Topic 3

Question 1

Reasons for needing business assurance

Answer 1

1. Transfer of ownership in the event of death or disability
2. Retention of employees
3. Key employees
4. Debt-related needs

Question 2

Transfer of ownership

Answer 2

If the surviving partners are unable to buy the deceased’s share, the executor may have to transfer the interest in the business to the deceased’s heirs, which may force the surviving members to take in a business partner or co-owner whom they would not otherwise have considered.

The solution is to enter into a buy-and-sell agreement, which will be funded by life insurance

Question 3

Retention of employees

Answer 3

Offer membership to a retirement fund or a medical scheme and preferred compensation schemes

Preferred compensation schemes involve offering a financial benefit to a vital employee, if they remain with the company for an agreed period of time

Question 4

Key employees

Answer 4

Keyperson insurance can make funds available immediately on the death or disability of the key employee, which can be used to soften the financial impact of the poss for the business and to provide funds for sourcing a replacement employee

Question 5

Debt-related needs

Answer 5

When owners have to lend substantial amounts of capital to the business instead, or pledge their personal assets as security for loan financing

Life insurance on the life of the owner of a particular owner can solve this through a contingent liability cover

Question 6

Report writing

Answer 6

It is not only a vital basic skill in the financial services environment, it is also a persuasive way to communicate with business leaders, and will enhance the financial planner’s credibility and professional image

Must be able to draw up a factual, objective, and professional business report that clearly communicates the areas of concern, and provides a rational and persuasive argument for the recommendations presented to solve potential business risks

Question 7

Business report

Answer 7

A formal document in which a summary is given of facts, progress, investigation or enquiries, consideration of the pros and cons of different courses of action, and recommendations with reasons based on an analysis of the facts

Question 8

Length of the report

Answer 8

Must be to the point, focused on the special topic and as short as possible

Only include the information necessary

Question 9

Presentation of the report

Answer 9

It suggests that attention has been paid to detail and accuracy

Divide subject matter into major sections and then subdivide it into clearly defined subsections in a logical order

A good rule of thumb is that each paragraph should only contain a single idea

Question 10

Structure of the report

Answer 10

1. Introduction
2. Areas of concern
3. Objectives
4. Possible courses of action
5. Recommendations

Question 11

Table of contents

Answer 11

1. Report or subject title - approximately ten words in length
2. Date of the report
3. Author’s name
4. Headings with corresponding page numbers
5. Subheadings (under the relevant headings), also with corresponding page numbers

Question 12

Introduction/background in the report

Answer 12

1. The names, ages, and positions of the business owners
2. If relevant, the member interest or shareholding of the business owners
3. The name of the business and a brief description of the main business activity of the business
4. Current products that the business has in place, such as pension funds

Question 13

Area of concern in the report

Answer 13

CONTENT TO INCLUDE:
1. Short description of the main problem
2. Short description of the subsidiary problems arising from the main problem

CONTENT TO AVOID:
1. Recommendations or solutions
2. Calculations or tables

Question 14

Objectives in the report

Answer 14

Should relate to the problem areas, in the sense that these objectives would be about avoiding the risk or problem outlined

This will provide pointers in determining what course of action will solve the problem

Question 15

Possible courses of action, as well as their appraisal and evaluation

Answer 15

Focuses on possible ways of achieving the objectives by outlining, evaluating, and stating the pros and cons of each possible way of achieving them

No ‘best’ alternative

Question 16

Recommendations in the report

Answer 16

Must recommend one or a combination of the different possible courses of actions outlined

The reasons for and the consequences of the recommended course of action should be given

If no action is recommended for a specific area of concern, the reasons and consequences must also be stated

Include information about the recommended product

Question 17

Appendices in the report

Answer 17

The supporting information with title headings that are cross-referenced to the content page numbers

Included at the end of the report

Can also include tables, charts and illustration

Question 18

Glossary and bibliography

Answer 18

Glossary is necessary if a lot of subject jargon is included in the report

Bibliography is the references that have been quoted elsewhere in the tect, which the reader might like to look up himself.

Gives the detail of the author’s name, title of the book, and relevant page numbers

Question 19

Planning the report

Answer 19

Draft subjects and headings logically, with the main points first.

Facts and figures must support the conclusion and recommendations.

Allow plenty of time to plan, revise, and edit, rather than actual time to write.

Question 20

Contingent liability

Answer 20

Risks a business may be faced with

Owner of a business is required to sigh surety when it takes out a loan from a financial institution

This means the owner will be liable for the debts of the business entity.

A contingent liability solution will also be an appropriate solution to cover this risk

Question 21

Structure and practical working of the contingent liability solution

Answer 21

Entails the business taking out cover on the life of an owner to ensure that the business will have the necessary funds to repay the outstanding loan amount in the event of the owner’s death

Personal surety may also be required

Add a disability cover to the life policy

Question 22

Agreement

Answer 22

Ensures that the business uses the policy proceeds to settle the debts for which the owner has signed surety

Question 23

Income Tax implications

Answer 23

Premiums on a contingent liability policy will not qualify for a tax deduction because the employer is not insured against an operating loss - section 11(w)(ii)

Qualifies for a section 10(1)(gH) exemption and the proceeds of a successful claim against the policy will not be subject to income tax

Question 24

CGT Implications

Answer 24

Capital gains in respect of risk policies with no cash or surrender value must be disregarded

Pure risk policies will always be exempt, so new contingent liability policies should, therefore, always be pure risk

Question 25

Estate duty requirements: section 3(3)(a)(ii)

Answer 25

1. The policy was not taken out by or at the instance of the deceased employee
2. No premium under the policy was paid or borne by the deceased employee
3. No amount due or recoverable under the policy has been or will be paid into the estate of the deceased
4. No amount due or recoverable under the policy has been or will be used for the benefit of any relative of the deceased

Question 26

Estate duty implications

Answer 26

In the case of a contingent liability policy, the first requirement is unlikely to be met, as it is highly unlikely that the person on whose life policy is taken out was not involved in the decision to take out the policy.

Does not qualify for an exclusion

Question 27

Amount of cover required to make provision for estate duty

Answer 27

Initial cover required ÷ (1 - Estate duty rate)