Business key person risk overlooked in favour of cost of living
30 March 2022
Many small to medium businesses carry significant financial risk should the unexpected happen to one of their key people. Yet, this year’s Federal Budget has ignored this completely, instead putting the focus on bringing the cost of living down.
The COVID-19 pandemic highlighted just how financially fragile small businesses can be. Of the businesses we surveyed in 2021 for the Findex SME Study, 7 in 10 businesses said the Government’s economic support packages had been important to the survival of their business during the pandemic and almost 6 in 10 businesses predicted that winding back government assistance would have an impact on their business.
Sales turnover and demand were drastically affected during COVID-19 and, in some cases, business owners lost complete control of their company’s operations. Never has the risk of losing key personnel due to health concerns been greater.
If we took away anything from COVID-19, it should be that more measures and incentives need to be in place to protect businesses against financial losses if a key employee becomes terminally or critically ill or dies. Key person protection can help to keep a business trading.
Key person insurance
Key person insurance is taken out by a business to help compensate for financial losses that may arise from the death or extended incapacity of a key person of the business. The insurance payout is a lump sum and is used to help offset the costs and losses which the business is likely to suffer in the event of the loss of a key person.
This year’s Budget missed the opportunity to review the current tax rules around key person protection payouts in the event of disability or critical illness, which is long overdue.
We have a history of under-insurance in Australia and the question we should be asking is, “Would your business be able to maintain its revenues and profits if one of its key people died or couldn’t work due to a serious illness or accident?” For many small business owners, the answer would be no and more than likely because they cannot afford the premiums to transfer the risk to an insurance company.
With interest rates expected to rise, this risk becomes even greater making it more important than ever for business owners to consider key person protection.
Bringing the cost of living down
Even though household disposable income increased by 5.8% during the pandemic, the emphasis of this year’s Federal Budget is being placed on bringing the cost of living down.
Basic economics will tell you that pumping money into the economy will drive up the cost of production, which, in turn, drives up inflation. So, is pumping government spending into an economy where inflation is at risk and rising interest rates are expected to materialise later in the year and continue to 2024, a good idea?
The Federal Government has seen the impact health can have on the economy. As a result, they are continuing to guarantee Medicare, introducing mental health targeted initiatives such as funding for Lifeline and improving accessibility and affordability of private health insurance for Australians.
But what about improving the accessibility and affordability for key person protection for small business owners? Things such as financial support on annual premiums, and the removal of Capital Gains Tax on insurance proceeds for permanent disability and critical illness of key people should be seriously considered.
Whilst ensuring that health care is accessible to all is a great initiative, who will pay your business financial commitments if your revenue ceases due to a key person being impacted from an injury or illness? Monthly loan repayments will continue to stack up, fixed costs and wages will need to be paid, and in cases where the family home is used as security, you’re still exposed to the risk of repossession.
Check out the full coveragefrom the Federal Budget 2022-23, which will continue to develop throughout the week as new insights and video content are published.