What is business life insurance?
Life insurance doesn’t just have personal benefits; it can also provide crucial protection for businesses against the financial consequences of a range of risks. Business life insurance refers to three types of cover that can safeguard your business against an unexpected loss of revenue:
- Key person insurance
- Buy/sell insurance
- Business expenses insurance
What do these three policies cover and why should you consider them for your business? Let’s take a closer look.
Business life insurance is a term used to describe the different types of life insurance policies designed protect businesses from sudden financial losses
How can this page help you?
Who can a business life insurance policy cover?
- Business owners
- Families of business owners
There are over 2.1 million businesses in Australia, with 96% of them are small businesses. Only 31% of this number who are self-employed have income protection in place, and only 10% of businesses have business expenses insurance (Comminsure, 2008). As a business owner, you have worked to make sure your business continues to operate and grow, even in difficult times. Having insurance in place for your business is important should anything happen down the track. There are many different kinds of insurance designed to secure the lifeline of your business and it is essential to choose the appropriate insurance for your business and review your cover on annual basis as your business changes.
3 types of business life insurance to understand
There are three main types of business life insurance, which include:
1. Key person insurance:
Key person insurance involves insuring a key staff member who is crucial to the success or profitability of your business. You can take out death, trauma and/or total and permanent disablement (TPD) cover for a key person, allowing you to cover lost revenue or repay existing debt if that person dies or suffers a serious illness or injury.
2. Buy/sell agreements
Buy/sell insurance agreements require business partners to take out life insurance on the lives of each co-owner. This cover ensures that if one business partner dies or becomes permanently disabled, the surviving business partner(s) can buy out their share of the business.
Death, trauma and/or TPD cover are all available, but the policies must be backed by a buy/sell legal agreement that outlines all the details of the buy/sell arrangement.
3. Business expenses insurance
Business expenses insurance provides an ongoing monthly benefit to help you cover your fixed business expenses when you’re unable to work due to illness or injury. This allows you to keep paying staff, clients and other regular bills until you’re back on your feet. Business expenses insurance is generally available to businesses with less than 5 employees that produce an income.
What factors should I consider when comparing business life insurance?
How can you find the right business life insurance policy for your needs? Remember to consider the following factors:
- Your cover needs. Take some time to think carefully about your business and the risks it faces. What are the critical risks you need to cover with business life insurance? For example, do you need to insure a key employee or maybe set up a buy/sell agreement to guarantee smooth succession of ownership if a tragedy occurs?
- Benefits. Consider the benefits each policy offers – what’s covered and to what level? Can you add optional extras to your business life insurance policy for an additional premium?
- Standalone or bundled cover. Do you want death cover only or should you combine death with TPD and/or trauma cover to provide more comprehensive protection?
- Exclusions. Read the fine print to make sure you’re fully aware of what’s not covered by business life insurance and aware of the situations where you won’t be eligible for any benefit.
- The cost of cover. Compare the cost of cover across several insurers to find out which one offers the best value for money. Also remember to consider the premium structure (stepped or level) and which one is a better fit for your financial situation.
- Get advice. Business life insurance is a complex and confusing topic. With this in mind, it’s essential to get advice tailored to the needs of your business, so talk to your financial planner, accountant and solicitor to ensure that you end up with the right cover.
What affects the cost of business life insurance?
There are various factors but in a nutshell:
- The industry you work in and how risky it is
- Your gender
- How old you are
- How healthy you are e.g if you have any pre-existing conditions
- Your pastimes and hobbies e.g if you partake in dangerous sports
- If you smoker
Business life Insurance vs personal life Insurance
Life insurance policies, either catered for personal or business purposes, are very similar in characteristics, although the need for cover and policy features may vary slightly between the two plans.
Business life insurance is usually taken out to meet the protection needs of a business, which could be either on a key employee, revenue, debts, business expenses or continuation of the business itself. By comparison, personal life insurance caters for individuals who are looking to protect their family financially and provide a replacement income to cover any ongoing living expenses and outstanding debts in the event of their death, terminal illness, temporary or permanent disability.
You will also find that most life insurance policies offer a built-in policy feature of guaranteed future insurability. This feature allows the policyholder to increase the cover amount when required. For personal life insurance policies, the guaranteed future insurability feature is tailored towards family-specific events, such as marriage, buying a home (mortgage), or birth of a child. However, with a business life insurance policy such as business expenses insurance,this feature is catered to business-specific events, such as an increase in business value, key employee’s value and business loans.
How much does Business life insurance cost?
The cost of business life insurance will vary depending on the type of cover that you require. Therefore, it is worthwhile to speak to an insurance adviser to discuss options on the type of business protection plan that is most suitable to your needs. Accurate and detailed information can assist your insurance adviser in finding suitable solutions for your situation and provide competitive quotes.
Business life insurance and tax
The tax treatment of a life insurance policy owned by businesses will vary depending on type and the purpose of cover.
Key Man Life Insurance
The tax treatment of key person life insurance will depend on the purpose and structure of ownership of the policy itself. Under section 51 of the Income Tax Assessment Act:
- Key person insurance premiums are tax-deductible when the policy is used for revenue purposes; however, the proceeds will be treated as assessable income to the business;
- Key person insurance premiums are not tax-deductible if the policy is used for capital purposes, and the benefit payment will not be assessable income to the business.
Business expenses insurance has similar characteristics to personal income protection insurance and its premiums are usually tax-deductible.
Why life insurance is important to to protect your business
You have worked hard to keep your business going, through the good times and the bad, and you are dedicated to make sure it prospers well into the future. To protect the continuation of your business in the future, it is important to consider the benefits having business life insurance in place.
The different types of business life insurance can ensure that your business is able to continue to run smoothly should you be forced out of work temporarily or that financial loss is not experienced in the event that a worker passes away. Speak with an adviser to find an appropriate protection solution for your business.