Productivity Protection

Hello Chasers,

A key part to being a ‘Productive Person’ is to ensure that you remain fit and healthy to carry out the role of business owner. If you are not in good shape then it is quite likely that you will be less productive in your business as a leader and it is something that you can do about it with a good diet and exercise.

What happens to your productivity if a life event occurs?

We have all seen first-hand the impact on productivity caused by the COVID pandemic, natural disasters and wars and a lot of this is out of our control.

But in the case of a life event, there is a lot we can do to reduce the impact on our business and personal lives by getting financial advice on wealth protection strategies through different forms of insurance.

There is no magic formula when it comes to the right amount of personal insurance, as this really depends on your personal unique individual situation. Everyone’s circumstances are different, so it’s important to identify what the financial impact of a specific event would be to your business, you and/or your family. Let’s explore some of the different types of personal insurances that can help preserve your productivity and your financial position.

Business Insurance

Running a successful business takes time, money and lots of hard work. Insuring your business should be top of your mind when you’re thinking about what might happen if you were totally and permanently disabled and couldn’t work.

What if something happened to you or another partner in your business?

  • What would happen to your business or family assets if you were to die or become permanently disabled?
  • If you died, would your business partners be able to pay out your family/estate for your share of the business?
  • Would your estate be liable for your business guarantees if you were to die or become permanently disabled?
  • What would happen to your family if you were no longer bringing in an income?
  • How would the business survive the loss of one of the partners?

Business insurance is not just about securing the future of your business… It’s also about securing the future of those you care about and who rely on you for financial support. 

Keyman Insurance

As a business owner, you already know that your employees are your most valuable asset. But have you ever thought about what would happen to your business if one of your most valuable employees was suddenly gone? Or what if something suddenly happened to you? It’s a possibility that nobody likes to think about, but the sudden loss of a crucial employee can take a huge toll on a business. Key person insurance can help your business carry on if the unthinkable happens.

Key person insurance is similar to life insurance, but for your business. If a key person suffers a major injury, illness, or death, key person insurance can help maintain profitability and cover some losses incurred. This might include the cost of replacing the employee, as well as losses from a decreased ability to do business. Unlike other types of life insurance, key person insurance is paid out to the business instead of an individual. It is usually paid in a lump sum, but in some cases may be paid out monthly to support ongoing loss of revenue.

Businesses can generally take out a policy for each key person, which will only come into effect if that key person dies suddenly or is permanently unable to work. Generally, any owners or partners are key people but it might also include a senior team member or an especially effective salesperson. A key person could be an employee who has personally guaranteed loans for your business, or someone with specific skills or knowledge that would take a long time to replace.

Generally, policies are taken out to cover either revenue purposes or capital purposes. This will depend on the key person, and their role in your business. If a key person generates a lot of income for your business that would take time to replace, they could be covered under this type of policy. This could help supplement losses in revenue, or cover replacement costs like recruitment and training. The other Capital purposes policies are usually only used to cover the loss of a business owner or principal partner. This type of policy could help pay back loans or offset intangible losses like the loss of goodwill or relationships with suppliers and customers.

The amount of cover you take out will depend on the size of your business, how much the key person contributes to its profitability, and how difficult they’d be to replace.

Income Protection 

What would happen to your ongoing expenses and lifestyle if you were unable to work due to illness or injury? I’m beginning with Income Protection as the ability to work and earn an income is our greatest asset. Sick and Annual Leave may cover you for some time, however what happens if you use all of it and still aren’t able to return to work? This is where Income Protection would help.

Income Protection policies applied for from 1 October 2021 are limited to paying up to a maximum percentage of 70% of your income (prior to this date it was generally 75% income) on a monthly basis. It is also important to remember that Income Protection claim payments are taxable. So not only is it generally impossible to cover 100% of your income through Income Protection, but if you do go on claim any payments you receive will also need to be counted as assessable income on your tax return. Depending on the insurer, Income Protection can also insure super contributions so that these can continue while you’re unable to work.

Ideally it is best to try to insure the maximum proportion of your income possible. Furthermore, it is important to consider the benefit period of Income Protection, which is the duration that you will continue to receive monthly Income Protection payments for. Generally, the longest benefit period you can apply for is up to your age 65. However, this will change from 1st July 2023 when it possibly will be extended to age 67 , which is aligned with the eligibility for the Age Pension. This is particularly important for younger people who still have decades of employment ahead of them for those born after 31st December 1956. The next longest benefit period is only 5 years, so having a benefit period to age 65 reduces the risk of you not being able to work in the long-term. 

Life

What are the financial consequences of you passing away?

A single person with no debt or dependents may not have a need for Life insurance. However as soon as dependents such as a partner or children are involved, the need for Life insurance increases.

Life insurance can pay off your mortgage (or the purchase of a house if renting) so that your dependents would have a debt-free home if you pass away. You may also want to provide for the loss of your income so that your dependents can continue to maintain their lifestyle. This again could vary from person to person. For example, we can calculate to provide ongoing income to your dependents for many years, or even just 1 year of income to allow your partner to take leave from work. Education expenses for your children such as private school fees can also be covered by Life insurance.

Even if you don’t earn an income (e.g., you are a homemaker), you should consider that your spouse/partner would have two choices if you pass away – the choice to stay home and maintain the lifestyle that they and your children are accustomed to or to go to work/pursue their career for the betterment of the family – both choices free of debt and financial constraints. Otherwise, they may be forced to take leave from their own job to look after the household and/or children in your absence (hence a loss of income), or they may need to hire someone to look after the household and/or children. Both situations can be insured through Life insurance.

The total calculated need for Life insurance can be offset or reduced by your existing income- producing assets such as superannuation, investment portfolios and investment properties.

Total and Permanent Disability (TPD)

What if you become disabled and were told you are unlikely to ever return to work? In this situation your Income Protection insurance would start paying you a monthly benefit. However, given Income Protection generally covers only 70-75% of your income, 

TPD insurance can assist with other areas such as paying off all debt and future education costs of your children. TPD insurance can also be used to insure the 25-30% of your income that cannot be insured by Income Protection, so effectively you can have 100% of your income insured.

The expense to hire a carer may need to be considered in the event of your disability, as these can be costly at an average of $50,000 per annum.

Another consideration when determining TPD cover is to include a provision for medical expenses (such as modifications to your home) or tax expenses if TPD insurance is owned through superannuation.

As with Life insurance, the total calculated need for TPD insurance can be reduced by income- producing assets.

Trauma

What if you suffered a serious illness such as a heart attack, stroke or cancer? Trauma insurance pays out on diagnosis of a critical illness and is unfortunately the type of personal insurance we are statistically most likely to claim upon. For this reason, it is the most expensive of the four types of insurance.

We consider the purpose of Trauma insurance to be used to pay for the medical costs and treatment that are incurred from a critical illness so that you are not needing to deplete your own assets. $150,000 is the average cost for cancer treatment, so we would look at insuring Trauma insurance for this amount as a minimum. Having higher levels of Trauma insurance (say $300,000 – $500,000) can unlock additional options for treating critical illness such as treatment overseas when effective treatment is unavailable in Australia, or the patient is willing to participate in clinical trials or experimental treatments.

At the end of the day, you also need to be comfortable with the amount of insurance premiums you will pay for your personal insurances. It is best to start with an ideal level of cover for your situation and if this is higher than you are comfortable with, our adviser should be able to suggest ways of reducing premiums.

In the case of a life event, there is a lot we can do to reduce the impact on our business and personal lives by getting financial advice on wealth protection strategies through different forms of insurance

There are many key factors that determine what is an ideal level of personal insurance, and it is vital that you speak to an adviser who can guide you around what is an appropriate amount for your individual situation.

If you would like to know how to protect the productivity of your business, yourself and the key people in your Team contact Shannae Hewett on 55612643.

Have a great day!

General advice disclaimer

The advice provided is general advice only as, in preparing it we did not take into account your investment objectives, financial situation or particular needs. Before making an investment decision on the basis of this advice, you should consider how appropriate the advice is to your particular investment needs, and objectives. You should also consider the relevant Product Disclosure Statement before making any decision relating to a financial product.

Only financial planning advice provided by Ceebeks Financial Solutions is associated with InterPrac Financial Planning Pty Ltd ASFL 246638.

Christopher Beks (Authorised Representative no. 231937) is a director of Ceebeks Financial Solutions (Authorised Representative no. 344518) and an Authorised Representative of InterPrac Financial Planning Pty Ltd ASFL 246638 and is authorised to provide personal financial advice.

Chris Beks operates under Beks and Associates Pty Ltd, Corporate Authorised Representative No. 344518.

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