What would happen to you and your family if you could no longer run your business as a result of illness, injury or death? Could it continue, would income remain the same? Could you pay your bills, would you have to sell your home, would you have to move in with family or friends?
Business owners invest a lot of time and money into establishing, growing and maintaining their business. Unfortunately a lot of business owners do not invest enough into protecting their business against illness, injury or death to key persons.
For a lot of small to medium businesses the owners are key people in the business, without them the business would struggle to survive.
Think about this, most of us would not consider driving our car without it being insured, nor would we consider owning our home without having it insured. But, a number of us go to work every day without properly insuring our greatest asset – our ability to generate income.
The table below demonstrates the income one can expect to earn up until age 65, and in turn further reinforces how important it is to protect your greatest asset:
| Current income (pa) | Age now | |||
| 25 | 35 | 45 | 55 | |
| $40,000 | $3,020,000 | $1,900,000 | $1,070,000 | $460,000 |
| $60,000 | $4,520,000 | $2,850,000 | $1,610,000 | $690,000 |
| $80,000 | $6,030,000 | $3,810,000 | $2,150,000 | $920,000 |
| $100,000 | $7,540,000 | $4,760,000 | $2,690,000 | $1,150,000 |
* These amounts assume a 3% increase per annum and no work breaks outside of normal leave until age 65.
Take someone who is 45 years old earning $100,000/annum. If they could not work after age 45 they would miss out on $2.69 million in income. What would that mean to you and your family’s circumstances?
Now might be a good time to investigate you and your family’s need for appropriate insurance to protect your business, and in turn protect you and your family. This could include:
- Income Protection’
- Key Person Insurance
- Total and Permanent Disability Insurance
- Life Insurance
- Other insurances appropriate for your business and circumstances
Have you thought about the need for a Buy / Sell agreement in your business?
If you are a part owner of a business a Buy / Sell agreement is a must for you!
Consider this scenario – Clare and Rachel are equal shareholders in ‘CR’s Business Advisory Services’. Unfortunately Clare is involved in a terrible accident and is killed. Clare’s shareholding reverts to her husband Bob, who is a builder with no expertise in Business Advisory. Bob, being a little bit of a chauvinist and someone who ‘knows best’, decides that Rachel cannot run the business on her own, and insists on taking an active role in the business. As Bob is now an equal shareholder he has equal say in the business and there is nothing Rachel can do.
This scenario may seem like an exaggeration but these sorts of scenarios do happen. What would happen to your business if a shareholder in your business died? Could the beneficiaries of their estate take an active role in the business, and if so, would you want that? The beneficiaries would almost certainly be entitled to their share of the profits, even if they do not work in the business. How would you feel if you were working hard in the absence of your business partner, only to see half the profits go to the beneficiaries of your partner’s estate?
These scenarios can be avoided by creating Buy / Sell agreements, and using insurance policies to fund these. If Clare and Rachel had a Buy / Sell agreement in place, the agreement could have included life insurance policies that provided funds for Rachel to pay Clare’s estate for Clare’s share in the business. This way Rachel can continue operating the business without interference from Clare’s estate, and Clare’s estate receives fair value for the capital value of Clare’s share in the business.
‘But what about the cost?’, I hear most of you ask. There are a number of possible cost effective solutions, including consideration of using super funds to purchase insurance. To provide sufficient cover for you and your family premiums will normally be between 1-3% of your annual income. We put 9% of our annual income away each year to fund our retirement, putting 1-3% of our annual income towards protecting you and your family until retirement is a good investment.
Now might be a great time to contact your financial adviser so they can best assist you in protecting your greatest asset, and in turn, protect you and your family.
General Advice Warning
The advice contained above does not take into account any persons particular objectives, needs or financial situation. Before making a decision regarding the acquisition or disposal of a Financial Product persons should assess whether the advice is appropriate to their objectives, needs or financial situation. Persons may wish to make this assessment themselves or seek the help of an adviser. No responsibility is taken for persons acting on the information provided. Persons doing so, do so at their own risk. Before acquiring a financial product a person should obtain a Product Disclosure Statement (PDS) relating to that product and consider the contents of the PDS before making a decision about whether to acquire the product.
Trevor Bransdon is an Authorised Representative of Godfrey Pembroke Limited ABN 23 002 336 254, an Australian Financial Services Licensee and member of the National Group of companies. From time to time members of the National group of companies, associated employees or agents may have an interest in or receive pecuniary and non pecuniary benefits from the financial products and services mentioned herein.
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