Most businesses have one or more individuals whose continued association with the business, as a result of their investment, experience, technical expertise or connections, provide the business with a significant and direct economic gain. Such individuals can be identified as key persons. Their loss from a business could result in a significant impact on revenue, profits or other financial aspects of a business, eg goodwill, ability to repay debt and other expenses or access to credit, business contacts and customers. Key person insurance is essentially life, total and permanent disablement (TPD) or trauma insurance policies taken out by a business on the life of a key person. Where this insurance is taken out and a key person departs the business or is unable to perform the duties due to an insurable event (death, disablement or a specified medical condition), the business can utilise the insurance proceeds to replace lost revenue, repay debt, cover additional expense items or inject required capital into the business. This ensures that the business is supported financially until a replacement is found or other staff are trained to fulfil a particular role. Hence, key person insurance helps protect the financial stability of a business and reduces business risk. It is important to understand the distinction between key person insurance and insurance policies used for business succession planning. Key person insurance is about protecting the ongoing viability of the business. Conversely, business succession planning is about protecting the owner’s (and indirectly their family’s) personal investment in the business.
When you own your business it becomes more than just a job because of your personal investment of time, money and energy. That’s why protecting your business is vital. And not just the building and contents, but also your role in keeping it running. Depending on your business, different types of insurance are available to help protect assets and employees. Insurance can also be used as part of your succession planning. What is business overheads or expenses insurance? Business insurance packages can help protect you against a range of contingencies like property damage, burglary, damage to office equipment, as well as looking after your public and product’s liability and professional indemnity insurance. Another type of cover is business overheads or expenses insurance, which can help you to manage your bills and continue to pay your staff and you are too sick or injured to go to work. It can give you the peace of mind that your business will continue to operate financially, even if you can’t be there. This cover can reimburse up to 100% of your regular business expenses like rent, property rates, vehicle leases, and even salaries that you are responsible for, of the non-income producing staff.
Small businesses, partnerships with five or less partners and sole traders should consider business overheads or expenses insurance.
Businesses where the cash flow generation is due to the services provided, for example professionals or consultants. Generally, this cover is not suitable for businesses where the cash flow is earned as a result of the sale of goods, for example, retail shopkeepers.
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