It is often said that your people are your biggest asset but do you protect them and your company from the loss of key personnel? There are a range to risks and covers available to properly protect you. Our specialist Life and Disability Team will help you develop the right plan for your people.
Life and Disability Protection for Businesses
When considering insurance for a business it is important to establish the appropriate area of risk that requires cover.
Essentially there are three separate areas of risk to be considered and although they are related, they have separate ownership requirements and different functions.
They are best illustrated as follows:
Owners Risk
Most small businesses are owned either by an individual or a number of individuals. Ownership is often on a 50:50 basis where there are only two parties involved, however this can vary with individuals owning larger or smaller numbers of shares.
The main risk faced by business owners is that one of the parties dies prematurely or becomes completely disabled.
This risk is normally covered by an insurance contract that will provide the necessary funding to facilitate a buy out of the deceased or disabled shareholder.
There are a number of crucial points that need to be recorded at the time the insurance is established.
They are:
- The value of the business today
- How the value was established and how it will be established in the future
- The level of insurance cover
- The type of insurance benefits to be included
- The ownership of policies
- The treatment of premiums – who pays and why?
All these points need to be recorded in a formal agreement. This agreement is often referred to as a ‘buy/sell agreement’ or a ‘share purchase agreement’. It is separate from other agreements such as a ‘shareholder agreement’ as it deals solely with the proceeds of the insurance and the transmission of shares or equity.
The purpose of the insurance and the agreement is to protect the interest of the business owners.
Business Risk
The purpose of ‘business risk’ cover is to protect the business in the event of a key person loss and other liabilities. It has nothing to do with the owners interest in a business, it is all about business survival.
Key Person Protection
Often when a business suffers the loss of a Key Person the business itself may fail or falter. Generally speaking a Key Person would be a person responsible for generating income, holding key relationships, having key skills and possibly providing guarantees for funding.
A ‘Key Person’ loss could adversely affect the financial viability of a business as the business would be required to replace the deceased or disabled person.
Key Person Cover provides capital to the business for:
- Loss of revenue
- Recruitment Costs
- Increase in operating costs
- Relocation Costs
Policies should be owned and paid for by the business as the cover is designed to help the business.
Debt Protection
As the name suggests this cover is designed to provide funds to retire debt and release owners from guarantees and other debt instruments.
Ownership and intent of the policy is critical when providing cover for this risk.
These critical areas are often overlooked in business insurance.
“An employee suffered a breakdown which their doctor identified was a result of work related stress. The doctor contacted the Department of Labour who prosecuted the company under grounds of not providing a safe work environment.
The Employers Liability policy paid out a total of $8,000 in compensation.”
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