Around about now, most South Africans are sitting up and taking notice of the impact on our lives of increased interest rates and the occasionally, nearly frightening fuel prices.
Many of us have living the last couple of years in some form of excess - enjoying the fruit of a lifestyle bought on credit at lowish interest rates.
By the time interest rates started their inevitable ascent up the other side of the cycle, many had already committed the last remaining cents of disposable income to repayments on a further advance on their bond used to buy something shiny and exciting.
Of course when the interest rates go up, so do bond and car payments, credit card and overdraft interest charges. An already stretched budget could snap (with a load twang!) whilst trying to make ends meet.
If you find yourself breaking into a cold sweat each time you get the bills each month, you may want to consider taking some positive action.
First of all - draw up a budget. In detail. Taking stock of exactly where you are is the first step to solving any problem.You should should know exactly what your income is, what your expenses are, your outsanding debt, the interest rates and the number of payments remaining.
Most of the time, just doing that triggers your natural creativity - and common sense - into figuring out a way to address the problem. Whatever you come up with, write a written plan and make sure the steps ofthat plan end up in your diary for execution, or you will have simply done an admin workout.
So many people don't seem to know quite where to start - so they dont. Some hope that ignoring the situation will force it to go away. But they just end up with sand in their ears.
With this national crisis in mind, I am considering putting a workshop/seminar together to guide and equip you in the area of personal budgeting. It would cover skills like budgeting, understanding the various debt instruments available to you, managing debt, eliminating debt, getting the most from a homeloan as well as other useful topics.It would provide tools and templates to assist with each technique shared.
Before I invest time and effort putting the material together, I need to know if you would value a seminar like this one.
Please mail me and tell me if you'd consider attending a seminar of about 3 hours duration (presented on an evening or Saturday) covering this topic and what you think you would be prepared to pay for it assuming you would be provided with notes, templates and possibly computer based tools to help you use the material. If you have any ideas as to what would be important to include in the material, I'd like to know. If you are a manager in a business, would you consider sending your staff on such a seminar.
Tuesday, June 16, 2009
Today's Gain - Tomorrow's Pain
With so many expenses rising, all of us are looking out for ways to save on anything we can.
Many people are looking at their insurance portfolios to find savings opportunities.
Savings in insurance premiums can come from a variety of sources including the following:
Get the same cover at better rates
People are often misled by unscrupulous brokers when searching for savings in this manner.
Two main things can go wrong.
The first is that replacement insurance may be cheaper because it is in fact inferior. Most people think of life, disability and dread disease cover as being the same from every supplier. It isn't. There is some prettty cheap and nasty cover out there that may be completely unsuitable for you, so it is really important to look into the detail of what you are being offered if it is cheaper.
The second common mistake is that a product is presented as having a lower premium, but on closer inspection it is only lower at the outset and it escalates in the future - sometimes resulting in a far worse deal than the one you have. Human nature is to only consider the present and defer consideration of the future until it becomes the present. This can be expensive.
Brokers who make a dishonest living by "churning" policies - that is, replacing existing policies, usually prey on people who do not examine the details - they look only at the premium on the quotes front page and assume they are getting a better deal.
Reduce Cover
I have not often met an individual who is over-insured. Reducing cover should only be done with careful consideration of the consequences you had in mind when you first took the cover. When times are hard (like now) the financial impact of a death, disability or dread disease is worse than ever.
Premium Restructuring
Despite the warning above regarding changing to a lower premium that becomes a higher premium in the end, it may be better to do this than to reduce benfits. There are three main premium structures out there that result in varying rates with a given insurance company for identical benfits.
The first is known as the "level premium basis". The premium quotes is guaranteed to stay the same (except for any voluntary escalation you may select) for a specific period of time.
The second is the 'compulsory escalation basis". The premium starts off lower than for the level basis, but escalates at a fixed rate per annum (often 5%). Eventually it becomes more expensive than the level premium, but this can be justified by comparing this cost with most other costs that escalate annually. 5% seems like a reasonable average price escalation and you may feel that since your income probably will also escalate at least at this rate, you are paying the same in real terms. The third premium structure is known as the "age rates basis". In this case your premium is increased every year (or longer period)based on your age. The premium would be the same each year as it would have been if you applied for the policy the first time in that year. This premium is in many cases the lowest of the three options initially. It is necessary to look carefully at your quote to see what future premiums may be. Some companies give an assurance that when the guarantee period expires and your rates come up for review, that they will not increase premiums beyond a certain threshold. This is also an important factor.
Is there a better deal out there?
Sometime there is a better deal, but it is a composite picture including cost of cover, quality of cover, premium structure and various issues like flexibilities, underwriting approach, claims process and payouts.
I am becoming very aware that despite all the laws set up to prevent it, many brokers are being persuaded to push a particular company's product based on incentives like overseas holidays and because of this, they turn a blind eye to the pitfalls of certain products and push them enthusiastically and aggressively to the client's detriment.
A broker's disclosure note is required to disclose the percentage of his income from any one company that exceeds 30%. Be warty when almost all income comes from a single product house - you have to consider that your advisor may not be an adviosor at all, but simply a representative for the company that gives him the best deal.
Your finnacial advisor should be comparing options for you and advising based on a range of factors, not just price.
Many people are looking at their insurance portfolios to find savings opportunities.
Savings in insurance premiums can come from a variety of sources including the following:
Get the same cover at better rates
People are often misled by unscrupulous brokers when searching for savings in this manner.
Two main things can go wrong.
The first is that replacement insurance may be cheaper because it is in fact inferior. Most people think of life, disability and dread disease cover as being the same from every supplier. It isn't. There is some prettty cheap and nasty cover out there that may be completely unsuitable for you, so it is really important to look into the detail of what you are being offered if it is cheaper.
The second common mistake is that a product is presented as having a lower premium, but on closer inspection it is only lower at the outset and it escalates in the future - sometimes resulting in a far worse deal than the one you have. Human nature is to only consider the present and defer consideration of the future until it becomes the present. This can be expensive.
Brokers who make a dishonest living by "churning" policies - that is, replacing existing policies, usually prey on people who do not examine the details - they look only at the premium on the quotes front page and assume they are getting a better deal.
Reduce Cover
I have not often met an individual who is over-insured. Reducing cover should only be done with careful consideration of the consequences you had in mind when you first took the cover. When times are hard (like now) the financial impact of a death, disability or dread disease is worse than ever.
Premium Restructuring
Despite the warning above regarding changing to a lower premium that becomes a higher premium in the end, it may be better to do this than to reduce benfits. There are three main premium structures out there that result in varying rates with a given insurance company for identical benfits.
The first is known as the "level premium basis". The premium quotes is guaranteed to stay the same (except for any voluntary escalation you may select) for a specific period of time.
The second is the 'compulsory escalation basis". The premium starts off lower than for the level basis, but escalates at a fixed rate per annum (often 5%). Eventually it becomes more expensive than the level premium, but this can be justified by comparing this cost with most other costs that escalate annually. 5% seems like a reasonable average price escalation and you may feel that since your income probably will also escalate at least at this rate, you are paying the same in real terms. The third premium structure is known as the "age rates basis". In this case your premium is increased every year (or longer period)based on your age. The premium would be the same each year as it would have been if you applied for the policy the first time in that year. This premium is in many cases the lowest of the three options initially. It is necessary to look carefully at your quote to see what future premiums may be. Some companies give an assurance that when the guarantee period expires and your rates come up for review, that they will not increase premiums beyond a certain threshold. This is also an important factor.
Is there a better deal out there?
Sometime there is a better deal, but it is a composite picture including cost of cover, quality of cover, premium structure and various issues like flexibilities, underwriting approach, claims process and payouts.
I am becoming very aware that despite all the laws set up to prevent it, many brokers are being persuaded to push a particular company's product based on incentives like overseas holidays and because of this, they turn a blind eye to the pitfalls of certain products and push them enthusiastically and aggressively to the client's detriment.
A broker's disclosure note is required to disclose the percentage of his income from any one company that exceeds 30%. Be warty when almost all income comes from a single product house - you have to consider that your advisor may not be an adviosor at all, but simply a representative for the company that gives him the best deal.
Your finnacial advisor should be comparing options for you and advising based on a range of factors, not just price.
The Pareto Principle and Your Budget
The Pareto principle (also known as the 80-20 rule) states that, for many events, roughly 80% of the effects come from 20% of the causes.
The rule can be re-phrased to apply to almost any situation - and astoundingly - it proves to hold true in almost every case.
Pareto offers a simple, but cunning tool to help zoom in on what really matters. If you need significant results from minor adjustments, Pareto is your man. With just a little thought, Pareto gives you maximum leverage for your effort.
If we're talking about your monthly personal budget, you could write the principle like this:
20% of what you buy accounts for 80% of what you spend.
So if you are trying to trim down a size-up budget, the most effective place to start working out is in your top 20% budget items where a small adjustment has a significant impact. Practically put, a 10% saving on a R10 000 expense is better than a 50% saving on dishwashing liquid.
The rule can be re-phrased to apply to almost any situation - and astoundingly - it proves to hold true in almost every case.
Pareto offers a simple, but cunning tool to help zoom in on what really matters. If you need significant results from minor adjustments, Pareto is your man. With just a little thought, Pareto gives you maximum leverage for your effort.
If we're talking about your monthly personal budget, you could write the principle like this:
20% of what you buy accounts for 80% of what you spend.
So if you are trying to trim down a size-up budget, the most effective place to start working out is in your top 20% budget items where a small adjustment has a significant impact. Practically put, a 10% saving on a R10 000 expense is better than a 50% saving on dishwashing liquid.
Milestones in Your Financial Journey
You'll probably agree that the journey to financial security is a long and challenging one.
Like every journey a destination is an important component - or how will you know when you've arrived? Have you established a clear idea of where you want to end up - financially speaking. And When?
Having set your destination, you can pack your bags and go. don't forget to fuel up as you are going to need a lot of energy to speed on your way to success.
When I drive, with my wife and screaming children - and occasionally my screaming wife, and children;-) - I stop often at one of the many food/fuelling stops along the road to get some fresh air. These are the milestones in my journey. At each stop I check to see that there is anough fuel in the tank to get me to the next one (more important these days with the Landrover) and make sure we all have enough water and toffees to keep me awake and everyone else quiet.
In your financial journey, there are milestones along the way where you should take a moment to evaluate your financial needs and your current status. Nothing like running out of fuel in the middle of nowhere! Here are some of the milestones that I believe are important times to review financial matters:
Just to be safe, just as you constantly monitor the instrument panel while driving, you should make egular checks on your progress and the condition of your finances.
"When a person with experience meets a person with money, the person with experience will get the money. And the person with the money will get the experience"Leonard Lauder
Like every journey a destination is an important component - or how will you know when you've arrived? Have you established a clear idea of where you want to end up - financially speaking. And When?
Having set your destination, you can pack your bags and go. don't forget to fuel up as you are going to need a lot of energy to speed on your way to success.
When I drive, with my wife and screaming children - and occasionally my screaming wife, and children;-) - I stop often at one of the many food/fuelling stops along the road to get some fresh air. These are the milestones in my journey. At each stop I check to see that there is anough fuel in the tank to get me to the next one (more important these days with the Landrover) and make sure we all have enough water and toffees to keep me awake and everyone else quiet.
In your financial journey, there are milestones along the way where you should take a moment to evaluate your financial needs and your current status. Nothing like running out of fuel in the middle of nowhere! Here are some of the milestones that I believe are important times to review financial matters:
- At the start of a career; goals need setting, a commitment to savings must be established and an understanding of what type of disability assurance one requires should be investigated.
- At every salary increase,promotion or change of employer; savings, insurance and corporate benefits should be reviewed
- When debt is entered into; budgeting should be addressed and possibly insurance
- When marriage is contemplated; An antenuptial conract and will is needed and new insurance requirements need consideration as well changes to savings habits based on adjusted goals in a new life phase
- When a business is started; Estate structuring and insurance become important as well as partnership and loan agreement that affect financial matters. Adjustments to savings habits are likely to be needed as well as tax planning.
- When a child is concieved; insurance now becomes highly important, savings for education costs, your will and estate planning need changing
- When you are within 10 years of retirement; start understanding your options.- At retirement; your investment change drammatically, your will and estate planning need review as does your budget.
Just to be safe, just as you constantly monitor the instrument panel while driving, you should make egular checks on your progress and the condition of your finances.
"When a person with experience meets a person with money, the person with experience will get the money. And the person with the money will get the experience"Leonard Lauder
About Dread Disease Insurance
Having extracted as much premium as they can for death and disability insurance, Life Assurance companies have innovated yet another form of insurance to help them part your hard earned money from you.
And to make sure you are suitably terrified not to buy it, they have named it "dread disease" cover. The name alone inspires shivers down one's spine.
Regardless of my cynicism, this kind of insurance, more subtly described as "severe illness" or "critical illness" insurance has an important place in your portfolio.
So what does it cover and what role does it play? Do you need it?
Dread Disease cover addresses the financial consequences of severe illnesses like cancer and heart disease (and a hospital full of other really nasty ailments). These illnesses very often have a severe impact on your life, but are not covered by disability insurance because they do not always result in a permanent inability to do your job. Consider someone who must undergo chemotherapy. Once sick leave and annual leave is used up, any time off needed to deal with the side effects of such severe treatment results in loss of income. A lump sum payment from a dread disease claim would buy a little welcome time off. The payment could also cover any shortfall of medical aid benefits that may crop up - funny how that happens for traetments that do not invovle full-time hospitalisation!
Many companies also make provision for dread disease cover for your children - you may find you need more time off for them than you would for yourself. Basically, covering dread disease provides for continued financial security amidst a temporary (hopefully) crisis.
And don't think you are immune from these diseases; Death claims from illness as well as dreads disease claims are primarily from cancer and heart disease - the statisics are frightening. Increased stress and poor eating habits are increasing the likelihood of these two conditions dramatically.
Many of you will have taken at least some of this cover when you took life insurance, but most of you don't enjoy paying insurance premiums and have either taken small amounts of dread disease cover or have excluded it completely. I'd like you to reconsider.
You can add dread disease cover onto your existing policy or you can take a dread disease policy on it's own.
For the detail oriented, here are some basic technical tidbits:
Many people have benefits that pay only for severe incidences - better cover may cost a litle more, but could really be a real help.
Over the last few years, big advances have been made regarding dread disease cover and if you wish to have excellent benefits, you may wish to ask us to discuss this cover with you.
And to make sure you are suitably terrified not to buy it, they have named it "dread disease" cover. The name alone inspires shivers down one's spine.
Regardless of my cynicism, this kind of insurance, more subtly described as "severe illness" or "critical illness" insurance has an important place in your portfolio.
So what does it cover and what role does it play? Do you need it?
Dread Disease cover addresses the financial consequences of severe illnesses like cancer and heart disease (and a hospital full of other really nasty ailments). These illnesses very often have a severe impact on your life, but are not covered by disability insurance because they do not always result in a permanent inability to do your job. Consider someone who must undergo chemotherapy. Once sick leave and annual leave is used up, any time off needed to deal with the side effects of such severe treatment results in loss of income. A lump sum payment from a dread disease claim would buy a little welcome time off. The payment could also cover any shortfall of medical aid benefits that may crop up - funny how that happens for traetments that do not invovle full-time hospitalisation!
Many companies also make provision for dread disease cover for your children - you may find you need more time off for them than you would for yourself. Basically, covering dread disease provides for continued financial security amidst a temporary (hopefully) crisis.
And don't think you are immune from these diseases; Death claims from illness as well as dreads disease claims are primarily from cancer and heart disease - the statisics are frightening. Increased stress and poor eating habits are increasing the likelihood of these two conditions dramatically.
Many of you will have taken at least some of this cover when you took life insurance, but most of you don't enjoy paying insurance premiums and have either taken small amounts of dread disease cover or have excluded it completely. I'd like you to reconsider.
You can add dread disease cover onto your existing policy or you can take a dread disease policy on it's own.
For the detail oriented, here are some basic technical tidbits:
- Your cover can be for serious incidences only; cheaper and pays the whole amount of cover when a claim is admissible, or it can allow for less serious incidences and pay varying amounts based on the severity of the condition.
- Dread disease can be limited to a shorter list of diseases or can address the issue more comprehensively.
- Dread Disease can be an advance payment of life cover (Your dread disease claim reduces your death benefit) or it can be a separate insured amount.
Many people have benefits that pay only for severe incidences - better cover may cost a litle more, but could really be a real help.
Over the last few years, big advances have been made regarding dread disease cover and if you wish to have excellent benefits, you may wish to ask us to discuss this cover with you.
The Last investment You'll Ever Need
Often the cleverest of concepts is also the simplest.
Imagine if a single, powerful investment just simply did what you need it to do.
Well it does.
Imagine if a single, powerful investment just simply did what you need it to do.
Well it does.
- Invest with the fund manager of your choice or all of them at once
- Change your mind...then change it back, becaus eyou can
- Invest for as long or short as you like, no need to commit to a specific term
- Start and stop contributing whenever without lapses or penalties
- Withdraw some or all of your funds any time.
- Manage your investment yourself... or get it done for you
- Complex or simple; risky or safe - up to you.
- Great for accumulating capital or for drawing income from capital - investment adapts to your needs
- Transparent fee structure
Whether you are investing your savings; need the tax benefits of a Retirement Annuity; investing your retirement fund on resignation or you are retiring and need a pension income this will do it for you.
A LISP (Linked Investment Service Provider) is a Unit Trust based investment that brings the "universe" of investment funds onto a single platforma nd allows the structuring of an investment portfolio tailored for you.
Protect Your Income
Can you imagine what it would be like if your income suddenly reduced or dissapeared?
If you were injured or ill, this would generally be the case - especially if you work on a commission basis or are self employed.
Did you know?
If you were injured or ill, this would generally be the case - especially if you work on a commission basis or are self employed.
Did you know?
- That you can insure your income.
- Most people do not have income protection or do not have nearly enough.
- Income Protection insurance is reasonable priced.
- Income Protection covers temporary disability and permanent disability.
- Income Protection covers partial disability.
- Contributions you make to income protection are tax-deductible.
- Most disability cover only pays out for total and permanent disability and only after around six months of waiting.(if it hasn't lapsed because you can't afford to pay your premiums because you are disabled!)
If you would like to know more about income protection, it would be my pleasure to meet with you to discuss the most appropriate solution for your particular circumstances.
About The Certified Financial Planner (CFP) Designation
The CERTIFIED FINANCIAL PLANNER® designation is the mark of quality for professional personal financial planning internationally.
A professional who uses the CFP® mark (also CERTIFIED FINANCIAL PLANNER® ) identifies that he has met rigorous ethics, competency and professional practice standards.
Membership of the Financial Planning Institute at this level of membership can only be bestowed by the FPI when a candidate satisfies various criteria in four areas, namely: Education, Examination, Experience and Ethics.
Education
Studies must be completed at a college or university that offers a curriculum approved by the Financial Planning Institute. Currently the Post Graduate Diploma and the B. Com Honors in Financial Planning (NQF level 7) are approved.
After certification, CFP professionals are required to complete 60 hours of professional development per two year cycle in order to stay current with developments in the profession.
Examination
A comprehensive CFP certification examination that tests the candidates’ ability to apply financial planning knowledge must be passed. The examination covers the financial planning process, risk planning, tax planning, employee benefits and retirement planning, estate planning, investment management and health insurance.
Experience
A minimum of 3 years relevant experience is required before a professional may use the CFP mark. This ensures that besides financial knowledge, the CFP professional possesses the necessary financial counseling skills.
Ethics
CFP Professionals agree to abide by a strict code of ethics. The CFP Board also performs a background check and requires disclosure of any investigations or legal proceedings relating to their professional or business conduct.
The code of ethics requires that the CFP professional act fairly and diligently and with objectivity – giving advice based on your needs.
In short, a CFP professional offers you the confidence that you are getting sound, professional advice. Can you afford to take any other kind of advice when it comes to your financial well-being?
A professional who uses the CFP® mark (also CERTIFIED FINANCIAL PLANNER® ) identifies that he has met rigorous ethics, competency and professional practice standards.
Membership of the Financial Planning Institute at this level of membership can only be bestowed by the FPI when a candidate satisfies various criteria in four areas, namely: Education, Examination, Experience and Ethics.
Education
Studies must be completed at a college or university that offers a curriculum approved by the Financial Planning Institute. Currently the Post Graduate Diploma and the B. Com Honors in Financial Planning (NQF level 7) are approved.
After certification, CFP professionals are required to complete 60 hours of professional development per two year cycle in order to stay current with developments in the profession.
Examination
A comprehensive CFP certification examination that tests the candidates’ ability to apply financial planning knowledge must be passed. The examination covers the financial planning process, risk planning, tax planning, employee benefits and retirement planning, estate planning, investment management and health insurance.
Experience
A minimum of 3 years relevant experience is required before a professional may use the CFP mark. This ensures that besides financial knowledge, the CFP professional possesses the necessary financial counseling skills.
Ethics
CFP Professionals agree to abide by a strict code of ethics. The CFP Board also performs a background check and requires disclosure of any investigations or legal proceedings relating to their professional or business conduct.
The code of ethics requires that the CFP professional act fairly and diligently and with objectivity – giving advice based on your needs.
In short, a CFP professional offers you the confidence that you are getting sound, professional advice. Can you afford to take any other kind of advice when it comes to your financial well-being?
Simple Solutions to Three Business Problems You Will Eventually Face
The three situations we'll take a look at in this series of posts relate to some of the serious consequences faced by a business and various stakeholders in the event of the death of a shareholder. In this post, an overview is offered by way of introduction to the concepts.
First Scenario
When a shareholder in a business dies (and everybody eventually does!), a potentially disastrous situation follows. His estate needs to be wound up, and that includes disposing of his shareholding in the business.
The business owner's heirs would like to either take control of the business or receive fair value for it by some kind of a sale of the business.
His business partners would like to be in a position to continue with the business unhindered by an inexperienced heir or by a new shareholder previously unknown to them.
Since deaths are not scheduled, it is unliklely that provision would have been made for funds to buy the deceased shareholder's share from the estate or the heirs - and in any case, the heir would probably have a different idea of fair value for the share in the business, and given the fact that a shareholder has just died, the banks may be unwilling to extend any loans to buy shares.
This situation is easily addressed using a "buy-and-sell agreement". This agreement enforces the sale of a deceased shareholder's share in a business to the surviving partners on terms agreed in advance and the purchase price is provided by the proceeds of specially structured life assurance taken on the lives of the shareholders.
Keep an eye out for a more detailed post on Buy-and-Sell Agreements in the near future.
Second Scenario
Another potentially devasting consequence of the death or disability of shareholder has to do do with their role as "key person" in the business. A key person is someone whose specialist skills, capabilities, experience, finances and contacts have an important role to play in the profitability of the business.
Without this person, the business may become less profitable or lose clients. Banks may decide to call in loans and sureties or refuse additional lines of credit, potentially crippling the business.
Once again, this situation can averted using life assurance - the company takes policies on the life of key individuals (owners or employees) in order to provide cash to assist with replacing a key person, supporting the creditworthiness of the business or providing reserves to weather a period of poor income. This special life assurance structure is know as "key person assurance".
Look out for a more detailed post on Key Person Assurance.
Third Scenario
It is common for shareholders in a business to sign personal surety for loans taken by the company. Such loans may be for start-up capital, vehicles and equipment, overdrafts or company credit cards.
Upon the death of a shareholder, lenders may require immediate settlement of debts since the guarantor has passed away, or because no alternative guarantor is available. If the business is unable to settle the debts, the lender can claim the outstanding amount from the estate of the deceased shareholder in terms of the surety signed.
A claim against the estate of the deceased shareholder could leave his heirs in financial difficulty.
This situation is dealt with by setting up a life assurance arrangement known as Contingent Liability Assurance on life of the shareholder who has signed surety, and owned by the company. A contract is set up between the shareholder and the company in terms of which the company agrees to settle all the debts for which surety has been signed using the proceeds of the policy.
A complete discussion of Contingent Liability Assurance will be posted on the Mark my Words Blog soon.
First Scenario
When a shareholder in a business dies (and everybody eventually does!), a potentially disastrous situation follows. His estate needs to be wound up, and that includes disposing of his shareholding in the business.
The business owner's heirs would like to either take control of the business or receive fair value for it by some kind of a sale of the business.
His business partners would like to be in a position to continue with the business unhindered by an inexperienced heir or by a new shareholder previously unknown to them.
Since deaths are not scheduled, it is unliklely that provision would have been made for funds to buy the deceased shareholder's share from the estate or the heirs - and in any case, the heir would probably have a different idea of fair value for the share in the business, and given the fact that a shareholder has just died, the banks may be unwilling to extend any loans to buy shares.
This situation is easily addressed using a "buy-and-sell agreement". This agreement enforces the sale of a deceased shareholder's share in a business to the surviving partners on terms agreed in advance and the purchase price is provided by the proceeds of specially structured life assurance taken on the lives of the shareholders.
Keep an eye out for a more detailed post on Buy-and-Sell Agreements in the near future.
Second Scenario
Another potentially devasting consequence of the death or disability of shareholder has to do do with their role as "key person" in the business. A key person is someone whose specialist skills, capabilities, experience, finances and contacts have an important role to play in the profitability of the business.
Without this person, the business may become less profitable or lose clients. Banks may decide to call in loans and sureties or refuse additional lines of credit, potentially crippling the business.
Once again, this situation can averted using life assurance - the company takes policies on the life of key individuals (owners or employees) in order to provide cash to assist with replacing a key person, supporting the creditworthiness of the business or providing reserves to weather a period of poor income. This special life assurance structure is know as "key person assurance".
Look out for a more detailed post on Key Person Assurance.
Third Scenario
It is common for shareholders in a business to sign personal surety for loans taken by the company. Such loans may be for start-up capital, vehicles and equipment, overdrafts or company credit cards.
Upon the death of a shareholder, lenders may require immediate settlement of debts since the guarantor has passed away, or because no alternative guarantor is available. If the business is unable to settle the debts, the lender can claim the outstanding amount from the estate of the deceased shareholder in terms of the surety signed.
A claim against the estate of the deceased shareholder could leave his heirs in financial difficulty.
This situation is dealt with by setting up a life assurance arrangement known as Contingent Liability Assurance on life of the shareholder who has signed surety, and owned by the company. A contract is set up between the shareholder and the company in terms of which the company agrees to settle all the debts for which surety has been signed using the proceeds of the policy.
A complete discussion of Contingent Liability Assurance will be posted on the Mark my Words Blog soon.
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