OPINION: How life cover can protect your business
Take, for example, Sipho Dlamini and his business partner, Mayra Banks, who own a small gym in Johannesburg. They know that their business and families could be faced with tough times if anything should happen to one of them, because life cover is still on their to-do list. The people counting on them could be left with nothing but start-up debt, running costs and general living expenses usually covered by the business.
A business should take out life cover on principal members and make the business the premium payer, too.
In accordance to Section 63 of the Long Term Insurance Act, the proceeds of the policy will go directly to the owner of the policy (in this case, the business) and not to the estate of the deceased.
The business will have funds to use in the business or to pay off loans or debt.
Insufficient planning can lead to the business having to liquidate or sequestrate, which is a lengthy and costly process.
In the case of Sipho and Mayra, if the business took out a life policy on their individual lives, and Mayra should suddenly die, Sipho would receive the proceeds of the policy in the business to apply as he, as the sole shareholder of the business at that stage, wishes.
There are two types of life cover policies for business owners to consider to guarantee the continuation of their business should something happen to them or the key people in their operation.
* Key-person insurance is for the owner and any key person in the business who is a main contributor to the business. Having this policy in place will help the company to withstand the loss of the person that made the business work. The proceeds can be used to keep the company afloat while finding a replacement person and paying for the costs of doing so.
* Buy-and-sell agreements. By putting buy-and-sell agreements in place, a business can ensure the smooth transfer of shareholding between partners and guarantee that, no matter what happens, there is continuity for the business.
Finally, business owners should consider a couple of factors when taking out life cover to mitigate the risk exposure of the key people, as well as the risk to team or company. These include the net worth of the business, insurable interests between parties and succession planning for the business.
Usually, an experienced or knowledgeable financial planner would be able to conduct the calculations, as well as provide guidance on the legal and technical aspects of the transaction.
The most important aspect of taking out life cover as a business owner or entrepreneur is a solid, fool-proof contract between all parties and the contracting insurance company.
Ernest Zamisa is a financial planner at Momentum.