Topic 3 Flashcards
Reasons for needing business assurance
- Transfer of ownership in the event of death or disability
- Retention of employees
- Key employees
- Debt-related needs
Transfer of ownership
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
Retention of employees
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
Key employees
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
Debt-related needs
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
Report writing
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
Business report
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
Length of the report
Must be to the point, focused on the special topic and as short as possible
Only include the information necessary
Presentation of the report
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
Structure of the report
- Introduction
- Areas of concern
- Objectives
- Possible courses of action
- Recommendations
Table of contents
- Report or subject title - approximately ten words in length
- Date of the report
- Author’s name
- Headings with corresponding page numbers
- Subheadings (under the relevant headings), also with corresponding page numbers
Introduction/background in the report
- The names, ages, and positions of the business owners
- If relevant, the member interest or shareholding of the business owners
- The name of the business and a brief description of the main business activity of the business
- Current products that the business has in place, such as pension funds
Area of concern in the report
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
Objectives in the report
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
Possible courses of action, as well as their appraisal and evaluation
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
Recommendations in the report
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
Appendices in the report
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
Glossary and bibliography
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
Planning the report
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.
Contingent liability
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
Structure and practical working of the contingent liability solution
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
Agreement
Ensures that the business uses the policy proceeds to settle the debts for which the owner has signed surety
Income Tax implications
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
CGT Implications
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
Estate duty requirements: section 3(3)(a)(ii)
- The policy was not taken out by or at the instance of the deceased employee
- No premium under the policy was paid or borne by the deceased employee
- No amount due or recoverable under the policy has been or will be paid into the estate of the deceased
- No amount due or recoverable under the policy has been or will be used for the benefit of any relative of the deceased
Estate duty implications
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
Amount of cover required to make provision for estate duty
Initial cover required ÷ (1 - Estate duty rate)
