People go into business for many reasons, but chief among them is security – for themselves and their families. But what happens to that security if you or a business partner become incapacitated, or worse?
Car insurance – check. Home insurance – got it. Life insurance…
It’s very easy to take stock of our tangible assets and guarantee they’re insured to the value of their worth.
For example, if your car is damaged in an accident, car insurance reduces the hit to your back pocket, and you’re back on the road as soon as possible. Or if your house burns down, home and contents insurance means that you can focus on rebuilding your life, safe in the mindset that your costs are covered.
Basically, insurance means that if something unexpected or unfortunate occurs, we are compensated and the financial loss is minimised or eradicated.
So why do so few of us not insure ourselves?
iSelect research found that less than half (46 per cent) of Australians say their family would have adequate financial support in the event that they or their partner passed away or could not work for some time.
While often a topic that is avoided due to its morbid connotations, it is important to plan for the worst and have those tricky conversations with your family when it comes to securing life insurance.
There is, however, some confusion surrounding life insurance in terms of what it can provide and who it can benefit.
Once you are able to discern between the different types of cover, it becomes easier to select the best option for both your personal needs and those of your business, assisting with financial hurdles that could be faced in the case of sudden trauma or disability.
The different types of life insurance
It is a common misconception to assume that life insurance refers to a lump sum payment in the event of someone passing away. Actually, it includes a number of products designed to provide different types of financial security.
Many types of life insurance are often provided through your superannuation, however it is important to take the time to properly understand what level of cover your super fund group policy actually provides, and knowing in what instance your policy will pay out and when it won’t.
Depending on the level of cover included in your super, you may also want to consider an additional level of financial security in the form of an individual life insurance policy.
Should something happen to you beyond your control, life insurance ensures that your family will have financial stability.
The four main types of life insurance are as follows:
• Life cover: a lump sum payment on the death of the insured person. This can be paid through your super via pre-tax income.
• Income protection: provides up to 75 per cent of your income for a period of time if you cannot work due to illness, and helps ensure mortgages and bills can still be paid. This can also be paid through your super via pre-tax income, however should you choose to pay for it yourself, it is generally tax deductible.
• Total and Permanent Disability Insurance (TPD): provides a lump sum payment if you become permanently disabled and will never return to work. This financial support can help provide necessary medical support and care, as well as a long-term income replacement. TPD can also be paid through your super via pre-tax income.
• Trauma insurance: a lump sum payment for specific medical conditions, (i.e. cancer or heart attack) which can be used to help with treatment and rehabilitation costs. Trauma, unlike other forms of life insurance, cannot be paid via your super.
The “life insurance” your business can benefit from
While it is important to ensure that your family is protected in the case of unexpected trauma or illness to yourself, it’s equally as vital to secure a plan for the future of your business.
Life insurance can also benefit your business, whether you are self-employed or otherwise. Taking out cover encourages you to think about whether or not the business could continue without you and what debts will need to be paid off.
There are two main forms of business insurance – key person insurance and business expense insurance. Both can be a tax deduction for your business.
Put simply, key person insurance protects against lost revenue, while business expense insurance keeps the business afloat.
Key person insurance is taken out by the business in the event that a “key person” passes away, is unable to work again or suffers a serious trauma. A ‘key person’ is an employee or working director whose absence would result in a negative financial impact on the company, for example: lost revenue as a result of the key person being unable to work.
Key person insurance typically pays a lump sum benefit to the business to help protect against the impact of these unexpected costs.
The price of this depends on the individual situation, and premiums are based on a number of factors including the level of cover desired as well as the key person’s age, health, occupation and their smoking status.
There are two types of key person insurance (revenue and capital) and it’s important to choose the type better suited to your business.
Business expense insurance, meanwhile, is designed specifically for self-employed individuals to cover the regular, ongoing business costs which still need to be paid if they are not able to work due to illness or injury.
This is generally attached to a personal income protection policy, and is designed to keep the business going by covering short-term costs, such as hiring a locum, while you are off work.
If you are unlikely to return to work, it’ll help cover your expenses while you decide what to do in the longer-term.
Laura Crowden is a national spokesperson for comparison site iSelect.