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Life Assurance
Sunday, February 1, 2004
Getting personal

Few businesses are ever loan-free. Generally the lender requires some kind of security for the loan in the form of a pledged asset, covering mortgage bond or the signing of a surety ship or guarantee by a director, member or shareholder of the business.

“However, should the guarantor die, resulting in the creditor calling up the surety ship or guarantee, he or she can lose a personal asset,” warns Chris Marx, Senior Legal Advisor, Metropolitan Odyssey. “The business can also suffer if there are too little funds to pay the loan.”
To avert this, he suggests that businesses take out a policy on the life of the guarantor and enter into a written Contingent Liability Agreement with him or her. “The business thereby undertakes to use the proceeds of the policy to repay the loan. It is also advisable to ensure that a disability benefit is included and that the amount of the cover should equal the loan.”

Income Tax Implications. Such a life policy may be conforming in terms of section 11(w) of the Income Tax Act. If it is, premiums will be tax deductible, but the proceeds will be taxable in the hands of the business. Allowance in the form of higher cover would therefore have to be made for tax.
If the policy is non-conforming, the premiums will not be tax deductible but the proceeds will be tax-free.
Estate Duty Implications. If the contingent liability arrangement is correctly structured, the  amount of life cover on the life of the deceased will not be taken into consideration when calculating the value of the deceased’s gross estate and thus will not be subject to Estate Duty.

Contingent liability presents a number of advantages:
• The liability of the business is settled in full.
• The financial position of the business is not compromised.
• The continuity of the business is assured.
• There is minimum disruption to the day-to-day running of the business.

There are similar offsets for the guarantor:
• The personal estate of the deceased is not depleted of funds.
• There is no delay in the winding-up of the estate.
• The lifestyle of the dependants will remain as planned.
• There will be no additional estate duty liability.

Copyright © Insurance Times and Investments® Vol:17.1 1st February, 2004
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