By Yann Henry (Senior Risk Analyst with The Insurance Brokers Limited).
Insuring your business is paramount to surviving in today’s world. This includes protecting yourself against sickness, injury, and any disablement. Many of you have spent a significant amount of time, energy, and money to establish the profitable clinic you have today. Most business owners are focused in the day to day running of their company and maintaining the success of the business. There can be issues where the clinic owner has not made appropriate provisions for the business running without them, even for a short period. This is where you, the owner, are exposing yourself to financial risk. Whilst most clinic owners understand the need for assets, gross profit and liability covers, very few take a step back to appreciate the risk to them as owners and key person of the business.
An example of this is when Jane* contacted us for advice regarding the Salon Businesspack, exclusive to members of NZARBth. The question was asked if she had considered her key person and/ or owner’s risk. Whilst the Salonpack provided her clinic with cost effective and comprehensive cover, Jane was vulnerable in the risks below.
Jane had a senior therapist who worked full-time and had a lot of clients. Jane worked on the day to day running of the business and worked part-time as a therapist. In early 2014, at only 35 years old, the senior therapist was diagnosed with stage three breast cancer. Once Jane got over the initial shock, she began to consider the impact of this on the day-to-day business. The first thing that struck her is that her senior therapist held the key relationship with many of their top clients and with her absence, those clients were now a target for competitors.
While the senior therapist had taken out a private medical insurance that provided her with the best treatment available, a lump sum was paid to the business to overcome additional workflow costs and potential lost relationships. An additional $5,000 was paid to the business on a monthly basis until the senior therapist was able to work again in her full capacity. This covered the salary of the new staff member and recruitment costs, much to Jane’s relief.
In June 2014, the senior therapist passed away. Doctors had diagnosed the cancer too late. The business would keep the benefit of the Key Person Cover ($5,000 per month) for an additional year and a half which allowed Jane some time to put in place a more permanent solution. Because the senior therapist owned a small portion of the clinic, that portion of the business was up for sale. Jane had taken out a life cover for the purpose of being secure – providing her with the ability to purchase the remaining shares.
Personal / Family Risk
Jane was severely underinsured with a business and house mortgage. She had a $200,000 Life Policy. This means that if she had passed away, the investment interest would not be sufficient to cover ongoing expenses of the household.
It didn’t take Jane long to see that if her family was going to continue a similar lifestyle with her gone, $3 million of Life Cover was going to be needed. The good news was that given Jane’s age, the premiums were low.
In conclusion, the key to eliminating financial risk in your business is to step back frequently and think where is my business heading? Do you have a succession plan? Are you the “key person” in your business? Have you given enough thought on the impact of your absence? What impact would it have on your business if you were unable to work? Often in any business there is a distraction and these questions are often not thought of or are thought of but often not discussed – rain checked.
In a framework where 1,800 New Zealanders are diagnosed with cancer each year and a further 24 Kiwis suffer a stroke every day, protecting your business, family and future is critical to making your business a success regardless of what life throws at you.
* The case is true although Jane is a fictitious name.