Policies: Adequate cover a must!

External funding – in the form of an overdraft facility, a term loan or asset finance – is a normal aspect of business. Few entrepreneurs realise, however, that signing surety on behalf of their business can have a severe impact on their personal estates unless they have taken out adequate insurance cover, says Deon Theunis, an expert in this field.

“Most financial institutions require the owner of the business to sign surety for funding. If the owner dies or is permanently disabled, his or her estate may be called upon to settle the debt. This can place enormous financial pressure on the owner’s family members, as funds that should have been used for their maintenance will now go towards paying business debt,” he says.

Business owners need to ensure their personal estates and their concerns are protected through what is called contingent liability insurance, which pays off business debt if the owner dies. “Of all the financial planning needs entrepreneurs should consider, such as insuring against the loss of a key person, succession planning and cover for employees, contingent liability is by far the most important. Covering other insurance needs first is like putting the horse before the cart.

“Nearly all businesses have debt, and yet our statistics show that only three per cent of the business insurance policies we sell, are for contingent liability.”

Theunis says, “Most owners have an attitude of ‘it will never happen to me’. They do not realise the risk they are running. For example, we know of a recent case in which a bank repossessed a widow’s house because her husband, a successful business owner, had signed surety for a loan without having adequate risk cover in place.

“In another case, a widow and her son lost their family farm after her husband signed surety for an overdraft facility and was then killed in a freak accident. He had not put any protective measures in place to secure his debt.”

He says the implications of signing surety on behalf of an enterprise do not stop at the estate of the deceased or permanently disabled owner. It can have a ripple effect that could potentially ruin a thriving business.

For example, if the surety is called up against the estate of the deceased, and there is no liquidity in the estate to cover the surety, it could result in a claim against the business or the remaining owners who signed surety, usually jointly and severally.

Theunis says owners often do not fully understand what they are liable for and for how long, when they sign a suretyship document. “It is important to note that signing surety is usually required only for the term of the financing agreement or while the owner is involved in the business. When the loan has been repaid or if the person leaves the concern, the surety must be cancelled.

“If this is not done, the owner who stood surety at the time of the debt, will remain liable for it if the surety is called up by the financial institution.”

Contingent liability insurance usually takes the form of an insurance policy with life and disability cover, taken out by the business, which owns the policy and pays the premiums. These are not tax deductible, making the eventual payout free of tax.

Theunis says it is crucial to obtain expert advice from a qualified financial adviser before making any decisions on business insurance cover.

“Each owner has unique financial needs. A financial adviser can assist in prioritising these needs to protect not only the individual owner, but also the families and their business,” he concludes.