Structuring life insurance correctly for SME owners

Structuring life insurance correctly for SME owners

Short-term insurance recently became one of the talking points of the July lootings after thousands of SMEs were affected by the riots, suffering loss and damage to assets. In the hopes of keeping these businesses afloat, the National Treasury announced that the South African Special Risks Insurance Association (Sasria) will be paying out R3.9 billion to small businesses, including SMEs that are not insured. Sasria is the only insurer in South Africa that covers riots.

The riots underscored the importance of having insurance for other situations that SMEs can’t protect themselves against, such as fires and acts of nature. In addition to insuring the business’ physical assets, however, business owners also need to remember that they themselves are their company’s most important assets and should be covered too. Insurance becomes important when businesses and individuals experience some kind of loss, and no loss is more acute than that of the business owner. This is where life insurance comes in, in the form of contingent liability insurance for major debts, cover for buy-and-sell agreements and keyperson insurance.

However, the affordability of cover could be a stumbling block for many business owners. Traditional business assurance policies are more often than not structured in the same form as personal life insurance policies.

“There tends to be a single capitalised block of cover for all needs, and this cover is priced for the maximum term. This cover structure is not necessarily in the best interest of the small business owner, because the cover increases as your needs decrease – leading to cost inefficiency in the way premiums are structured.”

“By structuring business owners’ cover to meet their exact needs, you can remove premium waste and save money from the payment of their first premiums. This approach allows advisers to tailor business owners’ cover over time to match the profile of their needs.”

Here is a summary of the kinds of long-term insurance that entrepreneurs should be thinking about for their company.

Long-term insurance for a small business: What should be covered?
Contingent liability insurance for major debts Long-term insurance for buy and sell agreements Keyperson insurance
A shareholder of a company often has to sign surety as co-principal debtor or provide personal security for a loan taken out by the business. The business incurs a liability if this person becomes permanently disabled or dies, and business is unable to repay the loan. Contingent liability insurance taken out by the company on the life of the shareholder solves this problem.


A buy-and-sell agreement will ensure that remaining co-owners of the business can purchase the interest of another business owner in the event of their death or permanent disability. It also ensures that the estate of the deceased business owner receives fair value for his or her business interest, as well as the settlement of his or her credit loan account. Life insurance policies ensure that the remaining owners have the necessary liquidity to be able to do this. This is an insurance policy taken out by a business to compensate the particular business for financial losses that would arise from the death or extended incapacity of an important member of the business.


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