Offering SME Owners peace of mind

For business owners their ‘monument’ (the business) can cause significant financial risk to themselves and their families. Some of this risk can be reduced by ensuring that there is appropriate life cover in the case of contingencies. If the owner is also the key person in a business (many SME owners fit this profile) sufficient life insurance becomes a necessity. 

 It is a well known fact that SMEs are substantially underinsured. This, however, is only the tip of the iceberg. Most research does not estimate the personal insurance requirement of the SME owner. When offering a full financial service, advisers need to consider the life risk requirement to support estate and succession planning strategies.

 Take the case of Greg Miles, a client who has a technology business, developing applications for mobile phone and tablets.

 

The Problem

Background:

  • Greg is 35 years old.
  • He is has a successful, young growing business.
  • His business has been operational for 5 years.
  • Greg has borrowed heavily to import equipment required for a state of the art development facility.
  • Greg is happily married with 3 young children but has mortgaged the family home to fund the business. His wife is a home-maker because the kids are very young.

 

The concerns:

  1. The business has significant leasing commitments with the total business debt including mortgage estimated at $1.3 million.
  2. The business, like so many other SMEs, is dependent on the skills of the owner. If Greg dies or becomes disabled, it would need to be wound up.
  3. The bank has a life insurance policy on Greg for $500,000 as part of their lending requirement. This still leaves a significant shortfall to cover the full debt of the business. Greg also has private life insurance and TPD to $500,000.

 

 

Identifying the Need

Greg meets with John a SME life risk specialist. John identified the following life risk needs for Greg.

  1. The bank  required insurance to protect their mortgage loan. The private life insurance was purchased online (instigated by Greg's wife).
  2. Should Greg die or become unable to work the business would be wound down. The value of the leased assets is limited because of the specialised nature of these assets. The trade debtors and creditors would balance each other out. Thus there is no inherent value in the business.
  3. Since the business generates $200,000 income to Greg and his family annually, it becomes obvious that the $500,000 personal insurance is hopelessly inadequate.
  4. Greg has a SMSF which has $75,000 member’s balance with no risk insurance. The family at this stage has very little by way of other assets (except the family home and the business).
  5. The business is built around the specialised skills of Greg which qualifies him as a key person. Without Greg  a significant short fall would exist to cover business liabilities and provide for the family.

 

The Solution

John developed a simple stepped plan which was accepted by Greg. The plan was as follows:

  1. The private life insurance policy was to be cancelled. Greg took out a policy on his life in the SMSF for $1.25 million death and total or permanent disability. In this way the premium is structured to be tax deductible and the proceeds in the event of a death claim would be tax free as Greg’s family are beneficiaries. The TPD proceeds would be taxed at the applicable concessional rate. John also offered an extra sum insured to cover this contingency but this was not taken up. The fund investment strategy would be amended to reflect this change.
  2. John recommended that Greg take out another life/ TPD policy on his life. This policy would nominate the company as the beneficiary to cover the $800,000 leasing liability. It was also decided not to claim a tax deduction on the premium so in the event of a claim the proceeds would be tax free. The purpose of the insurance would be appropriately minuted in the company’s records.
  3. Other risks were identified and it was agreed that these would be reviewed in 6 months:
    1. Greg’s partner is not currently covered for life risk which was identified as a gap. A suggestion was to make his partner an employee of the business and a member of the SMSF so life risk insurance could be structured in that way. Greg agreed to discuss this option with their accountant.
    2. Salary continuance insurance was also discussed and diarised as an option.
    3. Estate planning was also diarised for future discussion as Greg had not updated his will since he started the business and has the children and his partner did not have a will.

 

The Outcome

Greg was a positive client and a forward thinker. He committed to and implemented the life risk strategy and has also worked with an established estate practitioner in John’s firm to ensure that his estate is protected and distributed according to his wishes.  There are so many SME owners like Greg who have the capability and willingness to pay for a service that will achieve a favourable outcome. 

Can you afford to ignore this market?

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