Your business: how to structure contingent liability insurance

As a business owner, signing surety on behalf of your business – for instance for a loan, overdraft facility or asset finance – can be risky. The most effective way to protect yourself is by taking out contingent liability insurance. Without it, your personal estate may be affected if you should die or become permanently disabled, with possibly dire financial consequences for both your business and your loved ones.

Contingent liability insurance usually takes the form of an insurance policy with life and disability cover. Deon Theunis, head of distribution support of Sanlam Business Market, explains: “The cover is taken out on the life of the business owner for an amount equal to the amount for which the owner had stood surety. The policy is often ceded to the funding institution for security.”

He says there are two ways of structuring such a policy. “It can be owned either by the business itself as the policyholder (where the business pays the premiums), or by the business owner personally. We definitely recommend a company-owned policy structure, mainly because of complications which may arise if the business owner is the policyholder.”

The party who receives the benefit is obliged to pay the estate duty. The company gets the benefit of the policy (the company’s loan gets repaid by the proceeds of the policy), but where the business owner is the policyholder, the policy is paid out to the estate of the owner. The estate will have to pay the estate duty and then claim it back from the company. This will delay the winding up of the owner’s estate.

The tax implications of the two structures are:

Theunis says it is most important to obtain expert financial advice from a qualified financial adviser before deciding on a policy structure for contingent liability insurance. “A financial adviser can analyse business owners’ particular needs as well as the tax implications of covering these needs, and ensure that the contingent liability problem is solved without any unnecessary surprises for their families later on,” he says.