Protection of Credit Loan Accounts
The need
The capital structure of a business usually includes loans from its owners. The problem is that these loans are usually assets that diminish in value and usually remain unrecovered in the event of the death of such owners.
The business may not be able to repay the loans, or to refinance the loans, leaving it in distress. Funds that will enable the business to repay the loans can be created relatively easily. These loans can be covered with a life insurance policy.
The loan account solution
Loan account assurance covers the life of the owner of the business. Therefore, in the event of the owner’s death (or disability if the client wishes to include disability cover), it pays out an amount of capital which will, after estate duty, be equal to the loan account. This cover will enable the business to repay the loan and thus protect the capital structure of the business.
There are essentially two methods to address the stated problem that arises at the death or disability of the owner with an outstanding loan account:
- The one method is to include it in the buy-and-sell agreement as part of the shareholder’s interest.
- The second method is for the business to insure the life of the owner for an amount equal to the outstanding loan account. In this case, the business settles the loan account.
The main objective of the credit loan account solution is to ensure that a business that has borrowed money from an owner will be able to repay the money to the estate of the owner upon death or if he/she becomes disabled.
Contact us now or speak to your financial intermediary.
Protection of Debit Loan Accounts
The need
It is not uncommon for businesses to lend money to their owners. However, a problem arises if the owner/borrower dies or becomes disabled. The business then faces the risk that the estate of the owner may not be in a position to repay the money owed to that business.
This puts the estate at risk of being sued by the business to recover the loan. The remaining owners are indirectly at risk, and if the business cannot recover the capital, the remaining owners suffer consequential damages.
The debit loan account solution
The solution is to cover the debit loan account with a policy and cede that policy to the business as security.
Should the borrower die or become disabled, the proceeds of the policy can be used to settle the debt. This relieves the owner of the debt, and the business recovers its capital.
Contact us now to arrange for an accredited Sanlam financial planner to assist you.