In many cases, the key person in your business may suffer a temporary rather than a permanent disability. This could be from any cause, including a physical injury, early stage cancer or a minor heart attack. Suffering a disability and being able to return to work is more common than a suffering a permanent disability which prevents you from working again. For example, a 50 year old male has a 7% chance of suffering a disability prior to age 65 which results in a permanent inability to work compared with a 46% chance of suffering a sickness or injury before age 65 that results in 3 or more months off work.1
The absence of a key person due to temporary disability can place a business under the same significant stress that occurs in the event of the key person's death or permanent disablement. Often there is uncertainty as to when (or if) the key person will return, which makes it difficult for the business to make decisions about whether to hire and train a replacement, how to handle certain client relationships, and general business planning.
Having an income stream to replace revenue after the loss of a key person and in the months that follow could mean the difference between survival and business failure.
BT Protection Plans Key Person Income provides a monthly benefit for up to 12 months to help cover lost revenue of the business, in the event that the key person insured under the policy is unable to work due to sickness or injury.
Who is a 'key person'?
A key person is someone who is critical to the financial wellbeing of your business through their continued association. Key people can play an important part in generating the revenue for the business, and/or obtaining business loans.
Here are some typical examples of key people:
- Director, Managing Director or CEO
- Partner in a partnership
- Employee with a particular skill or technical expertise
- Senior sales manager.
Think about the people associated with your business that you would consider to be key people. For each person, what would be the impact on your business if that person was off work for 6-12 months?
In the case of some disabilities, when the person will return is very uncertain and an expected couple of months off can easily change to an indefinite return to work date.
You should take some time to consider how your business will continue to pay its expenses if this happens. There are a number of potential methods that a business might consider:
- Use existing cash reserves, if any
- Draw down from existing loan facilities
- Sell some of the business assets
- Weather a period of reduced profit.
However for many businesses, these options are simply not possible or too expensive.
If one of your key people goes on leave due to sickness or injury, you will need to decide if you will hire and train a replacement. In the meantime however, your business revenue could fall significantly.
Phil and Scott own equal shares in an accounting firm, Grey Shirts Accounting. They have 6 employees including 2 junior accountants.
The business revenue is around $1.1 million per annum and Phil and Scott are each responsible for around $300,000.
They visit their financial adviser, David, who recognises that Phil and Scott hold the relationships with most of the firm's clients. If something were to happen to either one of them, those relationships would be at risk. The junior accountants do not have the knowledge or experience to give the advice required or manage relationships with the firm's key clients.
What can Phil and Scott do to protect their business?
David suggests putting Key Person Income insurance in place for Phil and Scott. As they are each responsible for $300,000 per annum in revenue, they can be insured for this amount divided by 12 as a monthly benefit.
|Phil||$25,000 monthly benefit|
|Scott||$25,000 monthly benefit|
The policies are owned by Grey Shirts Accounting and the premiums are paid by the business. Each policy has a 30 day waiting period, which means that a benefit becomes payable if the key person insured under the policy is disabled for longer than 30 days.
If Phil or Scott become unable to work due to sickness or injury, the business can receive up to $25,000 per month for 12 months. This can help the business to continue to pay bills, loan repayments and employee salaries. It can also help the business to cover the cost of finding and training a replacement if necessary.
Outcome: The insurance benefit can help Grey Shirts Accounting to survive if one of the partners is unable to work due to sickness or injury, with minimal disruption to its cash flow.
Westpac and BT – we’re here to help
As part of our Group and one of Australia’s leading wealth experts, BT has been helping Australians build and protect their wealth since 1969.
Through BT, you can access a range of solutions across super, investments and insurance, to help you plan for today and tomorrow.
Things you should know
1. Source IRESS Risk Researcher Life Risk Calculator, accessed 4 April 2014.
2. For illustrative purposes only. The above case study demonstrates how BT Protection Plans may be able to aid you in times of need. Your financial planner will be able to assist you in determining the appropriate cover for your business.
A target market determination has been made for Protection Plans products. Please visit westpac.com.au/tmd for any of our target market determinations.
The Insurer and Issuer is Westpac Life Insurance Services Limited ABN 31 003 149 157 AFSL 233728, except for Term Life as Superannuation, Income Protection as Superannuation and Income Protection Assured as Superannuation, issued by BT Funds Management Limited ABN 63 002 916 458 AFSL 233724 as Trustee of Retirement Wrap ABN 39 827 542 991. They are subsidiaries of Westpac Banking Corporation ABN 33 007 457 141 AFSL 233714, who does not guarantee the insurance.