RISK – IP is only half your business protection

Business owner/operators who take out only income protection insurance to cover a possible absence still risk losing their businesses, writes David Wilkinson.

Planners and advisers running their own businesses know that their most valuable assets are the people who keep their business going. But how would your business cope if you or one of your partners were absent for an extended period because of an illness or injury?

You'd probably manage for a month or so, but could you really afford to continue to pay your own income, let alone the income of your employees and all the expenses of your business, if your business ceases to be operational?

None of us think it will happen to us, but the reality is that, according to the Australian Institute of Health and Welfare, every working Australian has a 50 per cent chance of being disabled for 3 months or more before reaching age 65. Most people insure their property and motor vehicles without question but leave their 'people' assets to chance.

A recent survey of small business owners has shown that despite a 90 per cent awareness of income protection insurance, almost 60 per cent did not have it. And although 64 per cent were aware of business expenses insurance, only 26 per cent had such cover in place.

Most people are familiar with life, trauma and income insurance but usually consider their general insurance needs to be more important than the need to insure themselves. Even fewer people insure their business expenses. Yet without both income protection and business expenses insurance, most small business owners won't be able to keep their family or their business afloat if they're absent due to illness or injury for even a short period.

As the market for income protection and business expenses insurance is so large, it's important to know how they operate and why it's so important for self-employed clients to have both.

Income protection (IP) insurance generally allows you to insure up to 75 per cent of your client's taxable monthly income net of expenses incurred in earning it.

Business expenses insurance allows businesses proprietors to insure against loss through illness or injury of the proportion of their gross income that normally meets a business's operating expenses - those that must be paid whether the business is generating revenue or not. Insured businesses are reimbursed for up to 100 cent of the insured person's share of operating expenses for every month they are off work.

If those expenses are not insured, the results of a disability could be catastrophic no matter how much income protection is in place.

IP insurance pays a specific insured amount, whereas business expenses insurance is an indemnity-type policy that covers actual costs only, up to an insured amount.

IP can also pay a benefit until you retire - even for life - while business expenses has a benefit period of one year.

It is assumed that after a year of disability, the business will have been disposed of in some way. In this case the benefit of business expenses insurance is that it will keep the business operational so that the best price can be realised. The insured's credit rating is also protected for the future.

Let's look at an example.

Case Study>

Paul is a computer consultant who generates a gross income of $20,000 per month. His monthly operating expenses are: