one or more of your children, you should be aware of the potential problems that could arise if you provide for certain children in this way and your other children might feel they have not been treated fairly. Even it is possible to see that your Will could be contested. If the challenge is successful, the business or other assets may need to be sold to distribute the proceeds which often end up with an accompanying Capital Gains Tax (CGT) bill.
Hence, to prevent family arguments and/or reduce the risk of your Will being challenged, you could think of taking out an appropriate amount of Life insurance cover. As life insurance can provide additional funds in a cost-effective way to ‘equalize ‘your estate and ensure all your beneficiaries are treated fairly. For instance, in the event of death:
- your family business could be passed on to one or more of your children, and
- the proceeds from the Life insurance policy could be used to provide an asset of equivalent value to your other children.
This is a very complex area of estate planning. Hence, we recommend you to seek a professional legal and taxation advice before applying for a life insurance cover in order to equalize your estate and treat all your beneficiaries fairly.
This document has been prepared by HQ Financial Solutions, an Authorized Representative of Lifespan Financial Planning Pty Ltd ABN 23 065 921 735,AFSL No.229892 based on providing for information purpose only. Accordingly, reliance should not be placed on this material as the basis for making a financial or other decision. While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), to the maximum extent permitted by law, no person including HQ Financial Solutions, Halle Yilmaz or Lifespan Financial Planning Pty Ltd, accepts responsibility for any loss suffered by any person arising from reliance on this information. Before acting on this material, you should consider its appropriateness, having regard to your financial circumstances and needs, and talked to a financial adviser in that field.
Halle Yilmaz is a financial adviser and business consultant. As a financial adviser, she gives solid advice that can create rapid and lasting results for her clients. Sign up for her free E-Book and download “7 Steps to Healthy Wealth Management.”