However at the same time we are one of the most under insured nations in the world.
None of us like the thought of insurance, but one of the realities in life is we need it. You don't have to have a big business to need insurance, small businesses need it just as much if not more in many cases.
There are three key areas of risk that should be addressed for a business and its owners. These are:
- The business
- The business owners
- Personal and family
These are structured together to ensure the owners and the business are protected against various risks and funding goes to the right hands when it is needed most. Without appropriate protection, creditors can attack your assets.
The business owners' risk deals with the value of your shareholding. This is required when there is more than one owner of the business.
What happens in the event of the untimely death or total & permanent disablement of one of the partners? Should the shares (ie control of the business) be transferred to the survivors? Would the surviving family (or trust) prefer cash to the shares (and business responsibility)? In order to provide for this, generally a buy/sell (or share purchase) agreement is used.
The most efficient funding mechanism for this is usually through the use of life insurance. Simply put, in the event of one of the shareholders' untimely death or serious disablement, the shareholders promise to buy the injured or deceased's shares while the estate of the injured or deceased promises to sell them. Buy/sell insurance is owned by the other shareholders or nominated trustee, and, through the agreement, the proceeds of the insurance reach the surviving dependants.
The business risk is otherwise known as 'key person insurance'. The business is valued today, with the owners active and vital to the company's success and bottom line. What is the real value and profitability of the business if one of them is suddenly taken out of the picture? They are all key people in the business, and without one of them either permanently or for a period of time, the business could flounder for several years and lose a considerable amount of profitability, not to mention the added strain on the other partners.
It also makes good sense to have key person cover for any other key staff within the business. Key person insurance is owned by the business and the proceeds of any claim go to the business.
If you are self-employed and don't have staff you will still need insurance but more of a personal nature. To understand how much you need, think through the "what-ifs" if something happened to you, either premature death or major health issues which would stop you working.
Business insurance is more complex that personal insurance so it's important that you get advice from an expert in business insurance.
Often people have too much of one insurance and not enough of the insurance that they really need so it's important to regularly review what you have to make sure it suits your needs.