Case study

Tony and his business partner Andrew run a successful veterinary practice. They each generate a pre-tax income of $20,000 per month and are jointly responsible for meeting the total business expenses of $16,000. This leaves them $12,000 each to draw as income every month.

They have both used Income Protection insurance to protect 75% of their respective incomes (see Strategy 2). Tony has also taken out Business Expenses insurance for $8,000 a month, which represents his share of the practice’s business overheads.

The table below outlines what could potentially happen if either Andrew or Tony became disabled.

Andrew’s Income Protection policy would provide a monthly benefit of $9,000, which represents 75% of his income, net of expenses, but before tax. However, because he doesn’t have Business Expenses insurance, he’ll have to fund the business expenses out of his own pocket – potentially from his Income Protection policy. As a result, he’s left with $1,000 each month, which won’t be enough to cover his personal expenses, medical expenses and tax liability.

Conversely, Tony, who also insured 100% of his share of the practice’s business expenses, will not need to use any of his Income Protection benefit (or any of his personal savings) to meet his ongoing business expenses.

Note: This case study highlights the importance of speaking to a financial adviser about getting insurance to cover your share of business overheads if you can’t work due to illness or injury. A financial adviser can also address a range of potential issues and identify other suitable protection strategies – see Tips and traps.

Tips and traps

  • Premiums for Business Expenses insurance are generally tax-deductible and benefits received will generally be assessable as income, to either the business or the business owner. You should get advice from a registered tax agent relevant to your circumstances.
  • Insurance contracts differ, so check the policy document to ensure you understand exactly what the Business Expenses insurance provides, including what are defined as eligible business expenses.
  • You should consider insurance policies that allow you to automatically increase your cover in line with increases in the Consumer Price Index, ensuring the benefit keeps pace with the rising cost of living.
  • 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 Strategy 6).
  • Some other strategies to consider include using insurance to protect your assets (see Strategy 3), offset a reduction in business revenue (see Strategy 7) and fund an orderly transfer of business ownership (see Strategy 1).
  • You should also make sure you have enough personal insurance to protect yourself and your family if something happens to you. To find out more about using insurance for personal protection purposes, see our ‘Protecting you and your family’ guide.
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