A client once sighed at the thought of discussing insurances, and advised that she viewed insurance as “one of life’s administrative weeds!”
True—there is nothing ‘exciting’ about insurance. Although we get caught up in discussions about policy wordings, money and premiums, insurance is in fact about choice, dignity, preservation of lifestyle and peace of mind.
The consequences of a disability, extended illness or premature death that prevent you working could be devastating to the financial security of your practice and therefore your family, and your long-term financial plan.
Hard questions to ask yourself and your practice partners
- How would your practice manage if one of the key people was suddenly unable to work in the business?
- Could the remaining doctors manage the workload?
- Would they be able to buy out the shares of the surviving spouse—and if so, how easily and from where would they get the money?
- How would your patients react?
- How would the bank react?
- How would your suppliers react?
Consideration of business risk needs to be viewed in conjunction with your personal risk plan. It is likely that your income from the practice supports your family and forms a basis for your long-term financial security.
If a business owner suffers a severe disability or dies prematurely, the proceeds from a claim can provide you with the cash to repay all or a significant part of the debt.
For example, if as a business you have borrowed $1,000,000 to buy or build a new practice and one of the business partners dies prematurely or becomes disabled, the remaining partners will be left with all the debt. Appropriate levels of insurance with the correct ownership structure protects the business, the business owners and their families.
If a business partner dies or suffers serious disablement, insurance can provide the funds for the remaining business partners to buy the shares from their partner or their estate.
How will this work?
It is important that you have a buy/sell agreement in place that sets the rules as to what will happen if one of the partners is taken out. We would recommend that you get legal advice when setting up a buy/sell agreement.
Who owns the policies?
Generally, the business partners will own the policy on their partners’ lives. However, it may be prudent to have an independent trustee own the policies to ensure that the buy/sell agreement is honoured at the time the claim is paid.
Key person protection
Who are the key people in your business? How do you value their contribution to the business? If they could no longer work in the business, what would be the impact on your cash flow?
We can assist you in determining what revenue a key person brings into the business and what other costs would be associated with the loss of that key person—it may be recruitment costs, it may be the time it takes to get a new person up and running. An injection of cash at this time can cover these costs and reassure customers and creditors.
Your protection plan should provide cover that is necessary and effective, and be at the best price possible.
All initial consultations are free of charge. We are always happy to have a chat, so call us today on 0800 379 325, or email firstname.lastname@example.org.
For more information, visit www.nzmafinancialservices.co.nz