BUSINESS INSURANCE

OWNERSHIP INSURANCE
(BUSINESS BUY/SELL COVER)

Ownership Insurance is designed to protect business owners and their equity, for which they have worked hard to create.

The insurance cover acts as a funding mechanism for the remaining partner(s) to buy out the equity of a deceased or disabled business partner.

How it works…

If an owner suffers a ‘trigger event’ (death or permanent disablement), the agreed value of their share in the business (usually market value) will be paid directly to their estate/family via the Ownership Insurance.

Ownership Insurance ensures;

  • The fair value of a business owners equity will be paid to their estate in the event of death or disablement. These funds are paid in a timely manner, minimising costs and delays;
  • The remaining partner(s) in the business are not required to source funds to buy out the deceased or disabled partner. Often funding this type of transaction can be very difficult and will cause greater problems for all parties;
  • Interference/involvement in the business by the deceased or disabled owner’s family or beneficiaries can be avoided.

Where there is NO Ownership Protection…

 

  • Businesses can suffer enough uncertainty in the event of the death or disablement of a business owner (see Key Person Insurance). This uncertainty may bring forth questions around the businesses future and going concern. Will the business be able to meet its creditor’s requirements? Is the value of the business still worth the same as it was prior to the trigger event?
  • The continuing owner(s) may not be able to afford to buy out the departing shareholder. Will a financial institution be confident enough in the businesses continuation to lend money?
  • If no funding is available, the outgoing shareholders family will not receive the compensation deserved whic is often required to maintain their living standards;
  • The business may no longer be viable and may be forced to be wound up;
  • An outgoing owners family may want to be involved in the business moving forward or alternatively sell their share to a third party. This is often not the desired outcome for the remaining shareholders.

Twilight Financial Planning strongly recommends that once this Insurance policy is issued, the business documents the purpose of their cover via entering into a formalised Business Buy/Sell Agreement.

KEYPERSON INSURANCE

A Key Person is usually a business owner or employee who is critical to the ongoing revenue, cash flow and profitability of the business, or provides capital to the business.

The purpose of Key Person Insurance is to ensure the business can continue at the same level of operations/profitability as it would normally had a deathdisablement or critical illness of a key person not occurred.

Protecting Debt

External funding of a business is usually provided based on the assumption of business continuation.

Whereby a person who is critical to the continuation of the business revenue and profitability suffers a deathdisablementor critical illness, there is uncertainty and creditors will often be concerned about their outstanding funds.

Questions will arise regarding the business ability to repay their debts. Often where there is more than one creditor, they will be keen to ensure they recoup their funds as soon as possible, and may even call the debt in immediately.

Control of the business continuation is then often taken away from the owners.

Internal funding can also provide obstacles. If an owner in the business suffers deathdisablement or critical illness, there is often financial stress that follows. A disabled/ill person or a deceased’s beneficiary may want to call in any loans to the business immediately.

Protecting Revenue

It is often viewed that if you protect the business revenue, you protect the business continuation.

If revenue is secure, payments of wages, operating expenses, debt repayments and other overheads can continue to be met when called upon.

Key Person Insurance for ‘Revenue Purposes’, or for ‘Debt Purposes’, will allow a business to stay on top and remain in control in a time of disruption and restructure.

Business Owners and Investors often view their ownership in a business as an Asset. This asset can and should be protected against uncertainties, particularly those with the opportunity to derail the business value and viability.

BUSINESS EXPENSE

Small business owners may have income protection to secure their living expenses in the event of an illness or injury; however often the fixed expenses within their business will be greater than their drawings.

If you are self employed or in a small business partnership, you can protect these fixed overheads for up to 12 months, providing you with security and flexibility to make the best decision regarding your business continuation.

When a small business owner suffers an illness or injury, commonly the real crippling effect is the obligation on the business to pay;

  • Rent or a mortgage
  • Equipment finance or rental costs
  • Staff Wages & Super
  • Utilities and more.

Premiums are a normal business expense and an allowable deduction.