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Many business owners and managers are putting their business at risk because they are underinsured.
If you ask business leaders whether they would intentionally risk the financial future of their business, the answer would be a resounding “no”. Yet, the fact remains that many Australian business owners remain underinsured and at risk, warns the National Australia Bank (NAB).
The most valuable assets of your business are the ones that produce the most profit. Recognising this can help protect your business against the loss of its most important assets – you and your people.
While physical assets can generally be replaced, this is not the case in relation to human assets. Good people can be difficult to find.
“The loss of a key staff member can have a substantial impact on profitability, operational management and the goodwill of your business,” says Vicki Carter, head of financial planning at Business and Private Banking at NAB. “Many businesses find there are no replacements readily available within the business and it may take substantial time and money to find and train a replacement.”
Ms Carter says: “The provision of Revenue Protection insurance on a ‘key person’ can help fund such a loss by providing an injection of cash to maintain cash flow.”
A ‘key person’ in any business may generally be defined as one whose death or disablement would have an adverse economic impact on the business. The purpose of Revenue Protection insurance is to provide the business with cash to compensate for the loss of revenue and replacement costs on the death or severe illness of a ‘key person’.
In addition to Revenue Protection insurance, a business owner should also consider Asset Protection insurance. Asset Protection insurance provides a business with sufficient cash to repay debts and free up cash flow on the death or severe illness of a ‘key person’.
“Of course there are alternatives to insurance,” she says. “Using savings, selling assets, or borrowing money may be an option for your business. However, all of those options (assuming they are, in fact, viable in the `real world') will cost at least 100 cents in the dollar. Insurance costs just a fraction of this.”
Revenue Protection and Asset Protection insurance protects your business by maintaining and freeing up cash flow which is the life blood of your business. The appropriate insurance will:
• Offset a drop in your business's revenue,
• Provide your business with sufficient cash to find and attract a suitable replacement,
• Repay or reduce debts,
• Protect goodwill and credit standing,
• Protect your business from a forced sale, and
• Enable you to continue your business expansion or development plans.
Ms Carter says: “It is essential to identify the key person or people whose loss would directly impact your revenue.
“Term life insurance policies used to protect against a loss of revenue may be tax deductible and benefits received may be assessable as income. Term life insurance policies used to repay a loan or debt are not tax deductible and any benefits received are not assessable as income.
One way to determine whether or not such insurance is needed is to pose the question “What would happen to my business if I was seriously injured or killed?” If you don’t have an answer, or don’t like the situation that would arise, then you need at least insurance and most likely a succession plan.
Here are five tips for business leaders to help ensure their business is not undermined by events beyond their control:
1. Protect your income. While most people insure their car, their home and its contents, many business people overlook insuring their most valuable asset – themselves.
2. Cover your debts. Life, total and permanent disability and critical illness insurance can be a cost-effective solution to repay your debts. Protect your business by covering your debts.
3. Don’t underinsure. Whatever your insurance needs, you should make sure you have the right level of cover, as underinsuring can have disastrous consequences.
4. Review your insurances regularly. Changes in your personal circumstances (eg. taking on additional debt) may mean you need to increase your insurance cover.
5. Keep your business afloat. If you are a business owner, business expenses insurance can enable you to meet up to 100% of your share of eligible business overheads during a period of disability.
About NAB Business and Private Banking
The National Australia Bank employs over 3,400 business banking specialists and 450 financial planners and specialists at over 170 business banking centres Australia wide. It is one of the market leaders in providing business banking services to Australian business. The National provides a number of ‘Business Information Guides’ that are available on its website www.nab.com.au. For further information /wps/wcm/connect/nab/nab/home/Business_Solutions?contentIDR=ffd678804b81dd679f3dffa8d9bf8e41
For further media information, please contact:
Guy McKanna
NAB Australia Corporate Affairs
Tel: (02) 9966 3532
Mob: 0402 893 843
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