In South Africa, private companies often mitigate risks like key employees leaving or unforeseen business disruptions by relying on insurance policies. Keyman, Buy-Sell, and Contingent Liability Insurance are three such policies.
Keyman insurance shields a business from the financial impact due to the loss of key personnel, covering scenarios like death or disability. Premiums, typically paid by the business, are tax-deductible, but the proceeds payable to the Company on the happening of an insured event are taxable.
Buy-Sell insurance safeguards business owners' interests in the event of a partner's death, disability, or retirement. In this instance, the business owners typically conclude a Buy & Sell Agreement in terms of which they agree to purchase each other’s shares of the business at a predetermined price in the event of an insured event occurring. The insurance policy provides the funds necessary for the remaining owners to purchase the shares, allowing them to maintain control of the business.
If business owners provide personal surety and/or guarantee for the business, contingent liability insurance can be used to settle outstanding debts in the event of an insured event occurring, thereby releasing their security.
Understanding these policies, along with their tax implications and implications for estate and succession planning, empowers business owners to protect their assets and operations effectively.