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Understanding personal risk vs business risk and ownership structure

September 2023

Personal risk insurance policies can provide funds to replace the loss of someone’s personal income and help pay their personal expenses, such as mortgage repayments or groceries. The difference with business risk insurance is that it enables the business to continue if the owner or another key person were unable to work in the business due to sickness, injury or death. A business risk policy injects funds back into the business to support the ongoing operation. Depending on the ownership structure, a combination of personal and business risk insurance may be most appropriate.

Sole traders

Many sole traders will not have business debt and may choose to wind up the business in the event of sickness or injury. However, they may face the loss of personal income they need to continue to pay their personal expenses. Some businesses have ongoing commitments they would still need to pay even if they were not able to operate, such as a lease agreement for a vehicle. They may also have contractual agreements that, due to an individual’s expertise, they would need to fulfill - even if they were unable to do so due to sickness or injury. If a business has been trading for less than three years, personal income cover may not be available. A business start-up product may be a better option.

Related parties 

Some businesses have related owners, and therefore their insurance goal is to replace a personal income as well as inject funds into the business. This would enable the business to continue generating revenue in the event of the sickness, injury or death of one of the parties. This is where a combination of personal and business insurance could help. It could inject funds back into the business to replace labour and loss of revenue, or cover the business overheads necessary to stay in business.

Unrelated parties

Some businesses have directors, partners or shareholders who are involved in the everyday running of the business. As a result, there could be serious financial consequences if they were unable to work due to sickness, injury or death. Others solely inject funds into a business.  If they were unable to work, or if they needed to withdraw their funds for any reason, they would need to be repaid. Shareholder agreements usually require funds to be available if a shareholder dies in order to fund the purchase of shares from the exiting shareholder. Business risk solutions such as Shareholder Protection and Debt Protection may be useful here.

To find out more download the Business Risk brochure