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Insuring debt and liability

Content provided by Sanlam. See Financial Solutions for Business Owners, for tailormade financial advice.


There are various ways to ensure that your business does not go down or be tied up in endless red tape because of the debt or liabilities you have left behind at your death or should you become disabled.

Business debt

Definition

A business often ends up with significant debt, an overdraft balance owed for the purchase of excess stock, for example. The financial institutions and creditors often expect repayment of loans on the death or disability of one of the owners.

The death or permanent disability of the owner could place severe strain on the cash resources of the business.

The solution

The business must effect assurance on the lives of the owners, which is to be ceded to the financial institution or the creditors as collateral security. The assurance could be structured to pay out at the first death.

Contingent liability

Definition

The creditors of a business often expect someone, usually the owner, to sign surety in his personal capacity for the liabilities of the business. Should the surety die or become disabled, and the suretyship cannot be transferred to somebody else, the creditor may call in the loan immediately.

If the business cannot repay the loan, that person's estate will be held liable for the outstanding debt. A business is a valuable asset, built up by the dedication of its owners. Every care should therefore be taken to protect it for the generation of future income and as a cornerstone of wealth.

The solution

The business and the surety enter into an agreement in terms of which the business effects a non-conforming policy on the life of the surety. The business then cedes the policy to the bank to cover the liability. When benefits become payable as a result of death or disability of the surety, the proceeds of the policy are paid out to the bank and the surety is then discharged.

The benefits of a contingent liability plan

If a contingent liability protection plan is in place, the outstanding loan for which the guarantor stood surety will be settled on the death or disability of the guarantor. The business can pay debts without having to utilise valuable cash reserves, or relying on having to fall back on surety.

A substitute guarantor is not required and the business can continue operations without delays caused by uncertainties about debts that might be called up by creditors, who in turn are unsure about the future of the business after the death of an owner.

The executor of a deceased estate will not be required to use cash or assets to pay business debts. The full benefit can therefore be applied to the dependants and heirs, and the estate may be wound up speedily.

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