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Shareholder Protection.
Shareholder Protection or Share Purchase Cover allows for the smooth transition of ownership in the event a Business Owner/Shareholder becomes totally and permanently disabled or dies. This is a particular risk for businesses with two or more owners who would often be left dealing with a partner’s family or estate taking their place in management and executive decision making.
Along with a binding Buy/Sell Agreement this policy creates a funding mechanism to provide the necessary cash to purchase the shares without the need to raise debt.
This protects both sides of the business and keeps the business on stable footing as the remaining shareholder/shareholders gain full ownership of all shares while the exited Shareholder or their family/estate receives fair value.
Key Person Cover.
Within any business there are key people (e.g. yourself, as business owner, or a general or sales manager) whose loss would impact on the business’ ability to generate income. In small businesses it may be that one or two people hold most of the technical knowledge, or all of the client relationships. The loss of such a person through death or disability would mean a substantial loss of revenue and profit which can make it difficult to service debt while also reducing the business’ value and the ability to sell it as a going concern.
Key Person Cover, as it suggests, protects the business from the loss of a Key Person through death or disability or illness (either temporary or permanent). This type of cover provides funds for the quick recruitment of a replacement key person and covers the potential loss of revenue while a new person ‘gets up to speed’ or even, in the case of the loss of the business owner, until the business can be arranged for sale.
Debt Protection.
Debt Protection Cover protects the guarantors of a business loan when, through the death or disability of the business owner, the business can no longer make repayments on a loan.
Many business owners use debt as a means of finance and their bank or lending institution will have required a personal guarantee. Defaulting on these debts can put assets such as the family home at risk. In the case where there are two or more business owners, the loan agreements will likely be ‘Joint and Several’ meaning any of the guarantors can be required to repay the full amount.
Debt Protection Cover enables the debt to be repaid in full without the guarantors having to raise the funds or sell their assets to cover it.
Note: In the case of a business with partners or shareholders, you should fully repay all such personally guaranteed business loans when you suffer the loss of any of the business owners. This is necessary in order to clear all guarantees related to the current ownership structure and ensure any personal liability relating to those that have left the business is cleared.
ACC Cover Plus Extra.
Many self-employed people have made the decision to opt into ACC Cover Plus Extra and have dialed down their benefit level in order to reduce their ACC costs. Moving to a lower benefit level can provide significant savings in ACC levies, particularly for job classes that are rated as high risk such as builders, plumbers etc.
However there is risk in dialling down the disability benefit to the minimum. It would leave most people with insufficient funds to cover their living expenses while on claim.
Many have found that a combination of ACC and Income Protection gives them the best value and have put in place full Income Protection (which will pay 75% of declared earnings to age 65). The cost is often fully covered by the savings made on their ACC levies – in this case they are now covered for both accidents and illnesses (within the terms of the policy) for their working life, without additional cost.
One thing is imperative if you take this action. Not all Income Protection Policies work in the same way. You must have the correct type and to an appropriate level. It must be a policy that will;
top up any ACC Claim,
provide an appropriate benefit claim amount,
have a benefit period payable through to age 65, in case you are left unable to ever work again.
Unfortunately we come across many cases where a client has been advised to dial down their ACC Benefit, but the correct Income Protection cover has not been instituted (i.e. cover with only a 1 or 2 year benefit), meaning there is still significant exposure for this person of which they may not be aware.