BUSINESS PROTECTION
The success and growth of a business can sometimes be attributed to the unique knowledge, talents and experience of one or more people. In a small business this may be the founder of the business or partners in a partnership. For a larger business, a key person may be someone whose absence would reduce the profitability of the business, such as a sales manager or a highly-skilled employee.
But what would happen to the business if one of its key people were to suddenly pass away, be diagnosed with a terminal illness or become unable to fulfil their role in the business for a period of time.
Would the business be able to keep operating?
Would the surviving business owners or partners be able to cope financially?
Would your business be able to buy a departing owner’s share of the business if that person died or suffered a serious illness or injury?
If your answer to this question is 'NO' to any of these questions, you need to consider transferring that financial risk to an insurance company.
Key Person Insurance
Key person insurance is not an insurance product; it is a means by which insurance products (Death Cover, TPD, Trauma) are used to protect a business in the event that a key person, such as a partner or director, dies or becomes unable to work.
The insurance is taken out by the business on the lives of named key persons, with premiums generally paid for by the business, and in the event of a claim, the benefit is paid to the business and not the individual or their family.
Key person insurance benefits can be used for revenue purposes, capital purposes or both revenue and capital purposes.
Buy/Sell Insurance
Buy/Sell Insurance’ or ‘Partner/Shareholder Protection’, is once again not insurance in itself, but is the insurance taken out as the funding mechanism to allow a surviving business partner to acquire the share of the business from the other party as part of a buy/sell agreement or partnership agreement.
In many cases, a business will not already have an agreement to facilitate the payment of an insurance benefit. In these cases, the business operator should seek legal and estate planning advice. Many insurance outcomes have complicated tax implications and business operators should also seek specialist taxation advice concerning the structure, ownership and benefit payments when considering their business insurance requirements.
Why is Buy/Sell Insurance Important?
Buy/Sell insurance can help minimise the risk of:
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The remaining owners having to sell the business to pay out the departing owner or their estate
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The control of the business or its assets being frozen due to legal difficulties created by the departing owner, or their spouse or estate
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A departing owner, or their spouse or estate, taking legal action over a valuation or pay-out figure
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A departing owner’s spouse deciding (against the wishes of the continuing owners) to become an active partner of the business (rather than taking the pay-out)
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The departing owner’s spouse or family taking their legal right to claim a share of the business profits without having to work in the business
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A departing owner’s spouse or estate selling their share of the business to an unsatisfactory third party.
Death & Terminal Illness Cover
(Term Life Insurance)
Term Life insurance works by paying a lump sum on the death of the key person insured or the diagnosis of a terminal illness.
As the policy is owned by the business, the benefit is paid to the business and not the individual or family that policy has insured.
Trauma (Critical Illness)
Trauma Cover pays the business a lump sum if a key person is diagnosed with a critical illness or suffers a trauma. It covers a wider range of insurable events than Income Protection, and has no restrictions on how the business uses the lump sum payment to their benefit.
As the policy is owned by the business, the benefit is paid to the business and not the individual or family that policy has insured.
Total Permanent Disability (TPD)
Total and Permanent Disability cover pays a lump sum in the event a key person is never able to return to work due to a total and permanent disability (e.g. quadriplegia)
As the policy is owned by the business, the benefit is paid to the business and not the individual or family that policy has insured.