When I first met Geoff, he had just set up his own printing business in his garage and was earning a moderate income.
After borrowing to finance his equipment and start-up costs, it dawned on Geoff that if he were unable to work, he could find himself in serious financial difficulty.
I pointed out a simple solution – Income Protection (IP), insurance that provides a replacement income for a set period of time if he was injured or become seriously ill. But determining how much to insure Geoff for was the hard part – particularly for a start-up with no financial history.
We looked at the following two options:
Agreed value: the insurer agrees to a benefit amount upfront and the premium is calculated accordingly. This method usually requires two years of financials, particularly if you’re self-employed – difficult for start-ups.
Indemnity: financials are unnecessary at the time you take out the policy, but in the event of a claim, evidence of income is required to determine the benefit amount. The benefit is paid on the amount you earn at that time – important if your income has reduced.
Then we discussed two potential income protection strategies to meet Geoff’s needs:
- Agreed value cover to, say, half of Geoff’s projected income, for twelve months with a review after that time. The advantage is in knowing what the payout will be.
- Indemnity cover, although the insurer will likely insert a clause disregarding income earned prior to starting the new business.
In the end, Geoff decided to take out an indemnity policy and his accountant advised that his premiums were tax deductible!
Geoff asked me about Key Person insurance. I explained that this covers the costs associated with the continuation of the business should an integral employee die or is no longer able to work. As Geoff had no rent or wage costs, it was not really relevant for him at that stage but as he was proving to be a born-salesman, we decided to revisit it down the track as the business grew.
With good advice and an understanding of his needs, we had Geoff’s financial concerns covered. We were able to put him in touch with the right financial planner to set up his policies and he was able to relax and get on with doing what he did best, growing his business.
Since then, Geoff has taken on several employees and moved to commercial premises. Every year, we, together with his financial planner, review his position and update his strategy, which now includes Key Person cover, ensuring he and his business continues to be protected now, and into the future.
According to the Australian Bureau of Statistics, the most active businesses in Australia in June 2015 were unincorporated businesses in the household sector. If you’ve recently taken the self-employment leap or are thinking about it, give me a call so we can put you in touch with the right specialist advisers and together we can help make sure you and your business are protected whilst assisting you with your financial needs.
- a) Not for publication (for research purposes)
www.abs.gov.au Counts of Australian Businesses June 2010 – June 2014 (Latest since May 2016)
www.moneysmart.gov.au Income protection
- b) For publication (for readers’ information)