Understanding Business Assurance Policies

August 2, 2021

Business assurance

As we enter the second year of Covid-19, the fad in the business world is start-ups and entrepreneurship. Be your own boss and work your own hours. However, starting a business is scary enough and having to cope with all the different aspects and specifics a start-up requires can be daunting.

There are lots of issues, questions and factors and this is the reason why business assurance (business cover) is so important for business owners as it reduces their personal risk, which is one less item to worry about.

Business assurance is a risk reduction tool that mitigates these risks by ensuring that sufficient provision has been made for your business to manage such risks proactively.

Business assurance provides certainty, financial liquidity and is instrumental in any succession planning process.
What is business assurance? This is a risk and / or investment assurance policy taken out to protect a business from potentially dire financial consequences should someone who is essential to its operation die or become disabled. This person could be an owner of the business, a director, or an employee.

Business assurance can also be used to retain key employees.

The purpose of business assurance is to ensure that a business remains a going concern after an unplanned event, and that an owner and their dependents are protected against financial hardship.

Structure of the business

This is important as you need to consider the financial risks that you and your family may face and what measures need to be taken to negate these risks. One important aspect to consider is how the business is structured which includes the ownership of the business because this will determine the type of business assurance required.

Types of business structures are as follows:

  1. Sole Proprietorship
  2. Partnership
  3. Close Corporation
  4. Company
  5. Small Business Corporation

Once registered a company has its own corporate character and personality. It is a legal entity (or legal person) with its own legal rights, rules, and obligations. Which are separate and distinct from those of its members and directors. The company’s property is its own and is not treated as belonging to the company’s shareholders and directors.

It is for this matter that all the above-mentioned structures have different implications and consequences for the financial planning of an owner or a shareholder. For example – a Sole Proprietorship will have more tax and other obligations at death than a shareholder in a Company.

The three main business assurance options are as follows:

[info_list style=”circle with_bg” icon_color=”#0c4698″ font_size_icon=”18″ eg_br_width=”1″][info_list_item list_title=”1. Key Person” list_icon=”Defaults-umbrella”]This type of insurance will insure employees whose services and knowledge are instrumental to the running of the business, so that the business may seek a replacement for such a key employee. For example, Lionel Messi from the Barcelona football team.[/info_list_item][info_list_item list_title=”2. Contingent Liability Cover” list_icon=”Defaults-umbrella”]Ensures the settlement of a business loan where a business owner has signed surety, in the event of the death, disability or critical illness, releases the estate, of the business owner, from future settlement claims.[/info_list_item][info_list_item list_title=”3. Buy and Sell” list_icon=”Defaults-umbrella”]This type of cover will insure business owners in the event of their deaths, disability, or critical illness, so that the surviving partners may purchase the deceased’s business interest and this is not left to a family member who doesn’t understand how the business is run.[/info_list_item][/info_list]

In closing

A sound business assurance structure is an essential tool in planning the succession of one’s business. The agreements and contracts should be clearly set out, and if the liquidity is funded by a life policy, the life policy needs to be set up correctly to avoid any estate duty or other tax issues.

Please speak to a financial adviser at Harbour Wealth should you have any queries or require assistance with business assurance policies.

Harbour Wealth - Fiona Butler Financial Risk Specialist