Business Risk Management
A business risk management strategy should ensure that your business can continue to operate, or be passed on to others to operate, in the event of the unforeseen death, major accident, or major illness of the owner operator or joint business owner. This entails business protection insurance.
There are three key forms of business protection insurance.
For self-employed persons
Although an Income Protection contract will (depending on the agreed terms) assist in replacing up to 75% of income if a self-employed person is unable to work, a business would usually have recurring expenses that still need to be met. Business Expenses insurance may be the answer.
Business Expenses Insurance pays up to a pre-determined monthly benefit for a pre-determined period of time (maximum one year) in the event of an injury or illness which prevents the life insured from working. The amount of benefit paid will be based on the fixed expenses incurred by the business, for example, lease, rental and / or interest payments, accounting and audit fees, energy costs, rates etc.
For partners within a business
Protection insurance contracts in business are the same as those in personal protection, but the ownership or beneficiary instructions are part of a legally binding agreement that usually forms part of a Business Succession or Business Transition plan. Business Succession or Business Transition plans are usually based on a Business Valuation which will assist all stakeholders in establishing realistic values on business assets and revenue expectations. Knowing these values allows business stakeholders to predict and therefore protect financial loss in the event that a key person or owner dies, suffers total and permanent disablement (as defined by the life office) or suffers a major trauma. The protections important to businesses include:
- Key person Protection – insurance to provide the business with a lump sum amount which the business uses to fund a head hunting exercise to replace the key person, or fund an income to the business to replace the anticipated loss if that key person is not able to work in the business for a period of time. Depending on the need, the insurance cover selected would be Term Life and / or TPD and / or Trauma contract. Based on the insurance contract held, a lump sum benefit would be paid in the event of the death, total and permanent disablement (as defined by the contract) or major trauma of the insured key person within your business.
- Buy / Sell Protection insurance – to provide the business owner with a lump sum amount which the business uses to buy out’ the insured persons interest in the business. This means that the business does not need to find a capital amount to pay out the departing owner (either themselves or their estate), nor do the remaining owners need to deal with the prospect of being in business with the spouse or offspring of the departed owner.