We have previously covered topics on the importance of asset protection. It is also vital that you protect yourself through insurance. Every business owner should consider what might happen to the business if they became totally and permanently disabled, terminally ill or if they died. Confronting issues to think about, but the ramifications for your business and your family if you haven’t can be significant.
In the case of death, the estate of the deceased owner may insist on being directly involved in the operations of the business, even when they lack expertise. Some businesses cannot continue without the business owner so the ability to repay debt needs to be considered. In some situations, the estate of the deceased owner may be forced to sell his or her interest in the business to an outside buyer at fire sale values.
In the case of traumatic illnesses or disablement, the business owner may be unable or uncertain they will recover or return to work, even though they may still be sharing the profits with the working owners who are left doing all the work. The situation is not any better of course for the partner who experiences the disability or traumatic illness themselves.
To ensure you have protected yourself from any of these occurrences, the types of insurances that should be considered as part of any business contingency plan include:
- Total and Permanent Disablement (TPD) Insurance, which provides a lump sum payment in the event the insured suffers an injury or sickness resulting in total and permanent disability;
- Term Life Insurance, which provides a lump sum payment in the event of the insured’s death;
- Trauma Insurance, which provides a lump sum payment if you suffer a major health problem such as cancer, heart attack or stroke;
- Income Protection Insurance, which pays a proportion of your salary for a certain amount of time if you’re temporarily unable to work because of sickness or injury.
Ownership of the policies can take a few forms.
Self-Ownership is quite straight forward. It involves each business owner taking out their own insurance policies.
On the upside, proceeds from TPD or trauma are exempt from tax. However, self-ownership of policies requires a business succession agreement to be entered into to ensure upon the death of one owner that the other owner or owners have the opportunity to acquire their share of the business.
This involves each business owner taking out or purchasing an insurance policy on the life of each of the other business owners. The proceeds from insurance would be paid to the purchaser, who then would pay the estate of the deceased partner in exchange for the transfer of the business equity.
Proceeds from cross-ownership life insurance are exempt from tax. However, when there is cross-ownership of life insurance policies that contain trauma or terminal illness benefit, because the party who receives payout from this type of policy is not the injured party, it would be taxable.
superannuation fund ownership
Some insurance policies can be owned by a Superannuation Fund which can have positive taxation implications on both the tax deductibility of the insurance premium and on the proceeds of the insurance policy.
Again, a business succession agreement may have to be entered into to ensure that business interests are transferred in the case of death, etc.
Everyone has individual circumstances so it is important that you consider your insurance needs as part of your overall strategy. If you would like to review your insurance needs, please contact us so we can facilitate this.