Why Business Insurance Matters: Protecting the Future of Your Business

In South Africa’s ever-evolving economic landscape, entrepreneurs and business owners face a wide array of risks. Some visible, many unforeseen. While traditional insurance like fire, theft, and liability cover is essential, business continuity planning goes much deeper. Specifically, Buy-and-Sell agreements, Key Person cover, and Contingent Liability insurance form the cornerstone of intelligent business risk management.

Let’s break down why these types of insurance are not only important—but essential.

1. Buy-and-Sell Insurance: Ensuring a Smooth Ownership Transition

What is it?

Buy-and-sell insurance is a policy taken out by co-owners (shareholders, partners, or members) of a business. Each owner is insured, and in the event of their death or permanent disability, the insurance pays out to the surviving owners who in turn are contractually obliged to buy the deceased or disabled partner’s share.

Why is it important?

• It ensures continuity of the business without disruption.

• It provides fair compensation to the deceased’s estate or family.

• It prevents a situation where heirs inherit shares they don’t want or the business can’t afford.

• It avoids forced sales or financial strain.

Tax treatment:

• Premiums are not tax-deductible for the business or shareholders.

• Proceeds are generally tax-free, provided the policy is correctly structured:

• The beneficiary must not be the deceased’s estate.

• The buy-and-sell agreement must be valid and align with the policy.

• The policy must not be ceded to the life insured.

2. Key Person Insurance: Protecting Your Business's Most Valuable Assets

What is it?

Key person insurance covers a business against the death or disability of a key individual whose knowledge, skills, or experience is critical to the company’s success. This could be a founder, technical expert, top salesperson, or CEO.

Why is it important?

• It provides the business with a lump sum to cover recruitment or training of a replacement.

• It protects against lost profits or contracts.

• It provides stakeholders and creditors with reassurance about the business’s stability.

• It can be the difference between survival and closure in the months following a tragedy.

Tax treatment:

• If the business is both the premium payer and the beneficiary, then:

• Premiums may be tax-deductible (as a business expense), but then:

• Proceeds become taxable income when received.

• Alternatively, if premiums are not deducted, then proceeds are usually tax-free.

Strategic tip: Many companies opt not to claim the deduction, preferring tax-free liquidity when it’s needed most.

3. Contingent Liability Insurance: Backing Business Loans with Peace of Mind

What is it?

Contingent liability insurance is used when a business owner signs surety on a loan or credit facility. If the owner dies or becomes disabled, the policy pays out to settle the outstanding debt.

Why is it important?

• It protects the deceased’s estate from being liable for business debt.

• It prevents creditors from seizing personal or family assets.

• It gives financiers greater confidence in lending to the business.

• It preserves wealth and avoids unintended consequences for heirs.

Tax treatment:

• Premiums are not tax-deductible, as the cover is linked to capital debt rather than income.

• Proceeds are tax-free, as they’re used to settle liabilities, not generate revenue.

Final Thoughts

Many business owners spend years building something meaningful but only minutes thinking about how to protect it when something goes wrong. Having the right insurance in place is not just a “nice-to-have". It’s a core component of a responsible risk strategy.

Buy-and-sell, Key Person, and Contingent Liability cover provide stability, protect families, and give peace of mind to everyone involved shareholders, staff, and clients alike. But the tax treatment can significantly affect the value and outcome of these strategies. That’s why proper structuring and financial advice are essential.

At Corona Financial Services, we help business owners design and implement insurance solutions that work legally, financially, and practically.

Disclaimer: This article is for informational purposes only and should not be considered financial advice. For personalised investment advice tailored to your specific financial situation, please contact us or one of our qualified financial advisers at Corona Financial Services.