Wealth Strategy Part 3 – ‘Protecting your Assets’;
If you’ve used debt to start-up or grow your business, you should ensure you and other key people have suitable insurance cover.
What are the benefits?
If something happens to you or another key person and the insurance provider pays the claim, the insurance payment could be used to;
- Reduce or repay debts
- Protect any personal or business assets used as loan security.
How does the strategy work?
Most businesses use debt to startup and grow their operations such as;
- Loans sourced from a lending institution (eg a bank) that are secured by personal assets (such as the family home) or business assets (such as business real property)
- Proprietor loan accounts
- Unsecured loans provided by a relative (eg spouse or a parent) or an associated entity (such as family trust or company)
- Significant trade creditors
Am I covered?
While few businesses could exist without entering into these types arrangements, problems can arise if you (or another key person) are lost to the business temporarily or permanently.
Your business could therefore have difficulty meeting loan commitments. The lender could also have concerns regarding the business’s cashflow and credit position and may require the outstanding loan to be repaid immediately.
You may even have to sell the personal or business assets used as security so the debts can be cleared.
One way to reduce these risks is to insure yourself and other key people in the event of death, total permanent disability and critical illness.
If any of these events should occur , the lump sum insurance payment can be used to;
- Reduce or pay off debts
- Release any loan guarantee or security provided.
- Protect your personal and business assets, and
- Ensure the business can continue as a viable operation.
Note: This strategy is particularly important for highly geared businesses.
- For the purpose of this strategy, a key person must have an interest in the debt and will usually be an owner, loan guarantor or third party who has lent money to the business.
- Proprietor loan accounts generally arise when a shareholder or director of a company lends money to the business.
MLC Protecting business owners Smart strategies guide”
If you need more information or help to implement this strategy for your wealth protection,
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