Business Insurance

Business Expenses Insurance

This type of insurance is designed to meet the ongoing needs of a business to pay regular expenses as and when they fall due, should a business principal be unable to work due to illness or injury.

If a business principal was to suffer a sickness or injury that stopped them from working there are two things that are almost certain to happen: The income they generate for their business will reduce or stop completely and fixed expenses will continue to be incurred (unless the business closes its doors).

Expenses covered

Listed below are business expenses that may be covered:

  • Rent on business premises
  • Regular interest instalment payments on business mortgage or loan
  • Electricity, gas, water bills
  • Telephone
  • Cleaning
  • Business property rates and taxes
  • Non-income producing employee’s salary and costs directly relating to salaries

Business Succession Agreements

Business Succession Agreements or Buy/Sell agreements are a means of providing a legal mechanism by which an ownership interest can be transferred from an outgoing business owner to the continuing business owner(s). This will generally occur as a consequence of an owner dying, or suffering disablement or critical illness. The areas that need to be addressed are:

  • Who are the parties to the agreement
  • What are the events that will trigger a sale by the existing business owner or purchase by the surviving business owner(s)
  • What is the value of the business
  • What is the most appropriate funding solution

Why have a Buy/ Sell agreement?

Without a Buy/Sell agreement in place in the event of ‘a trigger’, problems may occur between the departing business owner (or their estate) and the surviving business owner(s). Initially, this may be a disruption to the day-to-day activities on the business. However, it may flow on to more major issues:

  • The estate or family of the departing business owner may make unrealistic demands on the business’ value, or may even demand personal involvement in the business. This can result in a deterioration of the value of the business and the lifestyle of the remaining business owner(s)
  • The business’ creditors may call in outstanding debts. This can place a financial strain on the business and the remaining business owner(s). If the business cannot meet the obligations, the remaining business owner(s) may be required to cover the shortfall. If they are unable to do this, the business may be wound up and any funds distributed
  • A business owner who is unable to work due to illness or disability may refuse to leave the business. Apart from placing extra strain on the other business owner(s), this may place a financial strain on the business. The business will have to support an owner(or their estate) that is not adding value to the bottom line. Once again, this may flow onto a devaluation of the business, resulting in its closure and distribution of funds
  • The business might call in loans that it had made to the departing owner or, the departing owner (or their estate) calls in loans made to the business

Key Person Insurance

The most important asset a business has is its people. It is the human values of knowledge, skill, experience, creativity and leadership that enables a business to prosper and grow. Key employees that possess these values are the assets upon which the profitability of a business depends.

Identifying key persons

A simple rule: if the loss of an employee would have an adverse financial or economic impact on the business, then the employee is a candidate for key person insurance. Some key people may include:

  • Founding business principal
  • Key sales people
    Employees whose unique skill forms the basis of the organisation’s product
  • Employees whose reputation, prestige or connections has resulted in attracting valued customers
  • Employees whose reputation, prestige or connections has the ability to attract finance/venture capital
  • IT staff – programmers and analysts
  • Project managers that are critical to meeting deadlines
  • Financial controllers
  • External people – Key supplier including service people

Estate Planning

Estate Planning can’t happen once you are an estate.

When looking at a financial plan it is imperative that all issues be addressed. Estate planning is one of those issues that might be sometimes over looked and definitely should not be. The purpose of estate planning is to ensure your wealth and belongings are passed on as you would have wanted them. The truth about estate planning is, unfortunately, in most cases, it can only be done before an estate exists (i.e. before you die).

Estate planning can include the preparation of wills, enduring powers of attorney, testamentary trusts, buy-sell agreements, legal agreements and guardianship. The preparation of these documents will require the assistance of at least one professional (Solicitor, Accountant and/or Financial Planner).

A Financial Planner can analyse a client’s situation, advise the most appropriate strategy, and inform the client of the financial impact on their estate of their decision. The client would also need to involve their Solicitor to ensure the legal documents reflected the client’s wishes. The Accountant would also need to be consulted to ensure the estate would pass to the appropriate individuals in the most tax effective manner.

Some people believe “if I’m dead, who cares?” or “It won’t happen to me until I am really old”. Unfortunately, this is not the case. The proof is in any newspaper of any town in our country… in the obituary columns. More than 133,000 Australians die each year, or one in every 150 Australians. This is why it is essential we take the time and ask ourselves the following questions:

  • What would happen to your family, children, spouse or loved ones if you passed away?
  • What provisions do you have in place to make sure your dependants received your assets in the most effective way?
  • Will they have enough financial resources to continue the lifestyle they have grown accustomed to?

Appropriate financial planning will allow most clients to answer these questions with confidence and provide the client with peace of mind, ensuring that if the worst happened, your loved ones would be appropriately provided for.

Debt Reduction/Guarantor Protection

Many businesses have significant debt exposure that can only be managed if existing revenue of the business is maintained. If a business principal has guaranteed a business loan and provided his or her personal assets as security, they are at risk should the business be unable to repay the loan because of a death, disablement or traumatic illness of a business principal. Generally the guarantee given by the business principal is not extinguished until the debt has been repaid, i.e. death, trauma, etc, and will not release a principal from such obligations.

Type of insurance

The type of insurance taken out to protect the guarantor will depend on the particular options or events that the business principals wish to cover. These generally include:

  • Term life insurance
  • Total and permanent disability cover (TPD)
  • Critical illness cover

Duty of Disclosure