Business Life Insurance

Business Life Insurance

What is Business Life Insurance?

Business life insurance is a term used to describe the different types of life insurance policies designed protect businesses from sudden financial losses. The most common type of life insurance for business includes key person insurance (also known as keyman cover) and business expenses insurance. Business life insurance policies can be utilised to cover:

  • Employees
  • 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.

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Coverage is the amount of money that you will be paid in the event of a claim. An insurance consultant can help you determine an appropriate amount. Calculator
Provides a lump sum payment if you become totally and permanently disabled and are unable to return to work.
Provides a lump sum payment if you suffer a serious medical condition. Cover can be taken out for 40-60 medical conditions depending on the policy you choose.
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3 types of business life insurance to understand

There are three main types of business life insurance, which include:

Key person insurance

is designed to provide cover for the key people in your business. These employees are considered to be valuable assets to the company because of their expertise, with their loss having a significant impact on the business’ profitability. You can insure your key employees for death, critical illness and/or total and permanent disability, to provide protection against a loss in revenue or capital and pay off existing debt.

Buy/sell agreement:

is also known as business partner insurance and it provides a benefit payment to the surviving business partner so that he/she has the funds to buy the remaining share of the business. It can provide cover in the event of death, critical illness and/or total and permanent disability.

Business expenses insurance

This type of cover can provide many benefits for small to medium sized business owners and is generally available as an additional option on income protection policies. Business expenses insurance is designed to cover a business’ day-to-day operating expenses in the event that the main income earner is ill or injured and unable to work temporarily. Business expenses insurance is generally available to businesses with less than 5 employees that produce an income.
What is the benefit of a buy and sell agreement for businesses?

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

Business expenses insurance has similar characteristics to personal income protection insurance and its premiums are usually tax-deductible.

Read more on the tax treatment of various business life insurance plans

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.

William Eve

Will is a personal finance writer for specialising in content on insurance. While he cannot give personal advice to clients, Will enjoys explaining the intricacies of different types of protective cover to help individuals and businesses find affordable cover that won't leave them underinsured.

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