What is Business Protection Insurance?
Risk management is just as important for your business as it is for yourself. What happens if an owner or a key person in your business cannot work or leaves the business due to illness, injury or death? Do you have a succession plan in place?
A succession plan will look at:
- The risk of your business being impacted by any one of the owners or key people no longer being there (or Key Person insurance).
- A strategy to get through it with as little impact to the business as possible.
- If business protection insurance is required to fill the gaps financially to meet these goals.
How does it work?
Most business protection falls into three areas:
- A formal agreement for a buy out of owners of the business in the event of death, illness or injury.
- Covering business revenue when a key person is unable to contribute due to death, illness or injury.
- Extinguishing debts when business owners or key people cannot work or leave the business due to serious illness, injury or death.
Generally, any of the personal insurance (Life, Total and Permanent Disablement (TPD), Trauma or Income Protection) can be established to cover unforeseen events impacting the running and continuity of your business.
A formal agreement is a must!
If you are putting an insurance policy in place, a formal agreement coupled with expert advice is required to structure these correctly to support the business.
The intended beneficiary can be the owner of the policy but is this the most cost-effective way to manage the policy? Not always. Structuring your policy through superannuation can reduce the impact of paying premiums on the business but the benefit payment will not go directly to the business. Self-ownership of the policy might reduce the tax payable on the benefit at claim, but the premiums will not be tax deductible to the business. And then who re-directs the money at claim to the business where it is needed?
As a general rule, if the insurance premium is tax deductible, the benefit payment at claim is taxable also. Careful consideration needs to be given to the ownership structure you choose. Your adviser can help you navigate these options.
What are the benefits?
- Paying down debt in the event of death, disablement or serious medical illness of a key person, may allow the business to continue until an appropriate replacement can be found.
- Covering lost revenue in the event of death, disablement or serious medical illness of a key person, may allow the business to continue rather than being forced to liquidate.
- Holding the insurance via your business can ensure funds pass directly to the business for repayment of debt.
- Holding the insurance via your business allows premiums to be paid from business cash flow.
- Holding the insurance via super can reduce the impact on your business cash flow.
What should I be thinking about?
- If the cover is to replace revenue, premiums paid by the business are tax-deductible to the business and any benefit paid will also be taxable. The level of cover can be grossed up to allow for such tax payments.
- If the cover is to pay down debt, which is considered capital in nature, your business will not be able to claim a tax deduction for premiums paid.
- Holding Key Person insurance personally or via super means that benefits will be paid to the owner rather than the business. You will need to have a legal agreement in place to ensure that this benefit is transferred to the business for the intended purpose.
- Holding Key Person insurance via super also may mean that benefits are subject to tax, dependent on the type of cover and beneficiaries.