A business’s most valuable asset comes in human form, in the expertise of owners and employees. Owners who have comprehensively insured against threats to plant and equipment can still find they are vulnerable to sudden loss if the owner or an employee whose skills are vital to the business is struck down by illness.

A business without adequate income protection can quickly falter after a death or injury, according to Iain Rogers, Head of Business Development at NAB Financial Planning, who says the effects of critical illness or sudden death will spread well beyond the owner’s family to employees, business partners and their families. He has seen individuals dealing with grief or illness forced to take on extra responsibilities to keep a business functioning.

“Its common to see owners who have to return to work when they should be at home recuperating. We also see spouses forced into the business because they need the income but who are grieving and cannot add the value they otherwise might,”Rogerssays.

There are ways that businesses can prepare for unexpected tragedy. Rogerssays unnecessary risks can be avoided with insurance that maintains the value of the business by protecting against losses to three main areas: assets, revenue and owners’ equity.

 Asset protection

• Asset protection, also known as debt protection, provides a lump sum to enable businesses to free up cash flow by clearing or reducing debt and assists with the release of personal assets pledged as security. Rogers says it’s common to see business income suffer in the early weeks after a partner or key employee dies or takes sick leave. Managers may have to reduce staff, and business reputation can suffer from even a temporary disruption to cash flow.

 Revenue protection

• Revenue protection provides an income stream to compensate for a fall in business revenue when the skills of an owner-manager or vital employee are lost, for example while they’re off work receiving medical treatment or if a recruitment agency is needed to find a replacement.

 Ownership protection

• Ownership protection protects equity by providing a lump sum if the business owner dies or suffers a serious illness. This can be combined with a documented buy/sell agreement to provide certainty and an orderly transfer to maintain the value of the business.

Roger says business protection is particularly important for owners who have guaranteed their business loan with personal assets, and recalls a two-man partnership where one partner was killed in a car accident. Business borrowings were guaranteed by their homes and the surviving partner had to find other assets to borrow against to buy out the widow’s equity and remove her home from the loan.

“With the proper insurance, she would’ve received a fair value for her share of the business, the debts would’ve been cleared so her home would be released, and control of the business would pass to the surviving partner,” Rogers says.

The two men ran a very successful business because each of them performed different roles, but that also made the business vulnerable when the skills of one were lost. The partner who died was the salesman and when revenue fell, the remaining partner had to try to take on that role.

“Revenue protection would have injected extra funds while the remaining partner recruited a new sales person,” notes Rogers.

He says the example shows how an appropriate level of insurance will preserve the value of a business through difficult times, but warns it’s important for owners to obtain professional advice on the best solution for their business and personal circumstances. An experienced adviser will discuss risks, strategies and an affordable level of cover. “And not just broker a product. It’s an area that requires expertise,” says Rogers.

Please note: NAB has not taken into account your objectives, financial situation or needs and recommends that you consider whether any advice in this article is appropriate for your circumstances.

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