This protection strategy is particularly important for partnerships where responsibility for costs can be shared equally and the sickness or disability of one partner would then increase the cost responsibilities to the remaining partners, all at a time when cashflow would already be under stress.
The general idea behind fixed expenses insurance is to reimburse a business for the fixed expenses it would continue to accrue, if the business principal (or key person) was unable to work because of a sickness or injury.
In practical terms, it's designed to support short periods of disability (usually to a maximum of 12 – 24 months) so there's still a viable business for the business owner to go back to after they recover from a prolonged sickness or injury.
Use our Business Fixed Expenses Checklist to help get you started
What happens if an owner is disabled and unable to work for longer than 12 months?
Our experience has been if a business owner suffers a disability that sees them unable to work for an extended period of time, having the recurring fixed costs of the business taken care of, allows the owner to concentrate on recovery.
- For a worst case scenario, it provides breathing space to make arrangements to exit the business without the need to be forced into a fire sale position.
How does this work for a partnership or where there are two or more working owners or directors?
- In the case of a 50-50 partnership where the fixed costs are apportioned equally between the two partners, each partner can insure 100% of their portion of those costs.
- If a business owner has prepaid eligible fixed costs before being sick or injured and unable to work, a pro rata reimbursement for those amounts is usually available too.
How long can a benefit payment be made?
Business fixed cost cover is usually capped at paying for a maximum of 12 to 24 months, while the insured person is unable to work due to sickness or injury.
What happens if I work from home and share personal and business expenses?
Many people in a self-employed situation, choose to structure their tax position in a way where they might claim some expenses under their business structure for which they also may receive some degree of personal use.
Personal use items
Even though these expenses appear in the accounts of the business, they may be enhancing the lifestyle of the business owner to a percentage and as such the calculations can be adjusted accordingly. For example;
- A vehicle may be used 90% for business purposes and 10% for family use etc.
- You might share the business internet broadband services with your partner
Ask you, Accountant for a list of your business expenses with a breakdown of the eligible fixed cover costs for your business and compare them with our suggestions below.
What happens if I work from home?
Depending upon your type of occupation, working from home can be difficult for a risk insurance company to manage in the event of a claim, so be sure to check for any possible restrictions that may be relevant to your personal situation.
Where Business Expences Insurance fits into the bigger picture
|Typical fixed business expenses||Business Interruption insurance?||Personal Income Protection?||Business Expenses insurance?|
|Rent, property rates, taxes and insurance on your premises||☓||☓||✔|
|Utilities, internet, landline, mobile||☓||☓||✔|
|Vehicle leasing, registration, insurance||☓||☓||✔|
|Equipment leasing, tools, loan repayments||☓||☓||✔|
|Salaries of non-income generating employees, including Super Guarantee (SG) and Payroll tax||☓||☓||✔|
|Other costs eg. bank fees, interest on loans, business insurances||☓||☓||✔|
|Subscriptions, memberships, accountancy advice fees||☓||☓||✔|