By: Clyde Parsons
Small and medium enterprises (SMEs) are pivotal to South Africa’s economy, driving innovation, job creation, and economic growth. However, they are often vulnerable to financial and operational disruptions if the owner becomes disabled or passes away unexpectedly. The sudden loss of a business owner can lead to complex challenges, such as settling debts, transferring ownership, and ensuring business continuity. Proper contractual agreements and life insurance are vital in protecting these enterprises and ensuring their sustainability.
Protecting the estate and the business
When a business owner passes away, their estate – including assets, liabilities, and business interests – will need to be settled as quickly as possible. Without a full understanding of the business’s financials, settling outstanding credit agreements, loans, and supplier payments can become complex and time-consuming, potentially leading to insolvency or forced asset liquidation within the estate, where those assets were mostly likely meant to provide for financial dependants.
Clear documentation and a financial plan of the company’s financial obligations, such as credit agreements and loan terms, is essential to prevent costly delays or legal battles. An estate plan that reflects the owner’s intentions for the business, including succession plans and asset transfers, can further ensure smooth continuity.
The role of life Insurance in business continuity
Life insurance provides crucial financial support to the business during the period when the owner’s estate is being settled. This is particularly important for businesses carrying significant debt. Without liquid capital, creditors may demand repayment through the sale of assets, disrupting operations and crippling the company.
Having life insurance policies structures to cover business-related needs can keep the business running smoothly. It ensures that employees are paid, suppliers are covered, and operations continue uninterrupted until a new ownership structure is in place. Key types of life insurance that can support SMEs include:
Contingent liability insurance: This type of insurance covers major debts. If a shareholder has signed surety for a business loan and they pass away or become permanently disabled, this insurance ensures that the loan is repaid, preventing financial strain on the business and a depletion of the shareholder’s personal estate;
Buy-and-sell agreements: These agreements allow the remaining co-owners to buy the interest of a deceased or disabled business owner. Life insurance policies provide the necessary liquidity to complete these transactions smoothly, protecting both the business and the owner’s estate;
Key person insurance: This insurance compensates the business for financial losses due to the death or permanent disability of a crucial member of the business, helping stabilise operations and assist with recruiting a new keyperson during the transition period.
Addressing affordability and flexibility in business insurance
Business owners should consider getting life insurance with a flexible approach, allowing them to match their coverage to their specific needs, at the same time ensuring that premiums are affordable over the full duration of the business need. This method reduces premium waste and allows owners to allocate savings to other business needs or increase coverage in the event of underinsurance.
For businesses experiencing growth beyond expectations, insurers provide an extra cover buy-up account. This enables owners to increase coverage without additional medical underwriting, ensuring that insurance can adapt to the evolving needs of the business.
A holistic approach to SME risk management
The unexpected death or disability of a business owner should not spell the end of the enterprise they built. Comprehensive planning and well-structured life insurance can protect SMEs from significant risks. By ensuring that business debts are settled, ownership is transferred smoothly, and operations continue uninterrupted, SMEs can maintain their trajectory and safeguard their legacy. Taking this into account, business owners need insurance that understands the unique challenges faced by SMEs, and can be tailored to their needs.
* Parsons is a chief innovation officer at BrightRock Insurance.
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