life insurance quotes

Business Investment Plan

Business Assurance - Solutions to protect what you've worked so hard to build.

Running a business is fraught with risk. In a moment, an unexpected death or case of disability can destroy the business you've worked so hard to build. Banks may call in loans, surviving business owners and the deceased's heirs may become embroiled in bitter ownership battles. Client's may lose confidence and flee to competitors and your family and heirs may not receive what is due to them. How do you retain important employees, or protect your income and meet your monthly overhead expenses if you are unable to work? How will you finance future growth and expansion?

Financial Planners can offer a complete range of business solutions designed to address these scenarios.

Business Investment Plan:

A business may have cash reserves that are not earmarked for any specific purpose and would like to invest these reserves in a diversified portfolio in order to ensure capital appreciation, so that should they be needed at some future date the cash reserves will not have been eroded by inflation.

Investing the cash reserves through an endowment or other suitable investment vehicle is an ideal way of ensuring capital appreciation in a tax efficient manner.

Why is it important from the business’s perspective to have an investment plan in place?

  • The effect of inflation can result in cash reserves losing their value over time. A concern may also be that while there is a need to diversify the investment it is essential to guarantee a minimum return on the investment.
  • It may also make sense to invest outside of the business, as it can then diversify its risk and uncouple the rate of growth on this particular investment from the rate of growth in the business.
  • The investment may be used as security, if necessary, for example, to finance other projects or the expansion of thebusiness.

The structure of the investment plan:

The business will contribute to an endowment policy,(or it could contribute to a unit trust or some other suitable investment vehicle) on a regular recurring basis, or if it is in the position to do so, it will make a large single premium into an endowment policy or sinking fund policy or other suitable investment vehicle. In the case of an endowment or sinking fund policy, the term of the investment should be five years. The reason for this being that certain legislative restrictions apply with regards to the access of the investments in the first five years. There should be multiple lives assured on the endowment policy to ensure that it continues, and also to prevent the proceeds of the policy becoming deemed property in the estate of the deceased

If the business is a company, then it should conclude a board resolution indicating the decision and reason for the company effecting this particular policy.

Payment of premiums:

The business will pay the premiums in respect of the life insurance policies that have been taken out.

The Income tax consequences:

The premiums made will not be tax deductible and accordingly the proceeds will pay out tax free. Four Fund Approach

In terms of the Income Tax Act growth on investments by companies or close corporations in endowment or sinking fund policies, will be taxed in terms of the so called four fund approach. At this point in time, all interest and net rental income will be taxed at 28%, while capital gains will be taxed at an effective 14%. The tax levied will depend upon the type of assets class invested in. This taxation process takes place at the insurer and places no tax responsibility on the investor (the business). The proceeds paid out by the insurer therefore iarenot subject to tax in the business’s hands.

Estate duty consequences:

An endowment policy, which is a life insurance policy, will not attract estate duty, provided that the following requirements are met:

  • That the policy was not effected by or at the instance of the deceased,
  • That no premium on such policy was paid or borne by the deceased, and
  • that no amount due or recoverable under such policy has been or will be paid into the estate of the deceased and that no such amount has been or will be paid to, or utilized for the benefit of, any relative of the deceased or any person who was wholly or partly dependent for his maintenance upon the de ceased or any company which was at any time a family company in relation to the deceased.

A family company is one where the deceased, alone or together with any of his/her family members was able to exercise effective control over the business. Included in the definition of family member is the spouse of the person or anybody related to him/her or his/her spouse within the third degree. If the business was at any stage a family company in relation to the deceased, then even if this changes in the future, the estate duty exemption will be lost forever. In performing the business needs analysis, I will take into account whether or not the business is a family company in relation to the life assured and if so, I will include the potential estate duty in my proposal.

Furthermore, only domestic life insurance policies which become due and recoverable on the death of the life assured are included in that person’s estate for estate duty purposes. That means that if there are multiple lives assured on the endowment policy then the proceeds will attract estate duty only at the death of the last dying life assured. Sinking fund policies will not attract estate duty and the same goes for unit trust and other suitable investments. Therefore, if correctly structured, estate duty should not be applicable in the future liability scenario

If due to unforeseen circumstances, such as simultaneous death of all the lives assured, the policy does attract estate duty, then because the payer and beneficiary of the policy are both the same person (the business). then there will be a saving in estate duty, in that the proceeds brought into the estate duty calculation will be reduced by return of premiums plus 6% p.a compound interest.

Steps to be taken in implementing a Business Investment Plan:

  • Establish the extent to which the business wishes to invest in an endowment or alternative investment vehicle.
  • Consider the suitable products available and invest accordingly.
  • Ideally a risk profile analysis should be conducted in order to determine the business’s appetite for risk and which portfolios the contributions should be invested in.
  • If applicable, complete the necessary documents to obtain the life insurance with the relevant life office/LISP

Using a pure investment vehicle, such as an endowment policy or LISP product is an ideal way of providing for capital growth of cash reserves within the business, thereby protecting these reserves from the negative impact of inflation.