Insurance for the self-employed

South Africa is known as a country of entrepreneurial individuals, and many more have turned to self-employment recently as COVID-19 has put the economy under pressure. Small business owners need to insure their businesses against those rainy days where disaster strikes. And, if the last year has taught us anything, it’s that rainy days may come more frequently than we’d like, and they usually come when we least expect it.

Insuring a business’ physical assets is key, but what self-employed individuals often forget to cover is their most important asset of all – themselves. As good financial planners like you know, life insurance is a critical element that entrepreneurs need to bear in mind when considering the greatest risks to their income.

Three elements of long-term insurance:

Contingent liability insurance for major debts

Often,business owners have to sign surety on behalf of their business, which can impact their estate in the event of their death. Contingent liability insurance ensures that in the event of the death of the business owner, creditors cannot claim for business debts from their estate, so the business owner’s dependants are left well cared for. This type of insurance also covers the permanent disability of the business owner.

Life insurance for buy and sell agreements

This will ensure that co-owners of the business can continue to operate with as little disruption as possible in the event of the death of one of the business owners. It also ensures that the estate of the deceased business owner receives fair value for his or her business interest, as well as the settlement of his or her loan account.

Key-person insurance

The business takes out an insurance policy to compensate it for operational losses that would arise from the death, permanent disability, or extended incapacity of an important member of the business. 

While the benefits of long-term insurance are clear, the affordability of this cover can be a stumbling block for many entrepreneurs. This is particularly true if the cover is structured in the same way as personal life insurance policies.

With many business insurance policies consisting of a single capitalised block of cover for all needs, this cover structure is priced for the maximum term. It is therefore not necessarily in the best interest of the small business owner as these needs almost always exist for a particular term.

This means that very often businesses are being overcharged for cover that they know they won’t need later on. Another problem is that some needs may even decrease over time. For example, contingent liability cover, and traditionally structured policies might have cover amounts that are appropriate at the outset, but after a while deviate from how the underlying need is behaving over time.

We have decided to follow a more flexible approach to business insurance, where we give entrepreneurs cover that is appropriate to the need that they’re trying to protect. This ensures that the premiums they pay allow small business owners to fully cover their specific needs, as well as invest more funds in their business.

This means that you as an adviser can tailor your client’s cover, at the beginning as well as overtime, to match the profile of their needs. One of the ways that we at BrightRock do this is by making allowances for the expansion of the business.

In the event where the company’s growth exceeds expectations, and the entrepreneur wants to increase his/her cover, BrightRock policyholders automatically have access to extra cover buy-up, to access more cover later on, without medical underwriting. Another example is through providing certainty to business owners, for example, advisers can structure cover that increases over time, while the premiums for this cover don’t increase but remain constant and predictable.

Now more than ever, self-employed individuals need to see the value that long-term insurance can bring them. This value comes in the form of sustainable cover with appropriately priced premiums that consider the various stages of an entrepreneur’s business and the relevance of their cover over time. What makes BrightRock’s cover more efficient is that the duration and behaviour of the cover can be matched exactly to that of the underlying need.

This article first appeared on page 60 of the FIA Insights Quarter 2 of 2021 published in June 2021 and is attributed to Sean Hanlon, BrightRock Executive Director

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