Business Disability Cover

If you have just started your business and want to make sure that you have right insurance policy in place to protect yourself in the “what if” situation let’s look at:

Business Disability Cover

Some people call it “Key Business person” insurance while others “Keyman insurance” – it does not really make any difference how you call this type of insurance – the only important question is to ask how it is going to pay me and my family in the “unfortunate” situation?

Let’s discuss what this type of policy is going to cover:

Business Disability Cover

is designed to temporarily protect the business in the event that the key person within that business is disabled.

If you are new to business and cannot proof to underwriters that your business generates more than $6,000 in profit then this cover is for you. This is what the policy document says:

  • Maximum monthly benefit up to $6,000 – no proof required
  • Benefit period options – 6, 9 or 12 months
  • Partial disability benefit available

If your business has been around a few years and you can easily proof that your business generates more than $6,000 you would have to provide financial statements. The maximum you can get your cover for is $50,000 per months with Benefit period options – 6, 9, 12, 18 or 24 months.

Most importantly the cover is available till you are 61 and renewable till 70 which mean that you can have this type of cover at any age you want

Business Disability Cover has exactly the same definition of disability – you can claim under the policy if you cannot perform one income producing duty disregarding that this is due to an accident or illness. The policy also allows you to have an additional benefit for partial benefit.

How can you Business Disability Cover?

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Insurance for small business in AucklandOne of the most important “fine print details” in the policy is that this is an “Agreed Value” monthly benefit disability policy – which means that your insurer agrees to the amount on the time of application and you only have to proof the amount of your cover ONCE.

The Benefit under the Business Disability Cover is paid to the business and can be used for whatever the business wants to use the money for, for instance:

  • Replacement labor
  • Ongoing running costs
  • Replace lost profit

Or even to hire someone who is going to replace the key person and yet keep the company going.

The policy can be underwritten and the benefit calculated in two options (whatever is better for the business owner):

Option 1

Based on equity ownership

Equity Ownership Maximum sum insured as % of annual income Maximum benefit period
Employee 150% 2 years
0 – 5% 150% 2 years
6 – 50% 125% 2 years
51 – 75% 100% 2 years
76% + 75% 1 year

Option 2

Based on gross profit attributable to the insured

Sales manager generating 70% revenue is eligible for a benefit of 70% of gross profit

Sole trader – maximum of 75% of gross profit with one year maximum benefit period

Example:

Builder – qualified and been working as a builder for someone else for last 8 years he is 35 years old 100% owner of business (the building company was purchased off previous employer / self-employed only 13mths ago so has first year’s financials… )

  • Revenue of the building business $180,000
  • COGS $ 40,000
  • Gross Profit $140,000
  • Expenses $ 60,000 (incl the owner’s salary $40,000 & fixed exp $15,000)
  • Net Profit of the building business $ 80,000
  • Equity calculator limits Business Disability Cover benefit to 75% of annual income: ($40k + $80k) x75% = $90,000 pa / $7,500 p/mth,

The example above is here to show that even the builder earns $7,500 the Business Disability Cover benefit is capped at $6,000 per months.

The reason for $6,000 is that the builder has experience however yet new to business

If the builder in our example was in business for more than two years, had financial to prove it and yet had higher amount of revenue he could be insured for more.

For information about business insurance please check this page, it has a comprehensive set of information for your convenience in one place.

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Featured photo – courtesy of Steve wilson(CC ShareALike)

Photo courtesy of Nguyen Hung Vu(CC ShareALike)