Business life insurance is the over-arching term used to describe the suite of policies designed to add a layer of protection to businesses in the event of a sudden and unexpected hit to incoming revenue.
There are 3 key products which safeguard business owners and their family and employees, should the worst happen:
- Key Person Insurance
- Business Partner Insurance
- Business Expenses Insurance
Here’s how they work in more detail.
Key Person Insurance
Key people within your business are valuable assets because of their knowledge and contribution to the profitability of the business. That’s why business owners insure them.
Key people can be insured for death, trauma and/or total and permanent disablement. The reason for coverage is either loss of revenue or capital purposes to pay off existing debt.
A small business borrowed $1 million from the bank to fund growth. The main revenue generator in the business was an employee who had lengthy experience in tenders and contracts. This key person did nothing else except prepare tenders which gave the company an enviable success rate.
If this main person became sick and couldn’t ever work again, how would the business find a replacement person in a hurry to pay back the large debt to the bank? Key Person Insurance could help cover this problem.
Business Partner Insurance
This type of cover is generally known in the industry as Buy/Sell Insurance. The purpose of this type of insurance is to provide dollar funding to the surviving business partner to buy out your share of the business. This simply provides an easy solution to a potentially complicated situation.
Death, trauma and/or total and permanent disablement can all be covered.
Most important of all is the Buy/Sell legal agreement that must be implemented – it details all strict guidelines of the buy/sell arrangement.
Two friends are in a business partnership with next to no surplus cash. One dies prematurely, leaving the other in a business quandary. The deceased man’s wife does not have the necessary skills or indeed want to be involved in the running of the business.
The only option is to buy her out – but where are the funds to come from? The buy/sell option with the Business Life Insurance policy would provide the funds in this case so the business could continue.
Business Expenses Insurance
The majority of business expenses are fixed – rent, leases, staff wages, etc. – so if something happens to the main income earner, it can be a big problem for the continued running of the business.
Often a small to medium sized business has only one person bringing in the dollars. If that person is suddenly not there, Business Expenses Insurance steps in to cover day-to-day running expenses.
Business expenses insurance is usually only available to businesses with fewer than 5 “income-producing” employees. For example, a receptionist is deemed non-income producing while hairdressers are income producing. This type of insurance is particularly important for small businesses, as opposed to large businesses who can usually cope if staff fall ill or have an accident.
A house painter falls off a ladder and is unable to work for 10 months due to a broken leg and back injuries. His wife and niece work in the business and do all the client liaison and administration.
During this period, his Business Expenses Insurance kicks in to pay his normal business expenses, including the office lease, staff wages, etc. The painter’s personal Income Protection Insurance (if he has it) could then cover part of his income, which may be used to pay his home mortgage and other expenses such as groceries, fuel, utilities, and more.