Whether an entrepreneur, dentist, lawyer, accountant or even a marketing professional, as a small business owner working to win over clients and make your business a success, it’s absolutely vital not to lose sight of protecting your most valuable financial asset – yourself.
John Marsden, Managing Director of Citadel Financial Protection, emphasises that while big companies generally have a succession strategy in place to ensure continuity should the unexpected strike, as a small business owner you hold the reins.
“You therefore need to consider how best to protect your personal and business circumstances should you be unable to work, and ensure that you and your loved ones will still be provided for,” he says.
“Life doesn’t stop when you are ill or injured – you will still need to put food on the table, pay your bills, provide for your loved ones and make sure that your business doesn’t suffer unnecessarily in your absence. It only makes sense then to insure the machine that is making the money.”
He points out that while insurance is often a grudge purchase, because you are buying something you hope never to need, the reality is that life is uncertain.
“Just look at the events of the past year – if the devastation of the Knysna fires or even the Cape Town water crisis has taught us anything, it is to hope for the best but prepare for the worst.”
To help guide you in making sure that you and your business are covered, he briefly explores different types of insurance products for you to begin considering your insurance needs:
An income protection plan will pay out a lump-sum or a monthly benefit in the event that you are no longer able to work as a result of an illness or disability. This means that you will be able to continue to meet your daily living expenses, or potentially hire someone to help manage your business in your absence.
In case of permanent disability, remember to check the age the policy will pay out to, bearing in mind that you would still need to save enough money from this income to provide for your comfort in retirement. For example, some monthly income benefit policies will pay out to the age of 55 years while others may pay out to the age of 70 years.
You should also check the waiting period that may be imposed following a claim before the policy will pay out, which could vary from a week to a month, or even a year.
Buy and sell cover
Should your business partner or the co-owner of your business pass away or become disabled to the extent they cannot continue in the business, their share of the business could fall to their beneficiaries unless you have a legal document in place outlining the terms for you to buy back their share of their business from their estate, known as a buy-and-sell agreement. Having an up-to-date buy and sell agreement in place will prevent your co-owner’s family from needing to become involved in the business, and ensure that you have the power to select who your new business partner would be (if any) should your co-owner pass, or vice versa.
In cases where you or your partner are concerned that you may not have enough cash in reserve to buy out each other’s share of the business according to the terms of this agreement, you could choose to take out buy and sell cover. Essentially a form of life cover, the pay-out from this policy would mean that you or your partner would be able to offer each other’s family a fair price for each other’s share of the business, and ensure the continuity of your business.
Note, however, that you and your business partner must not pay the premiums on your own policies, as this would mean that the benefit would become subject to estate duty tax. In other words, Partner A must pay the premiums on Partner B’s policy, and vice versa. Having the company cover the cost of the policy premiums could also trigger estate duty tax.
Key person insurance
Key person insurance offers businesses financial protection against the loss of an employee crucial to its running by paying out a lump-sum benefit to the company should they die or become permanently disabled.
This means that should you, a business partner or key employee suffer an accident or illness, your business would still be able to meet its expenses while you found or trained a replacement, or else that your business’ debts could be settled and your employees provided with a severance benefit should the business need to close.
Business overheads cover
Business overheads cover is intended to offset your business’ expenses in the event that you or a key employee die or become disabled by paying a monthly amount to the company. This money could then be used to pay day-to-day expenses, rent, utilities or even salaries.
As this cover is intended to act as a stop-gap measure, however, the policies tend to offer protection for a shorter period of usually up to two years.
Short-term and liability insurance
Your business may have a number of physical assets that are crucial to its running. You should therefore consider insuring your company building, motor vehicle and company equipment against loss through fires, floods, storms, theft or malicious damage. If you have a legal or medical practice for instance that uses highly sensitive information, you could additionally consider more specialised cover against the loss of electronic and IT equipment, or even cover against data loss resulting from cyber-crime.
You could also consider liability insurance such as professional or public liability insurance to protect yourself against financial loss resulting from settling a claim or providing compensation to a third party, or requiring legal representation.
Marsden notes, however, that with so many different types of insurance available, it can be extremely difficult to decide upon the appropriate types and amount of cover for protecting yourself and your business are against your most pressing risks.
“It is therefore in your best interest to consult a trusted financial advisor who can offer you a balanced view of what insurance is practical and necessary to your individual situation, and help you understand the terms and tax implications of your individual policies,” he says.