AFRM SERIES: Do I need risk insurance? Part Four

Posted by Bethany Shaw on 24 May 2016

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iStock 000091126797 LargeThis month in our 'Do I need risk insurance?' series we meet two small-business owners.

Who are we?

We are Ben Lewis (38) and Michael Hudson (36), owners of a print management business. We have co-owned the business for 10 years and employ 11 staff members. Ben runs the operations and Michael does business development and sales. 

What is our financial situation?

Our business is profitable and is now worth about $3m. We have business debt of $800,000 and would have financial difficulties if something happened to either one of us.

Why would we need risk insurance?

If something happened to either of us:

  • The bank may want its debt repaid
  • The business could have issues with generating sales and delivering its services efficiently, leading to reduced cash flow and profitability
  • Our families are depending on the worth of the business for their future

What should my financial adviser ask us?

  • Do you have a plan to ensure the business survives if something happens to either of you?
  • Would your families be able to extract your wealth from the business?
  • Can you ensure release from any personal guarantees if either of you die?

My financial adviser said we should consider the following:

  • Have a shareholders agreement covering our plans in the event of death or disability
  • Cover to fund the purchase of each others shares
  • Cover to be able to repay the debt to the bank
  • Cover to maintain business cash flow for 12 months if something happens to either of us

It wouldn’t happen to us though….

The chance of dying during your working life (ages 18 to 65 years) is:

  • 11% for a non-smoking male
  • 7% for a non-smoking female
  • 17% for a 2 person partnership
  • 31% if there are four partners involved in a business, meaning there’s a 31 percent chance of one of the business partners dying before age 65

Also, one in six male workers aged 35-65 will likely suffer a disability which leaves them unable to work for six months or more*

Real AFRM example

We provided cover for the three partners of an accounting firm so they would receive full payment for their equity in the business should one of them die or become disabled. We also provided cover to repay all the bank debt of the business, leaving the surviving partners with a debt-free business and ensuring release of personal guarantees for the departed partner.

*Source: Institute of Actuaries 2011

Please note, this information has been prepared by Australian Financial Risk Management Pty Ltd (AFRM) ABN 21 001 696 868. AFRM hold an Australian Financial Services License (AFSL) 237186. The information is for general purposes only and has been prepared without taking account of your objectives, financial situation or needs. AFRM recommends that you seek professional advice before acting on any information contained herein.