Why Life, TPD, Trauma & Income Protection Insurance Matter for Business Owners
In businesses with multiple owners (e.g. partnerships or companies with multiple shareholders), it’s essential to plan for what happens if one of the owners dies or becomes seriously ill or injured.
What Happens Without a Plan?
- If an owner dies, their share of the business usually passes to their spouse or family — regardless of whether they’re involved in the business. Having a valid Will is best practice to help avoid estate disputes and a lengthy legal process, which can take years to resolve.
- If an owner becomes permanently disabled, they still technically retain ownership of their share — even if they can no longer contribute to the operations or profitability of the business.
- Without appropriate planning, this can cause disputes, misalignment, and serious disruption to the business.
What Should Be in Place?
- A Business Will (Buy/Sell Agreement)
- A legally binding document that includes put and call options to outline what happens to an owner’s share in the event of death or permanent disablement.
- It allows the remaining owners to purchase the share at a pre-agreed price using an agreed business valuation methodology.
- Insurance to Fund the Buyout
- Life and TPD (Total and Permanent Disability) insurance are used to fund the purchase of the departing owner’s share.
- This ensures the family receives fair value, and the business continues without disruption — keeping control with the surviving owner(s).
- Pre-Agreed Business Valuation
- All parties should agree upfront on how the business will be valued (e.g. multiple of EBITDA, market-based comparison, independent valuer).
- This avoids disputes at the time of a claim.
Income for the Departed Owner or Their Family
- Business owners typically draw income via salary, dividends, or drawings.
- If there is no Buy/Sell Agreement, the estate of a deceased or permanently disabled owner may still expect ongoing income from the business.
- A properly funded agreement ensures the estate receives a lump sum payout, and income payments cease.
Temporary Health Problems
- If an owner is temporarily unable to work due to illness or injury, their absence may still create a financial burden on the business.
- Income Protection Insurance helps maintain the owner’s personal income without placing strain on the business cash flow.
If the Business Suffers Financially Without an Owner
- Owners often provide key leadership, technical skills, and client relationships.
- Their loss can affect revenue, profitability, and staff morale.
- Key Person Insurance (Life & Trauma) provides working capital to help the business recover or recruit a replacement.
Each Owner Should Have Personal Cover Too
Comprehensive personal cover is essential to protect both the business and personal finances. This includes:
- Life Insurance
- Total and Permanent Disability (TPD) Insurance
- Trauma (Critical Illness) Insurance
- Income Protection
These policies help with:
- Paying off personal or business-related debts
- Covering medical and rehabilitation expenses
- Providing income replacement
- Funding long-term care or lifestyle adjustments
Key Considerations for Multi-Owner Businesses
- Ownership & Control
- Ensure all owners have a valid, up-to-date Will.
- Implement a Buy/Sell Agreement with appropriate funding strategies.
- Business Value Protection
- Agree on how the business is valued and review this regularly.
- Ensure the method is clearly documented in your agreement.
- Income Arrangements
- Understand how each owner is paid.
- Plan for scenarios where one cannot work — either temporarily or permanently.
- Successor Planning
- Decide whether a spouse or next of kin would be involved in the business.
- If not, ensure there’s a plan to transfer ownership and remove future involvement.
Funding the Buyout – Where Will the Money Come From?
- Bank finance or loans
- Sale of business assets
- Introduction of a new business partner
- Vendor finance (buy-now-pay-later approach)
- Life insurance – usually the most cost-effective and dependable option
Need Help Getting Started?
At Surety Life, we specialise in helping business owners implement effective insurance-funded Buy/Sell Agreements. We work with your accountant or lawyer to align your cover with your business structure and personal goals.
Contact Surety Life
🌐 www.suretylife.com.au
📧 hello@suretylife.com.au
📞 03 7053 0792