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Suretyship Protection

Raising finance in the business world can be critically important to sustain operations and growth. Owners who wish to borrow capital usually have to sign personal suretyship on behalf of their businesses with the result that the owner's estate could be held liable for the businesses debts. In order to separate personal financial needs from business obligations, the solution is to take out a suretyship protection plan (also known as contingent liability insurance). The need: Business owners often conduct their businesses through limited liability entities, because they wish to protect their personal estates from creditors if the business venture fails. Suretyship agreements effectively remove the benefit that these limited liability entities offer, as they remove the vital separation that there should be between personal financial affairs and business obligations. As a result personal assets are exposed to business risks and this situation invariably affects personal estate planning negatively. Problems relating to suretyship: Without suretyship protection insurance, the following problems may arise: The executor may be forced to sell estate assets to provide liquidity. Business debts may have to be settled to the disadvantage of heirs and dependants. The estate administration process may be delayed. The estate may be declared insolvent if total business debts exceed personal assets. Dependants may have to sell assets or borrow funds at great expense to maintain their standard of living. The continued existence of the business may be placed in jeopardy. The benefits of suretyship protection: Should sureties die or become disabled, suretyship protection insurance provides them with peace of mind that the business debts will be settled immediately and without their personal estates being held liable. The plan makes sound financial sense because the monthly cost is very small in relation to the benefit. The suretyship protection plan offers the following specific benefits: The outstanding loan/s covered by the suretyship agreement are settled on the death or permanent disability of the surety. The untimely death or permanent disability of the surety does not affect the business' liquidity and continuity is ensured. No substitute surety is required as the debt is settled in full and new facilities can be negotiated afresh. The surety's deceased estate can be wound up without unnecessary delays. The surety's personal estate is not affected in any way by standing in for business debts. The structure Should the surety die or become disabled, the creditor may wish to call up the loan even though the principal debtor is still making repayments. Suretyship protection is a life insurance policy taken out by a principal debtor on the life of an individual who stands surety for the debts of the principal debtor. If structured correctly, the insurance policy will provide sufficient funds to repay the outstanding balance of the debt, thereby releasing the surety's estate from this liability.
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