By Steve Marsten
When we first go into business – our focus is getting the business up and running. You don’t focus on what could go wrong. Your only focus is making sure you are getting the business streamlined and humming. That’s why Business Risk and Business Risk Insurance is not always front of mind.
Like anything if you give it makeshift thinking it will become potentially a hap hazard nightmare later.
Business risk insurance involves the development of strategies that will assist a business to continue to operate in an effective manner should a particular event or circumstance arise that will have a significant impact on the business.
Businesses need to effect policies that deal with:
A death of an owner and their Estate’s interest in the business.
The Total and Permanent disablement of a business principal
The Critical Illness of a business principal; and
Sickness or injury of a business principal
The purpose of Business Risk Insurance is to construct business insurance that protects the business by:
Paying out a grieving spouse/estate the fair or agreed value of their interest of the deceased principal;
Or alternatively fund the remaining partners to buy out the interest of a business principal who is unable to work due to illness or injury;
Replacing lost business income due to the loss of a key person;
Replacing lost profit which is due to a key principal being unable to work due to illness or injury;
Maintaining the credit standing of the business or
Ensuring the business viability is maintained until an appropriate buyer can be found.
Dealing with key questions of who is to be the insured person; who is to own the policy and who is to pay the premiums are not always straight forward. Clearly a Directors Agreement (or partners agreement or Key Business document) is important in understanding the purpose of each policy taken out. It’s important to have a Key Agreement in place that is understood by all partners; key shareholders and Directors. In determining the answers to these key questions – we also need to understand the tax consequences as well. Does FBT apply? Are the paid premiums a business expense? Are they tax deductible? (These last two questions are not necessarily a “Yes” to both.) and what are the Capital Gains Consequences should a payout occur? Are they on revenue or capital account?
This is why you will require a good financial planner; accountant and Legal Advisor to assist in these matters. Feel free to call the team at Appleby Chartered Accountants on 07 3876 6211.