For many business owners, life insurance starts as a personal decision. You take out cover to support your family, pay the mortgage, or replace income if something happens to you.
Then the business grows. You take on debt. You sign a personal guarantee. A business partner comes on board. A handful of people become central to the operation. Your plans for retirement start to depend on the eventual sale of the business.
At that point, the insurance you arranged years ago may no longer reflect what is at stake.
Protecting your biggest asset with business life insurance
Life insurance is about more than personal income. It should account for the business, the people who rely on it, and the financial plans built around it.
For a lot of business owners, a future sale of their business is expected to fund a large part of their retirement. But the value of a business can be closely tied to its owner.
If you’re responsible for major client relationships, operations or sales - an unexpected illness, injury or death can affect revenue and confidence in the business. It may also force a sale or restructure at the wrong time.
That does not mean a business cannot survive without its owner. It means there should be a plan for what happens if the owner cannot work, whether temporarily or permanently. Insurance can form part of that plan. It may provide funds to reduce financial pressure and give the business time to make clear-headed decisions.
Buy sell insurance and ownership protection
A business with more than 1 owner needs to consider what happens to an owner's share if they die or become permanently disabled.
Without a clear arrangement and funding in place, the remaining owners may not have the cash to buy that interest. The departing owner's family may then hold an interest in a business they don’t want to be involved in, while the business continues without a settled ownership position.
A buy sell agreement sets out what happens to an owner's interest in these circumstances. Buy sell insurance can provide the funds for the remaining owners to carry out that agreement and acquire the interest.
It can help the business stay with the people who are running it, while giving the owner's family fair value for their share.
The arrangement needs to reflect the ownership structure and the agreements between the parties. It should also be reviewed when the business changes. A policy taken out when the business was worth less, or when there were different owners, may no longer do the job.
We recommend buy/sell agreements be prepared with legal advice, which the BlueRock Law team can assist with.
Debt and personal guarantees can change the conversation
Business owners often borrow to fund growth, buy equipment, secure premises or manage cash flow. Many also provide personal guarantees to banks, landlords or suppliers.
Those commitments can have consequences beyond the business.
If an owner dies or cannot work, debt and guarantees do not disappear. They can place pressure on the business and the owner's family. In some cases, personal assets may be exposed.
A life insurance review can identify where there is debt, who has guaranteed it and how it could be managed if the unexpected happens.
How does key person insurance work?
Owners are not the only people who can create financial risk for a business.
A senior salesperson may hold important client relationships. A technical specialist may be difficult to replace. An operations manager may know how the business runs day to day.
Key person insurance pays a benefit to the business if an insured owner or employee dies, becomes seriously ill or is permanently disabled, subject to the policy terms.
When a person like this is unable to work, the business can face immediate costs. There may be lost revenue, recruitment expenses, pressure on other staff or disruption to client service.
The insurance proceeds may help cover lost revenue, recruit a replacement, or keep the business operating while the owners work through their next steps.
Tax treatment on future claims depends on policy ownership, purpose and should be considered with your accountant and adviser before being put in force.
The question is simple: if this person could not work tomorrow, what would it mean for the business over the next 6 to 12 months?
Is life insurance through super enough for business owners?
Many Australians have life insurance through their superannuation fund. This can be a useful starting point, but default cover is generally set up around an individual, not the full picture of their business ownership, debt, personal guarantees or succession plans.
That does not mean life insurance through super is always unsuitable. It means it should be considered alongside the owner's wider circumstances, rather than treated as the whole solution.
When should business owners review their life insurance?
A review is sensible when something meaningful changes. That could include taking on or refinancing business debt , signing a personal guarantee, buying into a business, or bringing in a new shareholder.
It’s also worth reviewing cover when the business expands, enters a new lease, takes on a major contract or becomes more reliant on a particular employee. Personal changes matter too, including marriage, children, separation, a new home loan or changing plans for retirement.
A business sale or succession plan is another common trigger. If the business is expected to fund retirement, the owners should understand how an unexpected event could affect that plan before they are forced to act.
Even where nothing obvious has changed, cover that hasn’t been reviewed for several years deserves another look. Premiums, policy definitions and the business itself may all have moved on.
See the full picture with a BlueRock Life Insurance Advisor
Good insurance advice starts with an honest view of the business and the people behind it.
What do you own? What do you owe? Who relies on you? Who would be affected if you could no longer work? What financial outcome would your family and fellow owners need? Those questions can be confronting, but they are easier to answer while there is time to plan.
BlueRock's life insurance team works with business owners to review their existing cover in the context of their ownership structure, debt, personal guarantees, family position and future.
To talk through whether your current cover still fits your circumstances, get in touch with our life insurance advisers by submitting the form below.
Disclaimer: The content is intended as general information/advice only and should not be considered as advice on any matter and should not be relied upon as such. This has been prepared without taking into account any individual objectives, financial situation or needs. You should therefore consider the appropriateness of the information in regard to these factors before acting or seek advice before making any financial decisions. BlueRock Private Wealth is a corporate authorised representative of BR Advice Pty Ltd ( AFSL No: 488 655, ABN: 30 612 056 523).
