Business Insurance Ownership Structures

One of the most important aspects of sound business insurance advice is determining the most appropriate ownership structure for said cover. There are a number of different ways in which business owners can utilise insurance products to protect their livelihood and there are a number of different ways in which this cover can be owned and paid for.

Below are some of the more common scenarios you will see.

Buy / Sell Insurance

In accordance with a written legal agreement, aims to ensure that the business has adequate arrangements in place regarding the transfer of equity in the event of an owner’s departure from the business due to death, disability, or traumatic illness or injury. This is achieved through taking out a Term Life, Total and Permanent Disability and Trauma Insurance policies on the life of the business owner.

Ownership StructureAdvantagesDisadvantages
Self Ownership Simple structure which delivers the desired outcome in the right amount to the right person at the right time.Premiums are not tax deductible.
Cross ownershipA logical structure in that the remaining entity receives the claimed benefit to purchase the equity share of the deceased entity.Payment of TPD and/or Trauma benefits are subject to capital gains tax. There may be a mismatch between the agreed value amount and the net amount actually received after capital gains tax.
Superannuation fund ownershipPremiums are effectively paid from pre-tax income.It is incredibly difficult to incorporate this into a buy/sell agreement as superannuation assets bypass your estate with a binding beneficiary nomination. This method is fraught with risk.

Debt Protection Insurance

Aims to cover outstanding debts in the event of an owner’s departure from the business due to death, disability or traumatic illness or injury. This is achieved through taking out a Term Life, Total and Permanent Disability and Trauma Insurance policies on the life of the business owner.

Key Person Insurance

Aims to cover the capital or revenue loss suffered by the business in the event of a key person’s departure from the business due to death, disability or traumatic illness or injury. This is achieved through taking out Term life, Total and Permanent Disability and Trauma Insurance policies on the life of the key person in the business.

Tax deductibility of premiums depends on the purpose of the key person insurance. Premiums are tax deductible if the purpose is to protect profits and cover operational expenses. Premiums are not tax deductible if the purpose is to protect the value of a capital investment.

Business Expenses Insurance

Provides an ongoing monthly benefit for a period of up to 1 year to cover the fixed operating costs of the business if the owner is unable to work due to sickness or injury. This type of cover is particularly useful if you are self-employed or a small business owner.

General Advice Disclaimer

General advice warning: The advice provided is general advice only and in preparing it we did not take into account your investment objectives, financial situation or particular needs. Before making an investment decision on the basis of this advice, you should consider how appropriate the advice is to your particular investment needs, and objectives. You should also consider the relevant Product Disclosure Statement before making any decision relating to a financial product.

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