What is business assurance?
When an owner or a key person dies or becomes disabled, both the business and that person’s family can be left short of money. Business assurance is life and disability cover arranged for a business reason. It usually covers three needs:
- buying out an owner who dies or becomes disabled;
- protecting the business if it loses a key person; and
- repaying business debts that an owner has signed surety for.
Buy-and-sell cover
A buy-and-sell agreement is a written contract between co-owners. If one owner dies or is permanently disabled, the others buy their share at a price, or using a formula, set out in the agreement. Each owner takes out cover on the others’ lives to pay for it.
- The owner’s family receives cash instead of a share in a business they may not want to run.
- The remaining owners keep control, without partners they did not choose.
For estate duty, the payout is not counted in the deceased owner’s estate if a co-owner took out the policy to buy their share and the deceased paid none of the premiums. The value of the share itself still counts in their estate, however, and capital gains tax can apply to it, because death counts as a disposal.
Key-person cover
The business insures someone it cannot easily replace, such as a founder or a key salesperson. The payout helps the business cope, for example by replacing lost profit, paying to recruit someone new or reassuring lenders.
The business chooses the tax treatment when the policy starts. If the policy agreement states that section 11(w) of the Income Tax Act applies, the premiums can be deducted and the payout is taxed. If not, there is no deduction and the payout is generally tax-free.
Contingent liability and loan account cover
Owners often sign surety for business loans, which means they promise to repay the loan personally if the business cannot. If an owner dies, the lender can claim from their estate, which reduces what their family inherits. Contingent liability cover pays off that debt.
If you have lent money to your business, your loan account is an asset in your estate, and the business may have to repay it. Cover can fund that repayment.
Things to know
- Keep agreements in writing, signed and up to date as the business changes.
- Make sure the policy ownership, the agreement and each owner’s will fit together.
- Tax and estate duty depend on how policies are owned and paid for, so check the rules before you set up cover.
Who it suits
Business assurance suits any business with more than one owner, or one that relies on a few key people or on loans the owners have signed surety for. It protects the owners’ families as well as the business.