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Understanding business life insurance as a SME

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As a small business owner, one of your primary objectives entails safeguarding your business against financial risks that could threaten the profitability and sustainability of your entity in the unfortunate event that you lose a key member or employee.

Lee Bromfield, FNB Life CEO, says every business, regardless of its size, should consider taking out business life insurance as protection against potential losses caused by the death, disability or terminal illness of a key employee or owner. The policy is taken up by and managed by the business, depending on your business type, it is essential that you have adequate cover that covers the critical contributor, and the business partners’ interests while also protecting the business against outstanding debts.

“Moreover, this cover should be reviewed regularly as the business grows or changes its structure,” adds Bromfield as he unpacks key reasons why having business life insurance should be non-negotiable:

  • Personal life cover is not enough – This type of cover is designed to cater for the financial needs of your family, instead of business-related expenses. In the event that it is used for business related liabilities, this could result in a shortfall of cover – intended for family or beneficiaries.
  • Loss of skills and knowledge  The loss of a key contributor due to death or permanent disability can have negative repercussions for the business such as lost production, and delays in executing the business strategy which can ultimately affect the business’ growth prospects.
  • Unmanageable debt from loans you stand surety for – Mostly, businesses which utilise credit solutions won’t have enough funds to settle the debt, this can result in a debt spiral for the business, the partners and family members, should the individual concerned pass away.

For example, in a situation where a deceased was a sole trader and married in community of property, the surviving spouse would:

  • be left to deal with estate administration costs,
  • inherit the debt obligations,
  • attract legal fees and
  • experience cash flow issues due to the debt, amongst other expenses.

All this while deciding the fate of the business, planning a funeral and maintaining some semblance of normalcy.

  • Ensuring a smooth transition for the remaining co-owner/s – Should a co-owner pass away, the remaining owners will be adequately covered and have enough cash flow to ensure that business operations aren’t interrupted while planning for a replacement.

“Lastly, there may be instances where a deceased business owner has taken out loans backed by family assets to start or grow a business – if the family is not well equipped to manage the business affairs, that gap may leave their estate exposed, as can be expected during these tough economic times” concludes Bromfield.

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