Protect against risks to life- Few suggestions to SMEs in India
Entrepreneurs normally obsess with the business goals and ignore risks to themselves. Mitigating such risks by taking sufficient insurance is paramount to protect themselves and their loved ones.
Recently I came across a story of an entrepreneur who had been thoroughly focusing on growing business which went through much turbulence in early days. As usual, he was very passionate and obsessed with his business which we normally observe among entrepreneurs. He had been managing finances of his business through hand loans and not much emphasis placed on bookkeeping or analysing major risks.
The life was routine till he met with an accident. He suffered grievous injury and could not survive for long. As his family started taking stock of his business and finances, they found there is not much to seek solace. There was no insurance cover for himself or family other than a small ULIP scheme. The assets of business were just enough to cover the liabilities.
The dreams and hope of the family shattered as they had to start the life from the scratch.
Key points of relevance are:
The growth of business was so obsessive for any entrepreneur that he does not give enough attention to other aspects which are part of preparedness for the journey of entrepreneurship and ring fence the family from any risks to self & business.
Lack of attention is alone responsible for it. Sometimes entrepreneurs tend to ignore these aspects in order to protect the liquidity needs of the budding business.
Sometimes it may also be due to lack of awareness about suitable avenues which can give maximum comfort with the minimum payout.
When going is smooth, many entrepreneurs ignore the need for robust Risk Management practice.
Insurance products are the best remedies:
Being primary earning member every entrepreneur always wants to make sure that his family is happy as long as they live. Insurance is one such avenue to achieve that.
There are many insurance products which are having minimum payout and capable of mitigating the risk to a significant proportion of the immediate families of entrepreneurs and their employees.
Following are the details of few products which entail minimum premium outgo and help to defend against risks to life:
Term Insurance: Term insurance is a life insurance product offered by an insurance company which offers financial coverage to the policyholder for a specific time period.
In the case of death of the insured individual during the policy term, the death benefit is paid by the company to the beneficiary.
The key points are:
- A term insurance plan ensures that your family is secured and leads a comfortable life in your absence.
- Term plan covers death due to any reason
- Buying Term plan under Married women Property Act (MWPA) will keep it safe from creditors if any
- Eligible for Tax benefits as per prevailing laws
Key man Insurance: It is commonly seen a phenomenon that many SMEs mostly dependent on the success of one or two key employees. A sudden loss of any of these key employees could pose a significant financial impact on your business.
Key man insurance helps to manage these risks and ensures the company has sufficient funds to keep the business going in the short term before a successor takes charge.
The key points are:
- Key man insurance is taken by a business for its own benefit. All the premiums are paid by the business & the business is eligible for all the policy proceedings.
- A key man is a person whose talent, contacts, goodwill etc a business is thriving on.
- The key persons can be chief executive, key employee, directors, project specialists, operations head etc.
- Any pure term insurance plan can be bought under Key person insurance
- The premium paid towards key man Insurance is treated as a valid business expense.
Partnership: Business Partners & shareholders are the backbones of any SME. The mitigating risk to their life is a strategic necessity for ensuring continuity of business.
When you and your business partners have put so much into your own business, it’s important to think about the company’s future and your dependents’ security, in the event death of any of the business partners.
Partnership Insurance Policy is taken by a partnership firm on the life of partners with the objective of protecting the deceased partner’s shares in the company
Key Points are:
- Partnership insurance is taken by a business for its own benefit. All the premiums are paid by the business & the business is eligible for all the policy proceedings.
- In the case of the unfortunate demise of any partner, the death claim amount is paid to the partnership firm.
- The firm can use the death claim to buy out the deceased partner’s share in case his/her family is not willing to continue with the business.
- Any pure term insurance plan can be bought under partnership insurance.
- The premium paid towards Partnership Insurance is treated as a valid business expense.
Health Insurance: Today’s lifestyle has made us vulnerable to critical illnesses at very early stage of life. The cost of procedure & treatment of such illnesses is escalating so high that it may lead to a serious dent to our savings.
Health Plans are offered by both general and life Insurance companies. They pay a lump sum that can be used for treatment and for other expenses during the recuperation period.
Key Points are:
- Cashless facility and tie-ups are available.
- Group Cover can be obtained.
- Some Insurers offer Lump sum payout on the diagnosis of covered illness/condition.
- Eligible for Tax benefits as per prevailing laws, tax laws are subject to change.
Personal Accident Insurance: Get covered against accidental death and disability with personal accident insurance:
The insurance provides compensation in the event of death or disability directly due to the accident. The policy offers compensation in case of death or bodily injury to the insured person, directly and solely as a result of an accident, by external, visible and violent means.
While minor accidents can indispose one temporarily, major ones can severely impact your life and well-being. A sound insurance plan to protect you from economic repercussions of having a mishap has become a necessity.
The policy guards your dependents (parents or family) against any economic repercussions if the unfortunate comes to pass. A person should purchase the policy that covers or provides reimbursements for all eventualities from short-term impairment to an untimely demise, and safeguard the family’s future.
Individual Accident Insurance: This policy guards an individual in the event of any intentional or unintentional mishap. The incident may cause impairment, whether short-term or lifelong wounds or even demise.
Group Accident Insurance: As the term itself suggests, it is not meant for individuals and is taken by employers for their employees. Depending on group size, discount on premium might be offered as well. It is a good incentive/ value added advantage for small businesses as it is available at low cost. However, this is a very basic plan and may not offer advantages like that of an individual plan (subject to terms of the plan).
Include employees in the drive to secure the life:
Apart from the above facilities of accident insurance and health insurance under group scheme, please ensure that employees are well aware of other affordable insurance schemes from Govt. Encouraging them to avail the facilities and /or sensitising them to keep those facilities alive by paying premiums on time can be a great charitable act for SMEs.
For instance, the beneficiaries of schemes such as Pradhan Mantri Suraksha Bima Yojana ( Accident cover up to Rs 2 lakhs at a premium of Rs 12/-) and Pradhan Mantri Jeevan Jyoti Bima Yojana (Accident Insurance cover of Rs 2 lakhs at a premium of Rs 330/- per year) may be sensitized on keeping the policies alive. Similarly, extend support to seek cover under ESI schemes.
You also insist the casual workers have insurance cover before taking up the job work whenever possible. Though not mandatory now, this may create goodwill among those who normally come from unorganised sector.
Ring fence the proceeds of these policies:
Your family is your most valuable asset. Protect them by creating an encumbrance-free asset for them.
You have a distinct role as the head of a family and you would want to secure the well-being of your family, as long as they live. You can and you do create separate assets to meet the objective but these could be exposed to the creditors in case of an eventuality.
It is possible to ensure an asset created for your family is encumbrance free and cannot be parted by your creditors in difficult times. An insurance policy bought under MWPA (Married Women’s Property Act) creates financial security for your wife and/or children. All the policy proceeds are for the exclusive benefit of the chosen beneficiary only, and cannot be attached even by creditors under any law.
As per section 6 of the Married Women’s Property Act (MWPA), 1874:
- An estate can be created exclusively for the benefit of the wife or children or both through a life insurance policy.
- All kinds of life insurance plans like protection, saving and investment can be bought under MWP Act.
- All the policy proceeds are for the exclusive use of the chosen beneficiary.
Every SME should place emphasis on securing sustainable future of their family as important as growing business. There are many insurance products which are affordable vis-à-vis benefits and can help families of entrepreneurs and employees feel safe and sustainable in any unfortunate events.