3 types of insurance to keep your business from bankruptcy

"There are a couple of scenarios which can make or break a business, and having the right kind of insurance in place can solve for problems before they happen," says Harry Joffe, the Head of Legal Services at Discovery.

In a podcast that explores the role of business assurance, Joffe explains, "Business directors are responsible for ensuring that, if anything happens to an owner, shareholder or key individual, the business can continue to run on a day-to-day basis."

Listen to the podcast here:

There are three main types of business assurance to cover this risk:

1. Contingent liability business assurance: This kind of insurance covers debt. So, for example, a business borrows money from the bank to help cover the initial costs of setting up the business. Likely, one or more of the owners of the business stands as surety for this loan that the business took out. If the owner then passes away, their estate will need to repay that loan. Without this cover, this can obviously place a lot of pressure on the family of the deceased and at the same time, it could take a while to recoup that money. Once a contingent liability policy is in place, if the life assured passes away, an amount is paid out to offset the loan and to relieve any pressure that there may be on the estate.
2. Key man insurance: This is where an owner or partner is insured because they are a key individual in the business - they are the ones with the key skills for the functioning of the business. These individuals are also often the ones with key contacts and networks. A key person policy ensures that if this person dies or is disabled, the rest of the company can go to the market and find a suitable replacement. So it requires determining the relative impact that a key individual has within the business, and using different metrics to decide how much cover a business needs to ensure as little disruption as possible if something happens to a key individual.
3. Buy and sell insurance: This is where partners or shareholders ensure that if one of them dies, the remaining partners can buy their shares from the deceased partner's family to prevent outside family members from entering the business. This could be important if, for example, a new heir does not have enough knowledge or ability to take over - which would create a lot of disruption within the business. Such a case can be completely prevented with a buy-and-sell policy, as the surviving partners receive a pay-out, which they must use to buy the deceased owner's shares from the family. This ensures the business can continue as smoothly as possible and that the family receives a fair payment for the ownership they inherited.

"What's clear is that these are three very different categories to cover for three very different needs," says Joffe.

Listen to the full podcast to learn more about what to watch out for as a business owner, and how to reduce your business' risk, so you can give it the best chance of success, no matter what the world throws at it!

Find more insight on how best to manage your finances in today's economic climate here.