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Insurance for business

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This advice has been prepared without taking account of your objectives, financial situation or needs. Because of that, before acting on the advice, you should consider the appropriateness of the advice in regards to your objectives, financial situation and needs. This information is provided by CommInsure, a registered business name of The Colonial Mutual Life Assurance Society Limited ABN 12 004 021 809 AFSL 235035 (CMLA). Business Overheads Cover, Business Safe Cover and Guaranteed Insurability (Business Events) forms part of CommInsure Protection. CommInsure Protection life insurance products are issued by CMLA and the superannuation product by Colonial Mutual Superannuation Pty Ltd ABN 56 006 831 983 AFSL 235025 (CMS), the trustee of the Colonial Super Retirement Fund ABN 40 328 908 469 SFN 2933/419/40 (the Fund). CMLA is responsible for the administration of

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4 Business loan protection

6 Shareholder/Director loan and beneficiary loan protection 8 Key person revenue protection

10 Business succession protection 12 Business expenses protection

14 Keeping your cover up-to-date as your business grows 16 Want to know more?

Contents

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Having a business protection plan should be part of life for all

small and medium sized businesses. As a business owner, you

should consider what might happen to your business should

one of the owners die, become totally and permanently

disabled, or suffer a terminal or traumatic illness.

A business generally depends on a few people to produce the profits, provide the capital or manage the business. If there is no viable succession plan, there may be significant financial hardship for the surviving business owners, as well as for the surviving family members.

It can be easy to overlook some important financial considerations. These

considerations specifically include ensuring you have in place plans to protect your business against events which may adversely affect its liquidity, profitability and ongoing viability.

Contingency planning Contingency planning is all about

protecting the assets of your business and its owners from liabilities which may be incurred as the result of an unfortunate circumstance involving a key employee or principal owner. Your financial adviser can

What arrangements have you made to protect your business?

Experience has shown that many businesses have suffered because they have not planned well enough for the unexpected. The six main business needs to consider are:

• business loan protection

• shareholder/director loan and beneficiary loan protection

• key person revenue protection

• business succession protection

• business expenses protection

• keeping your cover up-to-date as your business grows

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Business loan protection

Business loan protection

Life, TPD, Trauma Cover

The problem

On the death of a person responsible for the success and profitability, a business may have difficulty in meeting its commitments under a loan. The lending institution may then need to call on personal guarantees and supporting security.

The questions

• Who is the person on whom the firm’s success and profitability mainly depend?

• If something happened to that person, would your firm have difficulty meeting its commitments under the loan?

• If that happened, you wouldn’t want the personal assets to remain encumbered or to be sold, would you?

• If there was a way to guarantee that the funds would be available on death to repay the loan and free the assets, would you want to know about it?

• Would the borrowing capacity of your firm be compromised?

The solution A plan to provide:

• Cash to repay the loan on the death of someone on whom the success and profitability of the business depend.

• Cash to repay the loan on the death of someone who has given a personal guarantee or lodged personal assets as security.

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Bill (28) and Ben (32) enter into an IT business partnership together.

Bill is the brains behind the partnership and has great plans

for the business. Ben enjoys the business finance and

administration and has great contacts in the industry to

win new business sales opportunities.

Bill and Ben employ Bob (29) to be their programmer. He has the skills they need to deliver Bill’s ideas to the clients Ben sells to. To get the business off the ground, Bill and Ben take out a loan for $350,000 from the bank, using Ben’s family home (which he shares with his wife Linda and their children John (5) and Mary (2) as collateral. Unfortunately, the partnership doesn’t think it is necessary to put a buy-sell agreement in place, as the business is just starting out and Bill and Ben believe they have nothing to insure. Regrettably, twelve months later Bob dies in an automobile accident. Bob’s death impacts the business significantly, as he is not there to write programs and new business sales suffer as a result. Bill and Ben miss a few loan repayments as revenue from new business sales reduces. The bank calls for repayment of the $350,000 loan.

Bill and Ben have no funds set aside to repay the loan, as they assume sales would always be strong enough to provide funds for loan repayments. The bank utilises the collateral provided for the loan, which is Ben’s family home. Ben, Linda and the children now have to find a new home, while the business can continue on debt-free.

A Life policy on Bob’s life should have been purchased for a $350,000 sum insured. This would have provided Bill and Ben with the money to repay the loan. Ben, Linda and the children could have stayed in their family home. The annual premium for the

$350,000 life insurance policy for Bob would cost $287.63*.

* Premium illustration prepared by CommInsure on 4 January 2012, based on a male aged 30 (age next birthday), non-smoker, computer programmer, living in VIC.

Bill and Ben’s story

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Shareholder/Director loan and

beneficiary loan protection

Shareholder/Director loan and beneficiary loan protection

Life, TPD, Trauma Cover

The problem

On the death of a person responsible for the success and profitability, a business may have difficulty in meeting its commitments under a shareholder/director loan. Usually these loans are all on call and, on the death of the loan holder, his/her executor may call up the loan. The business could then face a severe liquidity problem.

The questions

• Is the loan on call?

• Could your company repay the loan today?

• Would your company face a liquidity problem if it had to repay the loan?

• If there was a way to guarantee that the funds would be available on the death of the loan holder, would you want to know about it?

The solution A plan to provide:

• Cash to repay the loan account on the death of the loan holder, relieving the business of a liability and giving the deceased’s estate liquidity.

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David and Andrew’s story

Two friends, David (45) and Andrew (47), enter into an interior design business together.

David is the creative inspiration behind the partnership – his

designs have obtained terrific reviews in the design industry.

Andrew has the ability to source exquisite fabric and material

for David’s designs.

Andrew, realising that the business needs to expand, invests $200,000 of his own money as ‘seed capital’ to get the business off the ground.

The partnership does all the correct things and puts a buy-sell agreement in place. David and Andrew each take out life, trauma, and total and permanent disability insurance for 50 percent of the value of the business (representing their respective shares).

Regretfully, nine months later Andrew dies. David obtains control of the company and Andrew’s wife, Betty, obtains the proceeds of the sale of business shares (representing Andrew’s interest in the company), paid by the insurance policy. The executor of Andrew’s estate then makes an important discovery – Andrew is owed an additional

$200,000 from the business for the repayment of the loan account (i.e. – repayment of the ‘seed capital’ loan).

David, as the new owner and CEO of the company, is forced to take out a commercial loan for $200,000 to repay the loan account to Andrew’s estate. A life insurance policy should have been purchased for $200,000 on Andrew’s life. This would have provided David with the money to repay the loan to Andrew’s estate, and enabled the company to be debt-free. The annual premium for the

$200,000 life insurance policy for Andrew would cost $395.02*.

* Premium illustration prepared by CommInsure on 4 January 2012, based on a male aged 48 (age next birthday), non-smoker, interior designer living in NSW.

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Key person revenue protection

Key person revenue protection

Life, TPD, Trauma Cover

The problem

Many businesses rely on one or two key persons to drive the revenue of the business. The business could suffer a substantial loss of profits if one of these key persons suffered a trauma or died.

The questions

• Who is the person on whom the firm’s revenue mainly depends?

• What would be the effect on your business if this key person suffered a trauma or died?

• What steps have you taken to protect your business revenue if this happened?

• If there was a way to provide you with a cash injection to offset loss of profits if the key person died, would you want to know about it?

• How would the firm cover the ongoing business costs normally covered by key person revenue?

The solution A plan to provide:

• A cash injection to help offset the reduction or loss of revenue on the death or incapacity of the key employee.

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Peter, John and Tony’s story

Roof Mates Pty Ltd is a business based in Adelaide and has three employees.

Tony (26) does all of the installation of the roofing, Peter (42)

does the accounting and administration, while John (31) does

the sales and marketing to attract new clients. Business

revenue quickly builds up to $30,000 per month.

Regretfully, ten months later Tony falls from a ladder, becoming a paraplegic, and can no longer work.

Peter and John do not have the expertise to install roofs. Consequently, they have to find a skilled employee to replace Tony; however, they are unable to attract an experienced person, as the business is relatively new and potential employees do not want to risk moving across to such a new venture.

As a result, Peter and John have to advise clients that they cannot complete the roof installations they booked in. Clients go to Peter and John’s competitors to get their jobs done. Within a few months, Roof Mates Pty Ltd closes down.

A trauma policy should have been taken out on Tony’s life. The sum insured should have been enough to cover revenue losses for six months, i.e. $180,000. The insurance funds could then provide a cash injection into the business upon Tony’s paralysis, allowing the business to show a strong financial position and attract a replacement for Tony. The annual premium for the

$180,000 Trauma policy on Tony would cost $340.27*.

* Premium illustration prepared by CommInsure on 4 January 2012, based on a male aged 27 (age next birthday), non-smoker, roof tiler <15 metres, other – minimum three years experience, living in SA.

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Business succession protection

Business succession protection

The problem

Often a principal’s interest in a business is left to his or her beneficiaries who have no skill, experience or expertise to contribute and who may not be compatible with the surviving principal/s. The surviving principal/s may wish to purchase the outgoing principal’s shares in the business, but have neither the funds nor the right to purchase at an agreed price.

The questions

• If something happened to your business partner, would you want to buy his/her share of the business?

• Do you have a business succession plan that gives you the right to buy shares at an agreed price?

• How important is it to you to be able to buy such a share of the business and keep outsiders out of your business?

• If there was a way you could ensure you had the right to purchase at an agreed price, and that the money was available when needed, would you want to know about it?

The solution A plan to provide:

• The right and the cash for the surviving principals to purchase the outgoing principal’s interest, keeping outsiders out of the business and ensuring the deceased principal’s beneficiaries receive a fair price, promptly and in cash.

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Stan, Oliver and Wilma’s story

Stan (35) and Oliver (36), enter into a business together, ABC Electrical Pty Ltd. They are so busy setting up the business, they do not put a funded buy-sell agreement in place. They think there will be time do that ‘sometime in the future’.

Oliver dies unexpectedly two years later. The business is worth

$3,000,000 by this time. The business partners hadn’t made

the time to arrange insurance or get their solicitor to write a

buy-sell agreement, outlining the sale price and transfer terms.

Stan wants control of the company, as he will now do all of the work and doesn’t want to share 50% of the profit with Oliver’s wife. Oliver’s wife, Wilma, agrees and is happy to sell the shares she inherited from Oliver. They do not agree on the price – Wilma wants more than Stan wants to pay. Stan can’t get financing from the bank now that Oliver is gone, so Wilma looks to sell her shares to an outside party. Outside parties assess the business, but no suitable offers are made.

Wilma is now forced to work with Stan in the business in order to support herself and her family. Stan resents Wilma being part of the business, since she has no expertise in the industry. The business doesn’t thrive as it used to when Oliver was alive, so the revenues reduce, which impacts on Wilma and Stan’s profit.

A life, TPD and trauma policy on both Stan and Oliver’s lives should have been purchased, in conjunction with a written buy-sell agreement for $1,500,000 each, which represents the agreed value of the shares. This policy would have provided Wilma with $1.5 million for the value of Oliver’s shares. Stan would have received the shares and the sole right to run the business and draw profits. The annual premium for the $1.5 million life, TPD and trauma policy on Oliver would have been

$4,209.86*.

* Premium illustration prepared by CommInsure on 4 January 2012, based on a male aged 37 (age next birthday), TPD based on any occupation, non-smoker, electrician – trade qualified, living in QLD.

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Business expenses protection

Business expenses protection

Business Overheads Cover available with Income Protection

The problem

Many small business owners or income generating members of a small business do not adequately plan for the possibility of them becoming disabled and unable to work due to illness or injury. This impacts on the ability to pay the regular, fixed operating expenses of running the business and keep the business viable whilst they are away.

The questions

• Could your business survive if you couldn’t work?

• How could you afford to pay the regular, fixed operating expenses of your business?

• If you had to make a claim because of illness or injury, could you drop into work for a few hours a week?

• If there was a way to receive cash payments to cover your expenses, would you want to know about it?

The solution A plan to provide:

• Cash to meet your regular, fixed operating expenses if you are unable to work because you are ill or injured. This would protect the viability of the business.

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Claire’s story

Claire (44) is a businesswoman who has been running a successful event management company for the past five years.

Claire currently employs a junior consultant, and between them

they manage all of the administration, sales and event

management aspects of the business.

The business was a great success however; Claire began to suffer from severe headaches and tiredness. After a number of visits to her doctor, tests were conducted which detected a severe virus. Claire was diagnosed with chronic fatigue and, as a result, was advised to undertake six months rest to aid in her recovery.

Fortunately, on the recommendation of her adviser, Claire had taken out Business Overheads Cover in conjunction with Income Care with CommInsure once she had been in business for twelve months. When Claire received her diagnosis, she contacted her adviser. He explained that she could submit a claim for the fixed, regular operating expenses of her business. Claire’s claim was processed and she has been paid a monthly payment of $3,500 for the past six months. The money has assisted in paying rent, electricity, car registration and insurance, as well as business insurance premiums.

Business Overheads Cover means Claire is free to focus on her health without the added worry of the financial pressures associated with her business and the need to generate income to cover the day-to-day operating expenses. Under the terms of the insurance policy, Claire is also able to catch up with her junior consultant and check emails for a maximum of ten hours per week. The insurance policy provides Claire with the reassurance that she will have a saleable business asset if she is prevented from returning to her business because of her illness. The annual premium Claire pays for her Business Overheads Cover is $692.68*.

* Premium illustration prepared by CommInsure on 4 January 2012, based on a female aged 45 (age next birthday), non-smoker, business manager, living in WA, one month waiting period. Business Overheads Cover taken in conjunction with Income Care.

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Keeping your cover up-to-date as your

business grows

Keeping your cover up-to-date as your business grows Life, TPD, Trauma Cover

The problem

Often certain ‘business events’ occur which renders a business protection plan inadequate (e.g. purchasing additional premises). To ensure the plan is in line with the new needs, an increase in cover would be required. At this time further medical information would normally be requested. If the insured person’s health has deteriorated since their initial application, additional premiums may need to be paid or the increase application could even be declined.

The questions

• Would it be easy to increase your insurance if one of the following ‘business events’ occurred:

– Your business increased in value (business growth)?

– You want to increase the value of a person who is crucial to the revenue of your business (key person)?

– You need to increase the amount of a business loan (business loan)? – Increase the value of your financial interest in your business, this could be

a shareholder, partner or unit holder (financial interest)?

The solution

• At the time of the original application, you can choose the Business Safe Cover option. This means that when the relevant ‘business event’ occurs, you will be able to increase your Life, TPD or Trauma Cover without having to provide further medical evidence for the increased sum insured.

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Gary’s story

Gary (45) runs a busy restaurant. He took out a $200,000 business loan a few years ago, which he now wishes to increase to $500,000 to upgrade his kitchen. In order to get loan approval Gary offers personal collateral as security for the loan.

Gary put life, TPD and trauma insurance in place for $200,000

when he took out the loan two years ago. He will need to

increase his insurance to cover the additional loan amount.

Gary contacts his insurance adviser and explains that he needs to increase his cover but he is concerned that his recent open heart surgery will have a big impact on his insurance premiums.

Gary’s adviser explains that he can increase his cover without medical underwriting because he selected the Business Safe Cover Option on his original application two years ago. He only needs to pay the additional premium that applies for the increased sum insured, as his recent surgery will have no impact on the increase application.

If Gary had not selected the Business Safe Cover Option, his medical history would have been considered when increasing his cover. This may have led to a significant increase in the premiums he pays, and possibly even a decline of cover.

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Want to know more?

Your financial adviser can explain how to protect your business against events which may adversely affect its liquidity, profitability and ongoing viability. And if you have a protection plan in place, they can review it for adequacy. Where there are gaps, your financial adviser can recommend appropriate products and levels of cover to protect you and your business.

Call 13 1056 from 8am to 8pm (Sydney time), Monday to Friday.

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CIL339 050112

13 1056

References

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