Running a business in New Zealand is both exciting and challenging. While the country’s Accident Compensation Corporation (ACC) provides coverage for accidental injuries, many small to medium-sized enterprises (SMEs) are unaware of the significant financial risks posed by illness, disability, and even premature death.
Below is a comprehensive guide to business risk insurance—which typically includes Life Insurance, Total and Permanent Disablement (TPD), Trauma Cover, and Key Person Insurance—and why it matters in the New Zealand context.
The New Zealand Business Landscape
SME Dominance: According to MYOB, 97% of all businesses in New Zealand have fewer than 20 employees. This structure means that losing a key individual—due to illness or death—can destabilise the entire operation.
Health Challenges: RNZ reports that cancer is the leading cause of death in New Zealand, accounting for around 30% of all deaths. Heart disease follows closely, and many conditions such as strokes and chronic illnesses can leave business owners or key employees unable to work.
Key takeaway: Whether you’re a sole trader or managing a small team, unforeseen health events can halt your revenue stream if you lack comprehensive business risk insurance.
ACC Coverage vs. Business Risk Insurance
What ACC Covers
ACC (Accident Compensation Corporation) is a no-fault scheme providing coverage for accidental injuries. Funded by levies on income and various other sources, it helps with:
Medical treatment and rehabilitation.
A portion of lost earnings (typically up to 80%) if you’re unable to work due to an accident.
ACC's Limitations
No Coverage for Illness or Chronic Conditions: ACC only covers injuries resulting from accidents. If you’re diagnosed with cancer, heart disease, or any chronic illness, ACC does not apply.
Insufficient Earnings Replacement: Even for accidental injuries, the 80% income replacement may not be enough to cover both personal and business expenses.
Business Overheads: ACC does not provide funds to keep your business running if you, or a key staff member, are out of action for a significant period due to illness or accident.
Key takeaway: ACC’s support is valuable for accidents but inadequate for many long-term health contingencies. This gap is where business risk insurance steps in.
Components of Business Risk Insurance
Life Insurance
What it covers: Pays out a lump sum to the policy’s beneficiaries (often the business or family) in the event of the insured’s death or terminal illness.
Why it matters: Can settle business debts, cover ongoing overheads, or facilitate a buy-out of the deceased’s shares, ensuring the business remains viable.
Impact on the business:
Buy-Sell Agreements: In businesses with multiple owners or shareholders, a buy-sell agreement funded by life insurance can ensure a smooth transfer of ownership if one owner dies. The life insurance payout is used by the remaining owners to buy out the deceased owner’s shares at a pre-agreed price. This prevents external parties (e.g., family members with no interest in running the business) from becoming involuntary co-owners.
Debt Repayment: If your business relies on loans or personal guarantees, the lump sum from a life insurance policy can cover outstanding debts, preventing creditors from seizing company assets.
Business Continuity: The funds can also be used for recruiting a replacement or for bridging short-term cash flow needs, ensuring daily operations continue with minimal disruption.
Example Scenario:
Buy-Sell Agreement in Action: Two partners, Alice and Bob, each own 50% of a small manufacturing business. They enter a buy-sell agreement and take out life insurance policies on each other. Alice unexpectedly passes away. Because of the buy-sell arrangement, Bob receives the insurance payout and uses it to purchase Alice’s shares from her estate. This ensures Bob retains full control while Alice’s family is fairly compensated.
Total and Permanent Disablement (TPD)
What it covers: Provides a lump-sum payment if you become permanently disabled and are unable to ever work again in your own or any suitable occupation (depending on policy definitions).
Why it matters: TPD cover can fund medical care, rehabilitation, or a complete business restructure if a key person can no longer return to work.
Impact on the business:
Funding a Restructure: The payout can be used to fund a reorganisation of the business if a key shareholder or senior staff member can no longer contribute. This might include hiring a full-time replacement or delegating responsibilities among current staff.
Business Partnership Agreements: Similar to life cover in a buy-sell arrangement, TPD can also trigger a share-buyout provision if a partner is permanently disabled.
Managing Cash Flow: If the disabled individual is essential to operations, the business can use the TPD benefit to ensure ongoing expenses (e.g., rent, wages, supplier payments) are met while a transition plan is implemented.
Trauma Cover
What it covers: Pays out a lump sum if you’re diagnosed with a specified critical illness such as cancer, heart attack, or stroke.
Why it matters: The Ministry of Health notes that heart disease and strokes are among the leading causes of hospitalisation and mortality. Trauma cover can be used for medical treatments not covered by the public system, or to keep your business afloat while you recover.
Impact on the business:
Covering Time Off: The insured can use the payout to cover personal or business overheads while undergoing treatment and recovery.
Protecting Revenue: If the insured is a key revenue driver—like a top salesperson or managing director—funds from a trauma payout can be used to hire interim support or invest in new processes to maintain revenue streams.
Specialist Treatments: Additional healthcare costs (specialist treatments, private surgery, rehab programs) can be covered, helping the key individual return to work sooner and reducing the overall impact on the business.
Key Person Insurance
What it covers: Compensates the business for the financial loss if a crucial employee (often an owner, director, or lead salesperson) dies or suffers a serious disability/illness.
Why it matters: Ensures business continuity. Funds from a key person policy can cover hiring a temporary replacement or bridging a gap in revenue during your recovery or recruitment process.
Impact on the business:
Revenue Protection: Replaces lost revenue or covers the costs to attract and train a skilled replacement.
Investor Confidence: Demonstrates foresight and responsible planning to stakeholders and investors, potentially improving investment terms.
Operational Continuity: Minimises the time your business spends in “crisis mode,” enabling a smoother transition if a key individual is suddenly unavailable.
Leveraging Cover Types
Many businesses choose to combine these covers for comprehensive protection. For instance, you might have:
Life Insurance paired with a Buy-Sell Agreement to secure ownership continuity.
TPD and Trauma Cover to protect against both permanent and temporary incapacity.
Key Person Insurance to ensure continued cash flow and stakeholder confidence.
Statistical Insights Supporting Business Risk Insurance
High Incidence of Chronic Illness: According to Cancer Society NZ, about 1 in 3 New Zealanders will have some experience with cancer (either personally or in their immediate family).
Longevity and Risk: Stats NZ data shows the average life expectancy in New Zealand is rising (around 81.8 years for men and 84.2 years for women). With increased longevity also comes a higher probability of facing a chronic illness at some stage.
Small Business Vulnerability: A 2020 study by the Financial Services Council found that 34% of New Zealanders have no form of life insurance, and 24% would struggle financially if they lost their primary income within four weeks. For business owners, that financial pressure is magnified if there are also employees and overheads to consider.
Key takeaway: Rising life expectancy and the increasing prevalence of chronic illnesses highlight the need for robust risk protection strategies, particularly among business owners.
Real-World Scenario: Where Business Risk Insurance Saved the Day
Consider a small accounting firm in Wellington led by two partners: Sarah and John. Sarah handles the majority of client relationships. She is suddenly diagnosed with a severe heart condition—an event not covered by ACC unless it results from an accident.
Trauma Cover: Because Sarah took out trauma insurance, she received a lump sum that covered her specialised treatment and rehabilitation costs.
Key Person Insurance: The firm also had key person cover on Sarah, which provided the business with funds to hire an interim accountant and keep the firm’s cash flow stable.
Outcome: Sarah’s recovery took several months, but because they had business risk insurance, the firm was able to retain clients and continue operating without financial devastation.
Structuring Your Business Risk Insurance
Identify Key Individuals: Determine whose death or disability would significantly harm the business’s revenue or operations.
Determine Coverage Levels: Consider both personal and business obligations—mortgages, loans, payroll, and ongoing overheads.
Tailor Policies: Work with a financial adviser (licensed to provide life insurance advice) to align policy types (Life, TPD, Trauma, Key Person) with your unique needs.
Review Annually: As your business evolves, ensure your cover keeps pace—particularly if you hire more staff, expand operations, or change your business structure.
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Conclusion
New Zealand’s ACC scheme is an excellent foundational safety net—but it does not cover the comprehensive range of risks faced by business owners, particularly when it comes to illness and death. By securing business risk insurance—Life, TPD, Trauma Cover, and Key Person Insurance—you create a robust financial buffer. This protection helps ensure continuity of operations, shields your personal finances, and maintains investor or family confidence in the event of life’s unforeseen health challenges.
By understanding the specific impact each cover option can have on your business, you’ll be better equipped to tailor a business risk insurance plan that aligns with your operational, financial, and partnership needs. Life Insurance can safeguard ownership structures through a buy-sell agreement, TPD can fund a business overhaul if a key person is disabled, and Trauma Cover shields you from the immediate financial shock of a critical illness. Meanwhile, Key Person Insurance ensures the business can quickly adapt and recover if a pivotal team member is sidelined.
Consult with one of our trusted financial advisors who specialise in Business Risk Protection products to structure these covers effectively—accounting for business size, industry risks, and the roles of key individuals. By doing so, you not only protect the investment you’ve poured into your enterprise but also provide stability for employees, partners, and families who depend on its success.
