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Case Study: Business Partnership Insurance

Life Insurance, Business Owners

Published with permission

Clients of ours have a business that has profit of about $800 - $1.6mill pa. They had an old partnership agreement and some insurance in place that had not been reviewed in several years.

They did not have a buy/sell agreement and were not clear on what was in their original partnership agreement. They had not really even discussed what their longer term plans were within the business and what they wanted to happen long term with their asset.

We had two meetings together reviewing what they would like to happen, if either death or disability were to transpire and discussed generally some business succession considerations.

The discussion involved:

  • Estimating the value of their business.
  • Identifying how long they agreed the business could sustain and/or they would be prepared to pay the other equal drawings if they were to be partially incapacitated.
  • How things would play out if either one of them were to become permanently incapacitated.
  • How things would play out if either one of them were to pass away.
  • Identifying how much they would need individually as an income, if their regular drawings stopped.

The above discovery raised several interesting conversations.

Once we were clear on the above, we compared the cost of the cover they needed to market. After identifying the top three policies for the needs, based on price and policy terms, we asked these three to run internal quoting and offer a better than standard price. Given the total cost of the policies was in excess of $30,000, the insurers obliged by providing structuring suggestions and reduced pricing, with the provider we elected bringing down their price by $1,500 per annum.

We compared their current cover to what we recommended and besides the fact the level of cover they had was very low, relative to their stated need, it was also:

  • Expensive.
  • The Life/TPD was owned personally, so paid for from net income and only $112K. They estimated $1.6mill as the total value for their business.
  • Life/TPD owned in a company, with the intention of funding the business needs. This was $1,050,000 of cover and greater than their need.
  • Business expenses cover of $23,000 pm for 12 months, which was the right cover amount but expensive compared to market.
  • Personal covers were low ball levels and poorly considered cost and structure.
  • All covers were on stepped premium.

As a consequence of our advice, they have:

For the business:

Life/TPD - $988K more cover to fund a buy out

Life/TPD - $50,000 less Life insurance and $300,000 less TPD within the company to fund business needs. The lower TPD level is due to the fact we recommended business expenses cover.

Business Expenses – The same level of cover.

Personally:

Income Protection – approximately $5,000 pm more cover each.

Life/TPD – A slightly greater level of Life/TPD.

Trauma – Trauma cover of $300K for both. One partner originally had none and it was a reduction for the other partner of $46K.

All premiums we recommended were level premium, which has a ‘to 65 saving’ of approximately $688,000

The total net cost of their current cover was $10,355.

The total net cost of our proposed cover was $22,721.

The outcome in this case is considerably more cover overall, which is aligned to their need.

We had also recommended that all policies be established on level premiums, leaving the clients with an expense they can effectively budget for in the years ahead, rather than finding the cover becomes unaffordable when they are most likely to need it.

In addition to this, we referred these clients to a solicitor specialising in business partnership agreements and buy / sell agreements. There were two meetings with the solicitor. We participated in the first for hand over and worked with the solicitor ongoing from there to help make it a simple process for all involved.

They now have a well considered business partnership agreement and buy/sell agreement in place, along with more appropriate cover for their needs that will continue to be a manageable cost into the future.

"GOOD FORTUNE NEEDS GREAT PLANNING"

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GENERAL DISCLAIMER:

The content of this presentation is intended to be general information only and has been prepared without taking into account any person’s objectives, financial situation or needs. Each person should consider its appropriateness having regard to these matters or obtain relevant professional financial advice before making any financial decisions.  Examples are illustrative only. Each person should obtain any relevant professional financial, taxation and social security advice before making any financial decisions.


Tagged: Life Insurance, Business Owners