If you’ve used debt to start-up or grow your business, it is wise to ensure yourself (and other key people) have suitable insurance cover, to make certain you are protecting your assets.
Protecting Your Assets
Adam, aged 40, is married to Kylie, aged 35. They have a young family and own a home worth $600,000.
Adam wants to expand his dry-cleaning business and to do this he’ll need to raise some capital. After assessing his options, he borrows $200,000 from a bank and, as part of the loan agreement, he signs a guarantee using the family home as security.
One of the conditions of the loan is that the debt must be repaid immediately if he dies or becomes totally and permanently disabled.
Protecting Your Assets – Case Study
First of all, his financial adviser explains that should either of these events occur… The only way he’ll be able to repay the loan is to sell either the business or the family home. And both these options would have significant drawbacks.
Selling the business assumes there’ll be a willing buyer prepared to pay a reasonable price. Selling the family home can present similar challenges. Compounded by Adam’s family having to find somewhere else to live.
Adam could also face problems if he suffers a critical illness. In this scenario, he could struggle to meet the loan repayments – particularly if he takes a while to recover or is unable to return to work.
After assessing Adam’s goals and financial situation, his adviser recommends he take out $200,000 in Life, TPD and Critical Illness insurance. If the unthinkable happens, he (or his estate) will receive the necessary cash to repay the loan and extinguish the guarantee. Hence, protecting his assets and his family.
Note: This case study highlights the importance of speaking to a financial adviser about protecting the assets that have been used to secure business debts. Just in case you (or another key person) die, become totally and permanently disabled or suffer a critical illness. A financial adviser can also address a range of potential issues and identify other suitable protection strategies – see Tips and traps below.
Protecting Your Assets – TIPS & TRAPS
- It’s important to update your insurance cover. Most importantly, in line with the changing value of your debts. Failing to do this may lead to underinsurance.
- Similarly, if you (or the entity through which your business is run) own an insurance policy taken out for the purpose of repaying a debt. The premiums paid by you (or the entity) will not be tax-deductible.
- If you take out the Life or TPD insurance through a super fund. The benefit could come from upfront tax concessions. This is generally not available when insuring outside super. (see Wealth Protection Strategy 5). However, restrictions do apply to who can be nominated as a beneficiary. Taxation liabilities may apply to certain eligible persons when a death benefit (including insurance proceeds) is paid. Especially, in the form of a lump sum, pension or a combination of both from a super fund.
Protecting Your Assets cont
- Insurance cover purchased through a super fund is owned by the fund trustee. As a result, this is who is responsible for paying benefits subject to relevant legislation and fund rules. (see ‘Restrictions on non-death benefits’ in the Glossary). When insuring in super you should be clear on the powers and obligations of the relevant trustee when paying benefits.
- It may be more cost-effective over the longer term if you pay level premiums, rather than stepped premiums that increase each year with age (see Wealth Protection Strategy 6).
- Insurance can also be used to protect your business revenue. Therefore, if you (or another key person) die, become disabled or suffer a critical illness you are covered. (see Wealth Protection Strategy 7).
- Finally, if you’re in business with other people, you should consider establishing a Buy Sell agreement funded by insurance (see Wealth Protection Strategy 1).
If you need more information or help to implement this strategy in protecting your assets for your wealth protection, contact us today.
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