Risk planning could take part of many forms and many people are sometimes penny wise and pound foolish when they act hastily in setting up structures.

Risk planning started when ships travelled from Europe to other countries, losing fingers, arms, legs and their lives. These sailors could pay a small fee to cover each body part and is known today as functional impairment. Insurance has developed into better cover across the globe.

Keyman Insurance

Keyman insurance is an arrangement whereby an employer insures the life of a key employee for the purpose of compensating for the loss of income that the employer would suffer in the event of the employees death or disability thereby ensuring the successful continued business operation.

Keyman insurance guarantees that cash will be able to absorb any disruptions to the business protecting existing credit facilities and provide the necessary funds for the recruitment and training of a replacement.

The employer will be able to deduct the premiums for income tax purposes if the policy conforms to section II(w) of the Income Tax Act. No income tax implications are incurred by the employee. The proceeds will be taxable in the hands of the employer if the premiums were deductible in terms of section II(w).

Buy and Sell

Buy and sell insurance should be taken out by the co-owners of the business to ensure that there will be funds available to purchase deceased or disabled co-owners interest.

Each co-owner will consequently own a policy on the life of the other and pay the premiums under the policy of which they are the owners. When more than one co-owner is involved, the policy on the life of each co-owner will be co-owned by the other co-owners, proportionate to their interest in the company.

The premiums are not tax deductible by the co-owners as the proceeds will be tax-free.

Contingency Liability

A contingent liability arises when one or more co-owners sign surety for the loans or other credit facilities of the business. The co-owner/s will therefore be bound jointly and severally for payment of the debt incurred by the business.

The policy should preferably include disability cover and the amount of life and disability cover should be equal to the loan amount. The business pays the premiums and an agreement is entered into between the business and the member / co-owner in terms of which the business undertakes to apply the proceeds of the policy to the repayment of the loan giving rise to the personal guarantees given by the member / co-owner.

If the policy is conforming the proceeds will be taxable in the hands of the employer.

There has been dramatic development on this subject in 2011 and many business owners do not have the correct documentation which has put themselves, partners and workers at risk.

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