Most businesses are very focussed on their clients, or the work the business is doing and it is easy to think that this is the most important part of your business. After all, you spend marketing dollars trying to attract clients, you invest in expensive machinery and systems to help you perform your business tasks more efficiently, so surely the work you are doing is what’s most important to the continuation of your business success.

Just stop for a minute and take a step back in the chain of events to look at what happens before the work is done or the clients are found. That’s right – it’s you there doing the work, and in many cases your key staff. Therefore before you make any more business decisions look at the investment you can make in business insurance.

Business Expenses Insurance

Business expenses insurance can pay a monthly benefit, usually for up to 12 months after a successful claim, where the money paid can cover your business costs if you as the business owners because sick or were injured and unable to work. While you hope that you business has safety nets which are strong enough to hold in most unexpected circumstances, there are some times when an emergency fund just won’t cut it. That is why you can also usually choose a waiting period between 14 and 90 days depending on how long your business would be able to survive on its emergency funds.

Business expenses insurance is specifically related to your health, and shouldn’t be confused with business interruption insurance, which pays a benefit is you are unable to do business because of an external influence such as fire or water damage, and is not related to your health or ability.

How to Choose a Cover Amount

To make sure you are paying the premiums on a relevant and useful amount of cover you need to consider the affect your inability to work will have on your business’ ability to continue to function, survive and thrive. Therefore, start adding up the specific outgoing expense amounts for:

• Staff salaries
• The rent or mortgage on your business premises
• Phone, internet, gas and electricity costs
• Costs of leases for equipment and vehicles
• Ongoing repair and maintenance costs

It always best to accurately calculate the amount your business would need to continue running if you weren’t there, even though the amount might seem large, remember that your premiums are generally tax deductible.

Features of Business Insurance

Business expenses insurance is very similar to income protection insurance and will pay a benefit amount to cover your fixed business costs if you are unable to work because of sickness or injury, according to the conditions and features of the specific policy and insurance provider you choose. This means that your business can continue to function even if you are not there because all the bills are paid, and it also ensures that there is a healthy business to sell if you choose not to return to work after you recover.

It is important that you consider all of the conditions of a business expenses insurance policy before you sign up, to ensure that you know exactly what you are signing up for and what will be covered. Each insurer and insurance policy will have their own definitions of the expenses which are covered and those which aren’t. Luckily, unlike income protection insurance which will only cover up 75% of your income when you make a claim, business expenses insurance will generally cover 100% of eligible business expenses during the benefit period. You’ll also usually have the option to regularly review and update your business expenses insurance to keep in line with your changing business needs. Your policy should also be regularly updated in line with the Consumer Price Index so that your benefit amount does not fall behind the cost of living.

Other features of a business expenses insurance policy can include:

• A 10 hours or 10 hours plus disability definition. This feature allows you to work for up to 10 house a week without that income affecting your benefit amount.
• Specific injury benefit. Guarantees payment for a specified time if you suffer from a specific injury listed by your insurance company.
• Crisis benefit. Guarantees payment if you suffer from any of the specific medical conditions listed by your insurer.
• Locum cover. Which reimburses you the cost of employing a locum who can maintain your business while you are sick or injured.

Benefits of Business Insurance

No matter how small your business is, even a sole trader has a number of expenses to meet each month regardless of business activity. The benefit of business expenses insurance is its ability to pay these expenses while you are recovering so you don’t have to worry about work at all, and can focus on getting healthy again.

An important benefit of business expenses insurance is its ability to bridge the gap which may be left by your income protection insurance. If you run your own business you can’t be too careful and so you have hopefully protected yourself with both income protection insurance and business insurance. However, if you become sick or injured and are unable to work, your income protection insurance will only pay out up to 75% of your income.

When you own your own business your business income and your personal income are closely tied. For example, if your business’ income is $9,000 per month and $3,000 of that pays for expenses, your business makes a profit of $6,000. From that $6,000 income you receive, you need $4,500 to pay your own bills, and you save the remaining $1,500.

However, if you can only make a claim on your income protection insurance you will only receive a benefit amount of $4,500 which is 75% of your $6,000 income. This is cutting your personal bills pretty close, but you can make adjustments to your spending to get by while you are away from work. However, the $3,000 in business expenses is going unpaid, and you don’t have enough money from your income protection benefit to pay your business expenses, and these are regular costs which must be paid regardless of the business’ activity.

If you are unable to pay your business expenses while you are sick or injured, you won’t have a business to go back to as your staff won’t be there because they weren’t getting paid, you won’t have an office because you couldn’t pay the rent and you won’t have a car because you couldn’t pay the lease. Plus, if you are unable to pay all of your business expenses you will quickly ruin your credit rating making it even harder to start again when you are healthy.

Therefore, you need business expenses insurance in addition to your income protection insurance, to make sure both you and your business can recover and survive this set back.

How to Apply

It is a good idea to work with your financial advisor to determine the right amount of cover for your business. A financial advisor will also assess your current situation and your medical history to ensure that your business insurance is suited to your needs, and offers you the best value for your money.

You should also take the time to compare insurers to find one who specialises in your sort of business. If you are a sole trader for example, or you work in a specific trade, seek out insurers who work with other similar businesses as they will understand your needs and the insurance will be better tailored to your business.

Key Person Insurance

There is no legal definition of key person insurance – also known as key man insurance – but it is an insurance which is taken out to cover a business’ financial loss if a key person in the business died or was unable to work for an extended period of time. The term of the policy continues for as long as the key person is useful to the business, and the benefit paid is the amount set by the insurance policy, and is not based on the actual losses incurred by the business.

Large and small companies can take out key person insurance on anyone who is instrumental to the continuing success of a business. This could be the owner, a partner in the business, a principal shareholder or a key employee, for example a particularly effective salesperson.

Who is Key in Your Business?

Look carefully about how your business operates and who is most important to that operation. Think about how your business would function if certain people within the business were suddenly unable to work. In most cases management and important staff can be replaced in the long term, but key person insurance is about insuring your business in the short term so that if a key person dies or is unable to work, your business doesn’t feel the glitch in operations.

A key person is more than just someone who works the greatest hours or has the highest sales figures for the month. A key person is someone from whom the business reaps a direct economic gain. This doesn’t just mean in the form of profits, but can also be business benefits such as cost saving, capital injections, goodwill with customers and clients, access to credit and access to a wide client base.

Therefore a key person could be someone who holds a significant amount of technical expertise which is integral to running a business, or who is a consistent and strong sales person. For example, a key people you might want to insure in your business include:

• Managing director. They use their expertise, ingenuity and ability to run your business smoothly and remain within budget. This helps your business secure a strong position in the market.
• Sales manager. Uses their unique contacts or methods to ensure your business has the edge over the competition.
• Financial controller. Has set up a budgeting and reporting system which has saved your business money and will be able to save you even more money as they develop the system further.
• Computer programmer. Has been contracted to write a software program that your business can sell on to make a profit, and will continue to be called on to develop new software and sales opportunities.
• Specialist engineer. Their specialised knowledge of your company, product and industry allows your business to win valuable contracts.
• Active director. Works hard in the business, completing the tasks of two employees yet only drawing a moderate salary to allow for more money to be invested in the business. To replace their role would cost you at least those two full salaries.
• Silent partner. Someone who has a strong reputation with financiers to instil confidence and offer security to allow the business to secure better finance.

What Would You Lose if You Lost a Key Person?

The exact losses your business would sustain if you lost a key person would depend on your situation, and which key person was lost, but regardless, it is a good idea to take out as much key person insurance as you can afford. Businesses can generally take out between $500,000 and $10 million of cover which may sound excessive, but think of the costs and the losses you could sustain from the time you lost a key person to the time you could replace them with someone worthy, and until that person themselves because as valuable as a key person in your business.

Key person insurance provides four main types of loss in your business:

• Temporary expenses. You can make a claim if a key person in your business is temporarily unable to work for an extended period of time. The insurance benefit can pay for temporary personnel and can cover the costs of recruiting and training the new person in your business.
• Insurance of your profits. Protects your business by offsetting the losses to your business from lost sales and the delay or cancellation of any business project in which the key person was involved. This will also cover the loss of an opportunity for your business to expand, and the loss of any specialised skills or knowledge the key person brought to your business.
• Insurance of the interests of shareholders or partnerships. If a shareholder or a partner of a business is the key person insured and unable to work, then the insurance can provide the necessary funds the other partners or shareholders need to buy out the incapacitated partner. It can also provide funds to buy out the family of a deceased partner or shareholder.
• Insurance of banking and loans. Key person insurance also protects anyone involved in guaranteeing business loans or banking facilities for your business. The value of the key person insurance in this case is equal to the value of the guarantee.

Features and Benefits of Key Person Insurance

The success of a business is wrapped up in a rich tapestry, unique to each individual business. However, one common thread across all business is the people who make it happen, and no matter what ‘it’ is for your business, you know that the dedication, inspiration, knowledge, training and passion of those people is hard to find. Therefore, imagine rigorously assessing applicants, carefully training staff members and watching them grow, and grow your business at the same time, only to suddenly lose all of the support and knowledge you rely on.

It would be devastating for any business, even if the only key person in the business is you, the contribution of key people in a business is key to the business’ success and key person insurance includes all of the features and benefits your business needs to minimise the effects the loss of one of those key persons would have. You will also need to make sure that your key person insurance suits your business type, for example, if your business is a partnership, make sure that the key person insurance has allowances for a surviving partner to purchase the deceased or incapacitated partner’s share from them or their estate.

Key person insurance is just as important as any other type of business insurance because just as your business couldn’t run if you were unable to pay your internet bill it couldn’t run if you lost your top sales person or researcher either. You probably already know that your team are an important asset in your business, so you need to insure them the same way you do your plant and equipment.

The reality is that most businesses rely on one or two key people to drive the revenue and success of a business. As a result, any business would suffer a substantial loss if one of these key people were unable to work. To make sure your key person insurance has all of the features your business needs ask yourself the following questions:

• Who does your business rely on the most for its income?
• What effect would the loss of that person have on your business?
• How have you protected your business revenue in case of the loss of this person?
• What would your business need in the event of the loss of this person?

What your business would need is a cash injection to ensure that it could remain operational while working on a way to replace the person and the skills and knowledge which have been lost. Key person insurance is able to do that in the following ways:

• Business beneficiary. In a traditional life insurance policy if you are injured or you die, the benefit amount goes to your family. In the case of key person insurance the benefit is paid to the company to help them deal financially with the loss. In many cases the death of a key person can mean the death of their business if there is not some financial benefit in place to keep the business running.
• Business expenses. The business can use the key person insurance benefit to cover the business expenses until they can find a replacement, as the business may not be as profitable without the key person, and so may find it hard to make ends meet.
• Stabilise the company. The benefit pay out can be used to buy the shares of the business from the family of the deceased.
• Pay off debts. When a business is facing turbulent times, it can become difficult to keep up with payments on loans and financiers can become nervous about their investment. an insurance benefit can pay off business debts, distribute money to investors and pay severance to employees so the business can be closed down correctly.
• Options. Receiving an insurance benefit with the loss of a key person gives a business the chance to assess options and consider the best course of action without immediately being forced into bankruptcy.
• Deductions. As a business expense, the premiums for key person insurance may be tax deductible depending on your business and your situation.

If you own and run your own business you know how much of yourself you have poured into its success. You are the one who has worked late nights, weekends and forgone holidays for years on end to make your business a success. Of course you couldn’t have done it alone and if you are lucky enough to have built a strong team around you who are just as passionate about the growth and success of your business as you are, then you need to protect everything you have worked so hard for.

Don’t put off business insurance any longer because on the way up your business is sure to have faced some setbacks, and whether you are still climbing to where you want to be, or enjoying the view, some setbacks can come at a time and with such a severity that no amount of afterhours work will help you recover.