Can Your Business Survive Losing One of Its Key People

As much as you try to share skills, knowledge and information in your company, you probably have some people who are key to your business’ success.

key person insurance

It might be a Director or the CEO, whose vision made it a success in the first place. It might be your star salesperson, or someone in your IT area who knows the system backwards. It could even be someone who doesn’t create any revenue but does a fantastic job of boosting your company’s reputation or perhaps running your admin and back office systems.

 

Now, what would happen if you suddenly lost one of those key people?

 

And if you think it would never happen because they love your business so much, think again. Sure they may not resign. But they might decide to start a family and want to leave the workforce. Or what if they suffered a major illness or injury, or even passed away?

 

In addition to the obvious issue of lost productivity and their contribution to the business, you also have to spend time (and money) to recruit and train a replacement. And losing such a key person in your company could even affect your reputation and credit standing.

 

Could your business survive until you find someone who can fill their shoes?

 

Key Person Insurance can help you get back on your feet

 

Key Person Insurance can give you the financial support you need while you’re getting back on your feet. It can offset both your costs (e.g. hiring temporary help or recruiting and training a replacement) and your losses (e.g. not being able to do as much business until they finish their training).

 

It can also help with:

 

  • business succession planning
  • protecting your company’s equity value
  • agreed funding to purchase the equity
  • continuity of equity value for the surviving spouse
  • funding re-payments of any capital loans or personal guarantees
  • meeting requirements for bank business loans
  • salary packaging benefits (depending on the person’s taxation affairs).

And you can take out a policy (which is usually tax-deductible) on anyone you feel is a key person in your company.

 

How much should I insure them for?

 

The amount you specify will depend on the size of your company and the person you’re insuring.

The amount can be calculated in a few ways, including:

 

  • the ‘replacement cost method’, which is based on the cost is to replace the key person
  • the ‘contributions to earnings method’, which is based on the percentage of their earnings towards your company’s revenue
  • the ‘multiples of income method’, where their current salary is multiplied to determine their value.

 

 

Protecting your partners (and their partners) with a Buy/Sell agreement

 

What if the key person happens to be your partner in the company? Yes, the Key Person Insurance may well cover the finances involved in buying your partner’s shares from their family. But do you really want to be negotiating a deal at such an emotionally trying time?

 

Having a Buy/Sell Agreement in place can save everyone from a lot of anguish. It’s a legally binding agreement that determines what will happen to each stakeholder’s shares if they suffer a major illness or injury, or pass away.

 

It has two parts:

 

  • The Disposal Mechanism (also known as a Business Will), which states what happens if a partner leaves the business due to death or disability. It usually contains a valuation method.
  • The Funding Mechanism, which funds the Buy/Sell Agreement. This is where you would find the details of the Key Person Insurance policy taken out for each partner.

 

How do I arrange Key Person Insurance?

 

Before you take out Key Person Insurance you should first speak with your business advisor about the overall approach and then get into the details with an insurance broker. You need to make sure you get the cover you need without paying for the cover you don’t need. We can guide you in this area.

 

After all, it may well be the key to your business’ survival.

Understanding Risk Management for Small Business

Operating a successful small business involves decisions in several areas , one such area is risk. Risk, is the exposure to danger, harm, or loss. For businesses the term usually applies to the risk of financial loss.

Whether you have just starting your business, or you have been trading for a while, protecting the business you worked so hard to build is a priority. Unfortunately, it’s a step that many entrepreneurs neglect in the rush of launching a startup and operating day-to-day.

 

Here are several steps you can take now to protect your small business.

 

Choose the right form of business

Operating as a sole proprietorship — the default business structure for a one-person business — may be easy, but it’s not necessarily the best choice to protect your business. For one thing, the sole proprietorship structure doesn’t protect your personal assets. That means if a customer decides to sue you or a vendor demands payment that your business can’t afford, your savings, home and other assets could be fair game.

 

Hire a lawyer

You may not need to use a lawyer that often, but when you need one, you need one fast. Ask other entrepreneurs, business colleagues and friends for recommendations to lawyers who are familiar with small business issues. Take the time to compare lawyers by scheduling an interview with each before you hire them. Discuss payment options — most lawyers have different payment options for smallest businesses.

 

Find an accountant

Even if you plan on doing the bookkeeping yourself, a good accountant is worth the price. Who has time to keep up to date on tax law changes? You sure don’t — but accountants do. Not only can they save you money on your taxes, they can also provide valuable advice on how to structure your business, the best way to finance expansion, and how much to pay yourself.

 

For suppliers and contractors: Be smart about new customers

Before taking on a major new customer, conduct a credit check. This helps protect you against unpaid invoices. Never do business without a written contract — no matter how confident you are in the customer’s word. If something goes wrong, a contract may be the only thing that ensures you get paid for your hard work.

 

Buy business insurance

Most businesses need general liability insurance, and if you provide advice or professional services to customers, you may also need professional liability insurance, also known as E&O (errors and omissions) coverage. If you have employees you are required to have workers’ compensation insurance. Other insurance products to consider include key man insurance on your life and the life of other key employees, business interruption insurance (which protects your income if your business has to shut down due to a disaster), product liability, and cyber-insurance.

 

Protect your employees and customers

Disaster can strike any time, so it’s important to have a disaster plan for what you will do in case of emergency to protect your business. Create a plan and assign responsibilities for how to get employees and customers out of the building safely, what to do if a disaster keeps you and employees from getting to your business, and how you will keep running even if you can’t get to your physical location. Learn more about creating an emergency disaster plan.

 

Protect your business data

Back up your company data and documents with cloud storage so you can access files anywhere. When your information is stored in the cloud, you don’t have to worry about a crashed hard drive, or how a fire on your premises could wipe out precious data. To protect your business from cyber-crime and hackers, install appropriate firewalls and, more importantly, train your employees in cyber security measures, such as creating strong passwords.

Four things Small to Medium Business Owners Should Consider About Insurance

Australia’s more than two million small businesses make an enormous contribution to our communities and are the backbone of our economy.

Here are four steps that every small business owner should consider when thinking about their insurance. 

Key person insurance

Key Person Insurance Cover

 

1. Protect your most important assets

 

Your most important assets are your family, your employees and your ability to earn an income. Small business owners have a lot on their plate, juggling many roles within a company. With so much going on, it is understandable insurance won’t always be high on a long list of priorities.

However, ABS statistics show 5.3% of Australians experience at least one work-related injury or illness within a year. This is in addition to accidents taking place outside the workplace and non-work related illnesses. Any of these events could mean time out of the workforce and sudden loss of income, so it’s worth thinking about how your business would manage in this type of situation.

Additionally, offering life insurance to employees can act as a compelling tool for attracting and retaining top talent, and could be a highly competitive benefit!

 

2. Understanding different types of cover

 

It’s important to understand the different types of cover available for both you and your employees. For instance, income protection, trauma and TPD can protect your income by providing a regular lump sum if you become sick or injured.

Life insurance provides a lump sum benefit for your dependants should you pass away or become terminally ill. Key person insurance (also called key man insurance) covers against lost revenue and assets if you or a key person were to pass away, or became unable to work due to disability or illness.

Imagine if a business is owned by two business partners. One of those partners becomes sick and dies. What happens to the business? His/ her spouse will have a right to take over the share of the business. With Key person insurance, the surviving business partner can buy out the remaining share of the business and continue operations, allowing the business to still continue forward.

 

3. What’s important to you?

 

When considering your options think about what matters to you most and use that as a starting point. In our research business owners emphasised the importance of safeguarding their lifestyle, family and business.

 

4. Ask around

 

Seeking professional advice is always a good idea when reviewing your insurance. Our research shows small business owners consult a variety of sources for financial information. These include independent financial advisers, accountants or lawyers, brokers, internet forums, banks, friends and family. The research also showed that SMEs found using a broker saved time and gave them peace of mind.

 

 

5 tips on holding Life Insurance through your SMSF

 

 

Holding your Life Insurance through your Self-Managed Super Fund can be an effective method to secure the future of yourself and your loved ones. The following tips may help:

 

1. Considering Life Insurance within your SMSF is actually a requirement by the ATO
Findings from the government’s Cooper review revealed that only 13% of self-managed super funds actually held any form of Life insurance. In response to this underinsurance gap the ATO made it a requirement for all trustees to at least consider life insurance in their strategy document or meeting minutes. This does not mean that trustees are required by law to hold life insurance within their SMSF, it does however mean to be compliant with the ATO, it must be documented that consideration was given to life insurance within the fund.

 

How we can help: We can provide you with the right information to pass onto your SMSF accountant in order to ensure your SMSF remains compliant in this area.

 

2. Cash Flow Benefits
Since your SMSF owns the policy, it will fund the premiums. This can free up your cash flow, especially for times when money is tight or when you have more pressing financial priorities. It can be beneficial however to implement a contributions plan in order to avoid the eroding effect insurance premiums can have on your retirement savings.

 

How we can help: We can assist you in either transferring your current policy into your SMSF or advise on an alternative policy to undertake should this be appropriate for your situation.

 

3. Tax Efficiency
Tax savings can be achieved by funding your insurance premiums via pre-tax dollars through salary sacrifice and personal tax-deductible super contribution strategies. This effect is magnified for those in the higher tax brackets in reducing taxable income.

 

How we can help: We can provide you with specialist advice as to a contribution plan to avoid retirement savings erosion and to reduce taxable income.

 

4. Protect your assets within your SMSF
Life insurance within your SMSF can help avoid the sale of valuable assets such as property should something happen to a member. Not having the right insurance in place could have a major effect on the liquidity of the SMSF, as the death or TPD of a member is unpredictable and the consequences could be damaging to the other members.

 

How we can help: we can provide you with a review of your current cover and make recommendations based on your needs to cover any risk in this area.

 

5. Protecting Members
The underlying motive behind the requirement for members to consider Life Insurance in their SMSF’s is to prevent members from being underinsured. Putting in place the right amount of cover for your situation can help protect yourself and your loved ones from financial strain should something tragic happen.

 

How we can help: If you don’t know how much cover you need let us provide you with recommendations for appropriate levels of cover so that your financial future cannot be hindered by a devastating injury or illness.

 

 

The information provided in this document, including any tax information, is general information only and does not constitute personal advice. It has been prepared without taking into account any of your individual objectives, financial situation or needs. Before acting on this information you should consider its appropriateness, having regard to your own objectives, financial situation and needs. You should read the relevant Product Disclosure Statements and seek personal advice from a qualified financial adviser. From time to time we may send you informative updates and details of the range of services we can provide. If you no longer want to receive this information please contact our office to opt out.

What is a buy sell agreement and how will it help my business?

 

Buy/sell agreements help to ensure a smooth transition of business ownership to remaining owners in the event that one business owner dies or is unable to work due to illness or disablement. They help to ensure remaining owners retain control of the business and the departing owner receives fair value for the sale of his or her share of the business.

 

Buy/sell agreements are often funded with insurance policies. There are various options for owning insurance policies and these should be discussed with a financial adviser and/or tax adviser.

 

To implement a buy/sell agreement, business owners should enter into a legally binding agreement setting out the details of the arrangement. This agreement should cover issues such as who is to receive the departing owner’s share of the business, the trigger events that will result in the transfer (eg death, disablement), the formula for determining the value of the business and how the transfer will be funded (eg insurance or other monies).

 

The tax implications of paying premiums and claiming proceeds will depend on how the insurance policies are owned.

 

Other things you should know
• Business insurance should be reviewed regularly, to ensure it continues to meet the changing needs of a business.
• Insurance contracts vary. It is important to check the terms of any contract to ensure the cover meets the needs of the business and the owner.

 

 

General Advice Warning: The information provided in this document, including any tax information is general information only and does not constitute personal advice. It has been prepared without taking into account any of your individual objectives, financial situation or needs. Before acting on this information you should consider its appropriateness, having regard to your own objectives, financial situation and needs. You should read any relevant Product Disclosure Statements and seek personal advice from a qualified financial adviser.

Reaching 100 years old: some tips from Sweden

The key ingredients are simple according to Researchers at the University of Gothenburg, Sweden. “Refrain from smoking, maintain healthy cholesterol levels and confine themselves to four cups of coffee a day” says Dr Lars Wilhelmsen.

 

The study analysed data on 855 Swedish men born in 1913, including 10 who are over the age of 100. The scientists were able to identify factors that promoted longevity of life, particularly after the age of 55.

 

The study also showed that it also helps to own a house by the age of 50 — indicating a high standard of living — display a good level of middle-age fitness and to have a mother who lived a long time.

 

The research found that 27 per cent of the study participants survived to the age of 80 and 13 per cent to 90.

 

Of all the deaths occurring after the age of 80, 42 per cent were attributed to heart disease, 20 per cent to infection, 8 per cent to stroke, eight per cent to cancer, six per cent to pneumonia, and 16 per cent to other causes.

 

You can find the complete findings in the Scandinavian Cardiovascular Journal.

Can you gamble with cardiovascular disease

The National Heart Foundation of Australia has estimated that nearly 4 million Australians have cardiovascular disease (CVD); almost 20% of the population. CVD prevalence increases with age, with 35% of Australians aged 55-64 reporting a long term CVD condition.
The Heart Foundation goes on to say that cardiovascular disease is the second largest cause of disease burden in Australia; accounting for 18% of the total burden of disease.

Cardiovascular disease is still Australia’s biggest killer. In 2011, CVD was the cause of 45,600 (31%) of all deaths—responsible for more deaths than any other disease group.

Knowledge and application of that knowledge is our battle against cardiovascular disease. By knowing the risk factors and developing protective factors we can reduce the likelihood of suffering a heart problem or disorder and improve our capacity to respond should a disease occur.

A protective factor can therefore be described as one that contributes positively to an individual’s health and wellbeing. Factors which protect against CVD can vary from levels of HDL in the bloodstream sufficient to help protect against arterial plaque formation to behavioural factors, such as getting regular physical activity or eating plenty of fresh fruit and vegetables. Socioeconomic protective factors, such as having a strong social support network or an adequate level of income, are also important.

Knowledge of the potential for cardiovascular disease should also be a reason to discuss whether you or your business is prepared for it to happen to you or someone important to you. What would you do if you could not work or have the work done by an employee integral to your business? Would your business survive losing a ‘keyperson’ for an extended period of time, or worse, permanently?

Knowledge is good, but only if you apply that knowledge. Safeguard your family and your livelihood, review your insurance cover and be proactive in looking after your health.

If you are in doubt with regards to your requirements or if you would like to review your existing life insurance, please feel free to call me on 1300 78 55 77.

Fact sheet released by National Heart Foundation of Australia www.heartfoundation.org.au

SMSF Funds Lack Important Protection

‘SMSFAdvisor’ recently highlighted a study carried out within the insurance industry which revealed that the majority of SMSF trustees are underinsured when it comes to life insurance – possibly without even realising it. It went on to explain how only 13% of those partaking in the study actually had life insurance with many believing they did not need it or were ignorant to the fact their SMSF did not provide for them.

Life insurance is often misunderstood when it comes to knowing how much is required. It does not need to be complicated but it does need to be considered.

If you are in doubt with regards to your requirements or if you would like to review your existing life insurance, please feel free to call me on 1300 78 55 77.

Original article released by www.smsfadvisoronline.com.au on 6/06/2013

Total & Permanent Disablement Tax Deduciton Portions

Total & Permanent Disablement Tax Deduction Portions

Changes were recommended to the Income Tax Assessment Amendment Regulations which related to the deductible portion of premiums for TPD insurance, and were passed on 5 October 2011.

These changes limit the deductible portion of TPD insurance premiums and give superannuation funds the option of using a simpler method to determine this portion, without having to engage an actuary.

Key changes from the draft Regulations include:

1. Clarification that deductibility is not affected if terminal illness is included into the insurance policy;

2. The inclusion of domestic (home) duties definition; and

3. The tightening of the definitions of TPD own occupation and TPD any occupation.

Importantly, there were no changes to the specified deductible portions of eligible TPD definitions, as follows:

Insurance Policy

Specified Deductible Proportion %

TPD Any Occupation*

100%

TPD Own Occupation*

67%

TPD Own Occupation bundled with Death (Life Cover)*

80%

*(Including with one or more of the following inclusions: ADL, cognitive loss, loss of limbs and domestic (home) duties)

(Article courtesy of AIA Insurance, 19 April 2012)

The Importance of Trauma & Income Protection Insurance

How would your family manage when faced with a traumatic event ?

When faced with a traumatic event, families need to cope emotionally, you may also need to make changes to your living arrangements and you may also be facing loss of income. The last thing you need to worry about at such a stressful time is finance.

Trauma insurance can provide peace of mind by ensuring you have sufficient money to fund changes in living arrangments, providing an income while you are off work & therefore creating less stress for your family at a difficult time.

Traumatic events are more common than you may think.

Take a look at the igures below :

Work Related Statistics (trauma and income protection)
• 2 of 3 males, 1 of 3 females, or 1 of 2 Australians will suffer a traumatic event during their working life
• 50% of all trauma policies sold are to “white collar” workers
• Most trauma claims occur within 2.5 years of policy commencement
• A person is 3 times more likely to suffer trauma than death before age 65
• There are approximately 117,000 Australians who are “permanently unable to work” due to illness or injury
• 1 in 3 Australians will be off work for more than 3 months during their working life due to illness or injury
• When a person is off work for more than 3 months, then the average duration of claim is usually 4.2 years!
• The most common type of work related injury is industrial deafness, followed closely by back related injuries
• Each year, approximately 1 million Australians experience serious injuries or illness, which either require hospitalisation or prevent them from working
• Half of all serious accidents occur away from work, so workers are not covered by workers compensation
• 20,000 Australian children (minors) are primary care givers for at least one parent due the parent’s sickness or disability
• 1 in 2 Australians will be off work for more than 7 days during their working life due to illness or injury
• Less than 1 in 5 Australians have income protection cover with a benefit period of greater than 2 years (Yes, this includes company sponsored plans!)
• Nearly 10% of Australian full-time workers leave work due to chronic illness
Source: “Year Book Australia 2002 – Health – Special Article – Chronic diseases and risk factors”. by Australian Bureau of Statistics