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Category Life Insurance

Managing business risks in the current economic environment

11 May 2022 Hannemie Mulder, Technical Specialist at PPS Specialist Support Services
Hannemie Mulder, Technical Specialist at PPS Specialist Support Services

Hannemie Mulder, Technical Specialist at PPS Specialist Support Services

In an uncertain world where markets are volatile, interest rates are rising and a war is raging, it is easy to lose perspective and focus on those events over which we have no control over and cannot change.

In PPS’s annual Professional Market Survey compiled by Catalyst Research and Strategy, we gauge our members’ perceptions on several issues affecting their professions, including unemployment. The majority of the participating members agreed that the main effect was that skilled professionals could not find appropriate jobs and were emigrating. Another common trend was that professionals are over-worked due to staff shortages.

When asked about the impact of the COVID-19 pandemic on their businesses, most participants believed that business opportunities decreased and their income reduced by more than 20%. An overwhelming majority of the participating members believe South Africa should focus on economic recovery over the next 12 months.

This study resonates with many professionals and it is easy to be drawn into uncertainties about the future. However, Steve Maraboli, in his book Life, The Truth and Being Free says that “incredible change happens in your life when you decide to take control of what you do have the power over instead of craving control over what you don’t”.

So, instead of worrying about events we cannot change, let us focus on what is important and in our control. One way to do this is to focus on addressing one of our biggest concerns: How do I protect myself, my family, my business and my employees against all these variable uncertainties?

One of the easiest ways to achieve this is through business assurance. Business assurance refers to various life assurance solutions that protect the business owner against risks that might arise from the owner’s death, disability and critical illness. These factors are known as wealth altering events.

They have a primary effect on the business owner and – in the case of a deceased business owner – his or her estate. However, they also have a secondary impact on the business, remaining owners and employees.

In my experience, business owners are so focused on building and expanding their businesses (and rightly so) that they are often unaware of the various risks that their personal estates and the business can face. Therefore, it is critical for each business to do a business needs analysis regularly to identify the various risks and put in place a proper risk mitigating solution to address the identified risks.

The main risks the business owner and the business can face are as follows:

Buy and sell
• Risk: If one of the business owners dies or becomes disabled, what will happen to their shareholding in the business?
• Solution: The business will be sold to the remaining owner(s) or a third party. A buy-and-sell agreement is put in place to enforce and regulate the sale, while a life insurance policy will be used to fund the sale.
• Advantage: Avoids the deceased owner’s share in the business being inherited by the family who cannot and/or are not qualified to continue with business operations. Provides liquidity in the deceased owner’s estate for the benefit of the deceased’s beneficiaries and ensures continuity of the business.

Credit loan
• Risk: Where a business owner has a credit loan account in the business, this loan account is an asset in their estate on their death. Once the business owner passes away, their estate has a claim against the business to settle that loan.
• Solution: A credit loan policy is put in place by the business to provide the business with the necessary liquidity to settle the loan.
• Advantage: This type of cover provides liquidity to the company to pay the claim, which they might not have had at that stage. It also ensures that the administration of the deceased partner’s estate is not delayed as a result of the company’s lack of sufficient cash to pay the claim.

Contingent liability
• Risk: Where a business owner has signed a personal surety for a debt due by the business, they bind their personal estate to that business debt.
If the company does not settle the loan, for whatever reason, the financial institution can claim settlement of the loan from the owner or their estate which in turn can have a devastating effect on the owner and/or their beneficiaries in their estate.
• Solution: A contingent liability policy can be taken out to insure the outstanding loan. Should the surety still be in place when a wealth altering event occurs, the cover will pay out to the company, which in turn is obliged to settle the loan. A contingent liability agreement is put in place to compel the company to use the proceeds from the life assurance to settle the loan.
• Advantage: Insuring the contingent liability risk provides the business with sufficient liquidity to settle the business debt, thereby releasing the deceased’s estate from the surety once cancelled in writing.

Keyperson
• Risk: A keyperson is usually someone (owner or valuable employee) who is key in the management or operations of the business. Should this person no longer be able to work due to a wealth altering event, the business will be severely impacted.
• Solution: The company puts a policy in place insuring them against the loss of the keyperson. This cover is used to supplement the business’s income until it can recover the losses made or to recruit and appoint a new person in the keyperson’s place.
• Advantage: This cover ensures the continuity of the business and protects the business against any unnecessary losses.

The common thread in all the business assurance solutions is that it provides certainty and financial liquidity. Business assurance is instrumental to any succession and financial planning process.

Appropriate, tailored solutions protect your business against the inevitability of the future. In summary, it helps you control what is in your control.

Contact your trusted financial adviser today for more information on business assurance.

Quick Polls

QUESTION

There are countless articles written about South Africa’s poor retirement outcomes. Which of the following would you single out as the biggest contributor to local savers not accumulating enough to buy an adequate and sustainable pension?

ANSWER

Lack of personal accountability
Poor participation in formal retirement funds
Reluctance to seek financial advice early on
SA’s high unemployment rate
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