They rightly deserve to be called the 'backbone' of our economy.

With over twenty years in the insurance industry, I have consistently seen the problems that these business owners face when they are unable to work, due to either sickness or accident.

Every working New Zealander contributes to ACC, either through their PAYE, or through invoiced levies, based on the industry they work in.

Why then do I have my self-employed clients, accountants, and other professionals tell me that this compulsory insurance will not work for most SME business owners at claim time?

There are a number of reasons.

Does the SME business owner split their income with their spouse?
For tax efficiency, a lot of accountants will suggest income splitting. The problem at claim time, is that the income that they show as being earned is not a true reflection of the person's actual earning capacity and, as such, any payments made from ACC resulting from a claim are substantially less.

An example of this is if Jim earns $100,000. His accountant could apportion $62,000 of this money to Jim and $38,000 to his spouse.

In the event of an ACC Claim, Jim will only get 80% of $62,000 which is $48,000. This is less than half of what he actually earned!

Can the SME business owner prove their loss immediately at claim time?
I am always concerned when I hear a SME business owner advise that their accounts aren't up to date, and they are still waiting for their accountant to prepare their financials. On ACC CoverPlus, ACC needs to see the last 3 years' financial statements to calculate an average of income over that time period. The delay in providing these statements means delays in any payment that ACC or an insurance provider will make.

These problems can be alleviated by ACC CoverPlus Xtra, which is the agreed value contract that ACC offers to self-employed people who take their income from business drawings.

It would be nice to think that this was the problem solved, BUT ACC only covers individuals for accidents. If a SME business owner has an illness that prevents them from going to work, they will not receive any ACC payment and, therefore, the importance of having other income or business revenue contracts in place is paramount to ensure the survival of the business entity during this time.

There are over 100 sets of policy wordings in the New Zealand market for income based insurance products. For a self-employed business owner, it is essential that they understand what type of contract they have, and how it would work in the event of a claim.

Questions to ask are:

What type of offsets does my contract have?

Are there partial payments available in the event of being able to only work part time?

Will this income be taxed when on claim?

Should I be claiming the premium as a tax deduction?

If you are unsure that you have the 'right' contracts, ask your advisor for a review.