Business Expenses Insurance is an important offering provided by several insurers in the Australia market. The purpose of Business Expenses Insurance is to assist our client’s that are Business Owner’s with meeting the daily running costs of their business, if they’re unable to work due to sickness or injury.
Using the employment measure of small business, there were 2,065,523 small businesses in Australia employing less than 19 people, accounting for 97 per cent of all Australian businesses by employee size (1). Businesses are stressful enough to run as is – but the financial ramifications on a business if an owner is rendered unable to work due to sickness or injury could be significant.
While the type of Business Expenses cover available in the market varies slightly, the fundamental nature of the product is to assist business owner’s with meeting the operating expenses of their business if they’re unable to work due to sickness or injury – up to the sum insured.
So what expenses are covered under a Business Expenses Insurance policy?
“Eligible expenses” that are covered are the Regular operating expenses of the business. Common examples are below:
- Accounting and audit fees.
- Electricity, gas, heating, water, telephone and cleaning costs.
- Security costs.
- Rent, property rates and taxes.
- Membership fees, publications and subscriptions to professional
- Leasing costs of plant and equipment.
- Bank charges, interest on business loans.
- Salaries and other related costs for non-income generating employees of the Life Insured’s business.
As you can see, the expenses listed above are all ongoing business costs.
On the flipside, examples of costs that are not covered are as follows:
- Salaries and other related costs for the Life Insured and income generating employees of the Life Insured’s business.
- Commissions or bonuses payable to the Life Insured.
- Repayments of principal of any loan or other finance agreement
- Any costs of a capital nature including the cost of any equipment, fittings, fixtures, furniture goods, implements, merchandise or stock
- Depreciation
- Losses on investments
- Non-Cash Expenses i.e. Amortisation, Bad Debts etc
The common themes in the above examples are the exclusion of liability repayments, asset purchases, private expenditure & “one-off” type expenses.
Income generating Vs Non-Income Generating Employees
You will note that employee costs are classed as income generating and non-income generating within the policy documents of insurance firms.
Income generating staff are qualified & specially skilled staff who’s personal exertion contributes DIRECTLY towards income of the business e.g. lawyers, accountants, builders. Their costs are NOT eligible expenses. Whereas Non-income generating staff are non-qualified staff who’s personal exertion cannot DIRECTLY contribute towards income of the income of the business e.g. admin staff, receptionist, bookkeeper etc. Their costs are eligible expenses.
The rationale behind this is “Income producing staff” are able to generate income to cover their associated costs. Whereas non-income producing staff do not have the skills or qualification to contribute to the generation of business income to cover their associated costs.
In the above example of Ho’s Lawyer’s, the Legal staff are deemed to have the skills and knowledge to sign off and at least contribute to the earning of legal services income. Their salary and superannuation costs are deemed ineligible as per a Business Expenses Policy. Whereas the Practise manager, Bookkeeper & Cleaner are not qualified lawyers, nor have the legal skills and knowledge to contribute to the earning of legal services income. Their salary and superannuation costs are deemed eligible.
Calculating the Benefit Payable
Now that you are of the Eligible vs ineligible expenses of a business policy, let’s take a look at the assessment for Ho Lawyer’s for February 2019:
| Ho Lawyer’s Pty Ltd | ||||
| Business Expenses Claim | ||||
| Profit/Loss statement for period 1/2/19 to 28/2/19 | ||||
| Account | Eligible | Not Eligible | Notes | |
| Accounting fees | $ 1,000.00 | business accounts | ||
| bank fees | $ 200.00 | business bank | ||
| loan repayments | $ 6,000.00 | repayment of liability | ||
| Private Expenditure | $ 1,500.00 | private – not business | ||
| Depreciation | $ 2,100.00 | non-cash expense | ||
| Rent | $ 1,100.00 | business premises | ||
| Purchase of Vehicle | $ 18,000.00 | capital (one-off) acquisition | ||
| Motor vehicle expenses | $ 450.00 | all business driving | ||
| Loss on sale of assets | $ 8,000.00 | non-cash expense | ||
| Wages | $ 4,500.00 | $ 24,000.00 | refer to payroll report | |
| Superannuation | $ 427.50 | $ 2,280.00 | refer to payroll report | |
| Bad debts | $ 250.00 | non-cash expense | ||
| GST paid | $ 3,000.00 | payment of liability to ATO | ||
| Sub Total | $ 7,677.50 | |||
| Sum Insured | $ 15,000.00 | |||
| Amount Payable | $ 7,677.50 | |||
Ho’s Lawyer’s incurred $7,677.50 worth of eligible expenses for the period 1/2/19 to 28/2/19. Noting a Sum Insured of $15,000 per month, the amount payable to Mr Ho would be $7,677.50. Please note: some companies may apply offset’s where applicable.
Business expenses Insurance, at its core, is the promise of financial support at a time of disablement for a life insured that owns a business. To determine the appropriate levels of cover or potential benefit payable, our clients really need to have a good understanding of the level of operating expenses they incur and how a period of disablement would affect their ability to meet these ongoing expenses.
Business owners are the heartbeat of our economy, and life insurers recognise the level of financial stress involved with running a business. The Business Expenses Insurance product exists to support business owner’s with covering their ongoing operating costs which will enable the business to stay afloat whilst a claimant is disabled so they can focus on getting themselves fit, healthy and ready to get back into running a successful business.
References:
Jason Noyahr is a degree qualified, chartered accountant with over 7 years’ experience. He started his career in a public sector accounting firm, moving on from his role of 5 years as a Senior Taxation Accountant, into the Life Insurance industry with AIA.
Since commencing with AIA in March 2017, Jason has been working as the Financial Specialist within the Retail Claims team, assisting the Claims department and other departments within AIA with the analysis & interpretation of financials, Forensic Accounting investigations and also being involved in the assessment of claims.
Ph: (03) 9009 4592 – Email: jason.noyahr@aia.com