All business owners should consider what would happen to their business if they were unavailable for any extended period. How would the running costs be met? What would happen to their customer relationships? How would it affect personal income?
Such risks can be managed through insurance. There are two core insurances that can ensure the viability of a business in the event of the unexpected.
Business Expenses Insurance is designed to cover up to 100% of a business’s regular fixed operating costs if the owner dies or becomes disabled. Expenses covered include rent, loan repayments, equipment leases, rates, electricity, and phone.
This type of insurance is vital for sole operators, or those operating small businesses and partnerships whose continuity depends on an individual’s ability to generate income.
Different waiting periods are available, regular payments are made, and premiums may be tax deductible, depending on circumstances.
Key Person Insurance protects businesses from the loss of individuals whose capital, knowledge, client base, or experience are critical to the company’s continuing success. The insurance proceeds allow the business to continue operating in the event of death or disablement of a key player such as a director, partner, or specialised employee. The payout may be used to repay debts, replace key skills, and protect revenues.
This type of insurance can also be useful in relation to people not directly involved in the business, for example a person who has guaranteed a business loan. In this situation, automatic default of a loan agreement may be triggered in the event of death.
Key Person Insurance is established via a Life and TPD (Total and Permanent Disablement), or a Trauma policy.
Different tax treatments apply if the policy is intended to cover revenues (e.g. staff replacement, training costs or loss of sales) compared to capital purposes (debt or loan repayment).
If the cover is for revenue purposes, premiums will be tax deductible and claim proceeds will be assessable. If it is for capital purposes premiums are not tax deductible and proceeds not assessable.
Capital gains tax can arise with death benefits in certain situations, or with TPD and trauma benefits paid to someone other than the life insured or a “defined relative”.
Ownership of the policy can be in a variety of names including, but not limited to, the business owner or their spouse, the business entity, a trust, a superannuation fund, or a guarantor.
It is important for all owners to consider risk management strategies such as these. Business and key person insurance needs to be correctly structured and tailored to the needs of the business and individual circumstances.
