Making the right decisions about your insurance policies is essential to ensure that, if you do suffer an illness or accident, you are fully covered.
Whilst we all have personal insurance needs, the stakes are higher for business owners including travel business owners.
Let’s take a look at the difference between income protection, trauma cover and key person insurance. Then we will explore how it might be possible to make a claim under more than one insurance policy for the same insurable event.
Life insurance adviser Kevin Feaver says the majority of claims made relate to an income protection policy, which generally pays out if the person is unable to work in his or her own business as a result of an accident or illness.
“Generally this is a monthly benefit which pays up to 75% of the owner’s salary package. The challenge for the self- employed is proving their income on application because it usually varies from year to year. However it is possible to have an agreed value contract if acceptable financial evidence is provided at time of application, such as accountant reports and tax returns with some insurers requiring two years’ worth of proof. In most cases monthly benefits extend to age 65 if the illness or injury lasts that long” says Kevin.
There is usually a waiting period associated with income protected policies with payouts commencing after 30 or 90 days from the claim being made, and sometimes as long as two years after a claim, depending on the business owner’s situation. For example, a two year waiting period only applies to a policyholder who has a salary continuance policy in his or her superannuation that has a two year benefit period.
“Premiums are generally tax deductible and there is no fringe benefits tax payable. Conversely any benefits received from the policy form part of the owner’s assessable income” Kevin says.
A business owner wears two hats: “the individual and the self-employed”. Thinking of the business owner as “the individual”, he or she may have personal or family expenses to maintain such as a home loan, credit card, school fees and car repayments. Trauma cover generally pays a lump sum on diagnosis of a certified medical condition that is a result of an accident or illness. The most common claims that are brought against a trauma policy relate to cancer, a heart attack, or a stroke, or a condition such as quadriplegia.
Kevin says although Trauma policies typically cover around 30 to 40 different conditions, over 80 per cent of claims relate to cancer, heart attack or stroke.
“Payouts are a lump sum and no tax is payable on the payout, although the premium the individual will pay is not tax deductible” he explains. “Thinking about trauma insurance for the self-employed and the financial obligations on that side of his or her life this type of cover would be incorporated as part of a key person policy” Kevin explains.
This type of insurance is usually different as it is usually a combination of a number of different types of insurance, including life, total and permanent disablement (TPD) and trauma insurance. It is generally taken out on a person who is involved in and crucial to, the business such as owners and key employees.
“Key person insurance replaces the income the key person would have generated and will assist the stabilisation and continuation of the business. For instance, they might have $3 million in life insurance, $1million in TPD and $500,000 in trauma” he says.
From a tax perspective, premiums are tax deductible for the business and the proceeds are taxed at the company tax rate as long as the purpose of the policy is to protect the revenue of the business.
In some circumstances, business expense insurance is another form of coverage which can expand protection and will provide cover for paying salaries, rent and utilities.
Let’s take a look at how a hypothetical claim would work across the three different types of insurance: Income protection, trauma and key person.
In this example a travel business owner, Karen has taken out trauma insurances as well as income protection insurance. Given that she is critical to her business operations, she has also taken out key person insurance. Unfortunately, Karen suffers a heart attack and is unable to return to her business.
As she cannot resume her previous role within the business, she would be able to claim under her income protection policy. In the case of a heart attack, says Kevin, the waiting period is usually waived for payouts related to an income protection policy. It’s likely in this situation she would also receive a lump sum benefit through her trauma policy and a claim would also be made under her key person insurance.
“In this claim scenario, the three policies would respond as long as Karen disclosed all existing policies at the time the policies were commenced” Kevin says.
“Policies are usually guaranteed renewable, so there is no disadvantage in making a claim” says Kevin. “But in all circumstances, it’s advisable to ask a life risk specialist for help at claim time” he adds.
For more information and an analysis of your circumstances you can contact Kevin Feaver at Gow Gates Financial Services on (02) 8267 9951 or email: firstname.lastname@example.org.
Gow Gates Financial Services has been in the business of providing insurance advice to business owners, the self- employed and salaried employees since 1964. We are proud to have been specifically aligned to the Travel Industry for many years now.
Gow-Gates Financial Services Pty Ltd (ABN 97 001 250 344) is an authorised representative of Apogee Financial Planning (ABN 28 056 426 932), an Australian Financial Services Licensee with its registered office at 105 – 153 Miller Street, North Sydney NSW 2060.
Disclaimer: The advice in this article may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information.
The hypothetical claims scenarios contained herein are for illustrative purposes only and should not be relied upon as governing any specific facts or circumstances. Actual claims are governed by the specific policy terms, conditions, limits, and exclusions and are subject to individual claims review by applicable insurer representatives. Statements concerning tax, accounting and legal matters should be understood to be general observations based solely on our experience as insurance advisers and should not be relied upon as tax accounting or legal advice, which we are not authorised to provide. All such matters should be reviewed with your own qualified tax accounting and legal advisers.