The capital structure of a business usually includes loans from their shareholders (in the case of a business), partners (in the case of a partnership), or members (in the case of the close corporation).
The problem is that these loans are usually assets that diminish in value and remain unrecovered in the event of the death of such owner. The business may not be able to repay the loans, or to refinance the loans, leaving it in distress. Funds can be relatively easily created for the business to repay the loans.
The Loan Account Solution
Loan account assurance covers the life of the owner of the enterprise in the event of his death (and disability if the client wishes to include disability) to pay out an amount of capital which will, after income tax and estate duty, be equal to the loan account. This cover will enable the business to repay the loan and thus protect the capital structure of the business.
There are essentially two methods to address the stated problem that arises at the death or disability of the owner with an outstanding loan account. The one method is to include it in the buy-and-sell agreement as part of the member’s interest and claims.
The second method is for the business to insure the life of the owner for an amount equal to the outstanding loan account. In this case, the business settles the loan account.
The main objective of the credit loan account solution is to ensure that a business that has borrowed money from an owner will be able to repay the money to the estate of the owner upon the death and/or disability of that owner.
The content in this article was provided by Sanlam – a diversified financial services group, headquartered in South Africa, operating across a number of selected global markets.
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