Key Person Insurance is worth unlocking
There are over 2.1 million active businesses operating in Australia, and according to government figures, almost 9,000 new ventures sprang into life last year.
Clearly running our own show remains a popular option for many people. But along with the general pitfalls all businesses face, there is one risk that poses a particular threat to small ventures.
It's estimated that 70% of all businesses in Australia are family run enterprises. For those who run the ventures they can be an excellent investment, providing jobs for trusted family members, and generating the funds to build wealth across several generations.
However many small businesses are especially vulnerable to the loss of a key person through injury, illness or death.
In many family businesses - and indeed plenty of small to medium enterprises, one person can be central to the success of the business. They can be a great strategist, a finance whizz, a great sales person or have some other key ability.
Whatever the case, if anything were to happen to this key person it's a fair bet the activities of the business would be severely interrupted. In the worst case scenario the venture may never recover entirely, or fold.
Worryingly, as many small enterprises rely on funding secured by the family home, the loss of a key person could jeopardise the roof over your head.
While assets like plant and equipment can be easily replaced, this certainly isn't the case with human assets. But it's possible to protect the business, and possibly your family's welfare, with 'key person' insurance.
This type of insurance is designed to protect businesses if anything happens to the key person. Key people can be insured for death, trauma and/or total and permanent disablement.
Yes, the premiums are an extra expense, and I'm aware that when you're in business it's important to keep a lid on costs. As it stands, businesses already face several compulsory insurance costs including workers' compensation.
Nonetheless it's worth thinking about whether your business relies on a key person - and how well the venture would cope if anything happened to him or her.
You may feel that having life insurance for family members working in your business is sufficient though this may not be the case. Business can chew through cash very quickly, and besides, it always makes sense for a venture to keep personal and business matters entirely separate.
As business insurances are generally tailored to your particular enterprise it's almost impossible to provide an indicative guide as to what you could expect to pay in premiums. The cost of key man cover will vary according to the nature of your business, how much cover you choose and the insurance company you use.
When you're in business, time is money, so it can be a good idea to speak with your accountant or solicitor to get some referrals to a reputable insurance broker.
Paul Clitheroe is a founding director of financial planning firm ipac, chairman of the Australian Government Financial Literacy Board and chief commentator for Money magazine. Visit www.paulsmoney.com.au for more information.