Why should business owners consider business partner insurance?
Taking out sufficient insurance cover is a fundamental step of business planning. From insuring against fire and theft to income protection, there’s a range of covers that are simply a necessity for business owners. It's also important to think about having cover in place in the event that one of the business partners or key employees suffers a serious illness, injury or passes away.
Buy-Sell Life Insurance and Key Person Insurance can provide the means for business succession in the event that a business partner or employee becomes permanently disabled or passes away. This article will provide an overview of how these different types of insurance actually work.
3 types of business life insurance to understand
There are three main types of business life insurance, which include:
- Key person insurance
- Buy/sell agreements
- Business expenses insurance
1. Key person insurance
Key person insurance is a corporate-owned life insurance cover that insurers the employer against the loss or permanent disablement of a key worker in the business.
This cover can be taken out on any employee whose loss would impact the companies profitability and result in additional costs including:
- Cost of hiring a temporary worker
- Cost of recruiting successor
- Loss of capacity to conduct business until successor is trained
As well as a business partner, other employees who can be considered a key person in a company include:
- Managing director
- Financial controller
- Computer programmer
- Sales manager
This is far from an exhaustive list, but a person is basically anyone who provides a business with a direct and substantial economic gain.
2. Buy/sell life insurance agreements
A buy/sell life insurance agreement is a written agreement that business owners enter into that sets out each owner’s obligations concerning the transfer of the business equity in the event one partner passes away. So if one business partner dies or suffers total and permanent disablement, a plan for how to proceed with the business has already been laid out.
Buy/sell agreements are usually made up of a transfer agreement and a funding agreement. The former concerns the transfer of the departing owner’s interest in the business to the remaining owners, while the latter specifies how the departing owner or their estate will be compensated for their share of the business. These agreements are usually linked to life insurance policies for each partner.
Buy/Sell Agreements in a small online fashion store
Sue and Jenny are business partners running a small online fashion store. When Sue passes away unexpectedly, her husband doesn’t have the interest or knowledge necessary to take over her share of the business.
Luckily, Sue and Jenny had set up a buy/sell insurance agreement when they first went into partnership together. The life cover insurance payout gives Jenny the funds she needs to buy out Sue’s share of the partnership and continue building the business.
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.
Who needs business expenses insurance?
Business expenses insurance is a crucial consideration for many small and medium business owners. If the profitability of your business depends on your ability to earn an income, for example if you’re a tradie, it provides the funds you need to keep the business afloat while you are unable to work. You can use the ongoing benefit to cover the following expenses:
- Staff salaries
- Phone, Internet and utilities
- Vehicle and equipment leasing costs
- Business repairs and maintenance
- Loan repayments
Example: Business expenses insurance and injuries
Darren is a landscape gardener with a thriving small business. He employs two people and has an extensive list of clients, but after falling down the stairs at home he is severely injured and unable to work for eight months.
But because Darren has business expenses insurance, Darren receives an ongoing benefit to put towards paying his staff, repaying his business loan, making lease repayments on earthmoving equipment and covering his business’s phone and Internet costs.