Do You Have a Safety Net for Your Family?
Every day when business owners go to work, they are providing for their families who rely upon them for their income to meet expenses.
What happens if that income from the business owner spouse/parent stops or gets severely affected? What contingencies are in place to ensure if the worst happened expenses could still be met?
Remember business owners don’t have accumulated sick leave, annual leave or long service leave. It is also estimated that around 70% of business owners don’t have a business partner who can take up the slack. Even if they were among the 30% who had a business partner, could that business partner do their job in the long run?
So, putting in place a safety net is vital. Do you have such a safety net in place?
Most business owners running a substantial business, that is, more than a lifestyle business usually have a risk management plan. This involves protecting buildings, plant, equipment and stock amongst other things. How about something similar for the key person in the business?
I asked an accountant I know to tell me of an instance where a successful business owner had a problem when he could no longer turn up to work. This accountant has been in operation for about 45 years. He said one of his business owner clients passed away unexpectedly. He had no safety net in place. As a consequence, his business, which was successful, collapsed and his wife and family who relied on his income were left destitute. Now clearly if he had not died prematurely, life would have gone on as planned and there would have been income to pay off debt and meet expenses and when he eventually retired he would have sold the business to fund his retirement. With no safety net to protect against the unexpected, his best-laid plans weren’t realised.
Safety net options.
So, what options do business owners have?
- They can build up independent wealth and investment income and wean themselves off reliance on the business to maintain their lifestyle.
- They can sell assets if the worst happens.
- A sinking fund can be set up in the business to cater for a rainy day.
- They can create a safety net by taking out personal risk insurance.
What safety net have you put in place to protect your family?
In our experience business owners who run a successful business say they get better returns re-investing in their business rather than in shares and property, so many don’t have a lot of assets outside the family home.
Many owners don’t have assets to sell in a time of need. Sinking funds are great in theory, but if a business needs cash, this is the first reserve to be drawn upon.
Cost effective options.
Generally, personal risk insurance is the most cost-effective solution. It could be tax deductible and could be funded via superannuation if required. So, what stops owners from putting in place a safety net? We find it is because no one has raised the issue with them. They believe nothing will happen to them. Their family doesn’t comprehend the risks they are facing. They are concerned about the cost of a safety net. What about the ultimate cost of not having a safety net, it could be the complete collapse of their lifetime of effort.
Debts the business may have, and personal loans such as a mortgage don’t disappear when the person who created them is no longer here. Our philosophy is the debt should not outlast the person who created it. The partners/spouses of business owners we deal with agree with us on this point.
So, if an owner and his/her business have loans, for the family’s sake, cover this liability. If the worst happened at least those relying on you would be debt free and have one less thing to worry about.
A personal risk example.
So how much extra cover would be needed?
Let’s say the owner’s family lived on $60,000 per annum after tax and after mortgage repayments. The life and disability insurance needed would be $1.2 million. Why this sum? If $1.2 million were invested for the long term, a return of 5% per annum could be expected. This provides $60,000 per annum for the family left behind.
So, if you love your family and who doesn’t, do the right thing and protect their future and that of your business from key person risk. That is, the possibility that one day, due to fate, you may no longer be able to operate the business and therefore the income it generates. This income needs to be replaced from another source, and the cheapest source is via personal risk insurance policies.
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