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Can we get one life policy to cover a lender and a shareholder?

Such policies are generally taken out between spouses and not found in a business environment – and there is generally no cost benefit compared with taking out separate policies on each life.

I have been trying to assist with insurance for a loan, where both parties’ lives are to be insured. The scenario is as follows: a loan of R900 000 was arranged between a registered company and a person. The company has only one shareholder, who provides surety. The idea for the insurance is to insure both lives, so whoever dies, the loan is paid. The questions are: 

  1. Is it possible to get one life insurance policy that covers whoever dies first? So far, no seems to understand this request.
  2. Who pays and who is the beneficiary? My thoughts are that the company is the payer and beneficiary.
  3. Would it not be better to get credit or credit life insurance?

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In respect of a life insurance policy where two lives are insured and the policy pays out on the death of the first life assured, such policies are generally taken out between spouses and, as such, are not usually found within a business environment. There is generally no cost benefit to this structure when compared with taking out a separate policy on each life (ie. one on the life of the lender and one on the life of the shareholder). While most insurers offer a joint policy option, it usually pays out on the death of the second life assured or the last surviving life assured, which would not be of assistance in your case.

Firstly, in respect of a life policy for the shareholder, we recommend a contingent liability policy on the life of the shareholder which is owned by the registered company that will be required to repay the loan in the event of the shareholder’s death. As the policy will be company-owned, the premiums paid by the company in respect of the contingent liability policy do not qualify as a deduction for the company under Section 11(w)(ii) of the Income Tax Act. This is because the policy does not protect the company against a business operating loss but is to be used for a capital repayment.

In turn, as the premiums are not allowed as a deduction, the proceeds from the policy will pay out free of income tax. Therefore, in the event of the shareholder’s death, the proceeds of the policy will be paid to the company and will be used to pay back the loan. It is important to ensure that the lender is listed on the company’s credit register to ensure that the lender has a claim against the company for the value of the outstanding loan.

In general, the proceeds from a life insurance policy are considered deemed property in the deceased’s estate. The effect that a contingent liability policy will have on the shareholder’s estate is that the proceeds will not be considered deemed property if the commissioner is satisfied that all four requirements stipulated in Section 3(3)(a)(ii) of the Estate Duty Act are met. If one of these four requirements are not met, the proceeds will be estate dutiable in the shareholder’s deceased estate.

Secondly, with regard to life cover for the lender, our advice would be to take out a pure life policy on the life of the lender which is owned and paid for by the company. In the event of the lender’s death, the deceased estate would request that the loan be paid by the company from the proceeds of the policy.

Once again, the lender should be listed as a creditor in the company’s credit register, or it must state in the loan agreement that the proceeds of the policy must be used to repay the loan. In the event of the lender’s death, the proceeds of this policy will be regarded as deemed property in his/her estate and will therefore be subject to estate duty under section 3(3)(a) of the Estate Duty Act. As such, it is important to adjust the quantum of life cover taken out to account for estate duty and to ensure that no liquidity problems arise in the deceased’s estate.

Do you have any questions you would like answered by registered financial planners?

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