Businesses rely on loans for all manner of reasons. In fact, the average UK business borrowing is £176,000. However, few companies consider how they would find the capital to pay this money back, should they become financially liable for the outstanding debts of a key person, such as a business owner or director, if they became critically ill or passed on suddenly.
Lenders commonly ask for immediate repayment of the borrowed sum upon the death of the person responsible for the loan. If a company is in its early stages, it may still be using the loaned funds to get off the ground, leaving it unlikely that it could raise sufficient capital to repay the debt at short notice. Business loan protection can offer a cash injection to the company on the death of their key personnel, to enable the firm to repay the funds and stay afloat in challenging times.
Find out how business loan protection insurance could benefit your business in this helpful guide, which takes you through the following sections:
- What is business loan protection insurance?
- How does business loan protection work?
- What is covered by business loan protection insurance?
- Do I need business loan protection insurance?
- How much cover do I need?
- How much does business loan protection cost?
- How to find a business loan protection insurance provider
- Final thoughts & FAQs.
What is business loan protection insurance?
If a business owner or director dies unexpectedly, liability for their outstanding loans and debts may pass to the surviving business owners or the company itself. Many lenders demand immediate repayment if the loan recipient dies, which may put the firm at financial risk. Business loan protection protects the company financially by providing a cash lump sum to cover the business debts of the deceased.
Alternatively, some business loans have personal guarantees. If a business were to fail following the loss of an owner, then the lender may chase repayment from the person’s estate or family. If they cannot afford to repay the debt, the lender may seize their personal assets, such as their home or car. Business loan protection can shield business owners who have personally guaranteed loans and other forms of finance, in the event the business folds due to the death of a key employee.
How does business loan protection work?
Business loan protection is a flexible solution which suppliers can tailor to the specific requirements of each business. Typically, businesses take out cover on the life of the persons responsible for the repayment of the loan on a ‘life of another’ basis. The company can take out separate policies for each person responsible for the loan, with each policy reflecting their differing degrees of liability. For example, each person can have a separate plan with a different sum insured.
Under these circumstances, the business is the policyholder and is, therefore, the recipient of the payout. The firm can then decide to pay the loan off immediately in full using the funds or continue to repay the loan using interim instalments in line with the original borrowing agreement.
Business loan protection works slightly different for business partnerships, where two partners or more share ownership of a company. In this case, all partners typically take out own life cover to cover the amount of debt they have in their name and place it under a business trust for the other business partners.
Sole traders can also secure business loan protection insurance. A sole trader would usually take out loan protection on their own life and place the policy into trust for their family. Should they pass away, the family can use the funds to pay off any outstanding commercial debt they might have.
What is covered by business loan protection insurance?
Lenders typically require somebody to be named on any lending agreement, who is liable for the debt. This person is known as the guarantor. If they die, liability for repaying the funds passes to the remaining business owners or the business itself. Business loan protection insurance can cover any debts guaranteed by the insured person, in the event that they pass away unexpectedly. Typically, there’s no limit to the amount of debt which you can insure on the policy. Companies can use this kind of insurance as a safety net for a range of commercial debt, such as:
- business loans
- commercial mortgages
- venture capital funding
- personal guarantees
- directors’ loans.
While it’s primarily a life assurance-based insurance policy, many policies can pay out if the insured person becomes terminally ill with a life expectancy of fewer than 12 months. Some plans can also cover those who fall seriously unwell and are unable to work, provided you have opted for a critical illness policy. Typical illnesses for which you can claim critical illness cover include:
- heart attacks
- organ failure
- brain injury
- HIV infection
- bacterial meningitis
- cancer (some policies may specify the type)
- permanent disability.
Do I need business loan protection insurance?
Business loan protection insurance is by no means a legal requirement. However, many lenders require an assignment of a policy as a form of security for the loan. Some insurers can assign policies to the lender so that they receive the funds directly following the death of the guarantor.
That said, any company with outstanding debts should consider a business loan protection policy, particularly if the company would struggle to repay these amounts if the owner were to die. This type of insurance is crucial for businesses that wouldn’t have enough assets to cover the debt, as they could be at risk of bankruptcy.
Not only could the death of a business owner put the company at risk without business loan protection insurance, but it could also put their family at risk if the outstanding loans have personal guarantees attached. Should the business be unable to repay the loans and subsequently fold, the lender may seek repayment from the estate of the guarantor, putting their family’s private assets at risk.
Many insurance advisers consider smaller companies at higher risk of inability to repay loans, as they are less likely to be able to absorb the financial blow of repaying significant amounts of commercial debt. Smaller loans, and particularly start-ups, rely on business loans to begin trading, meaning they have both more debt and fewer assets to repay them, leaving them especially vulnerable to financial difficulties if the guarantor was no longer around.
According to research carried out by Legal & General, 52% of UK businesses would fold within just one year if they were to lose one of their key staff members. It also showed that over half of UK businesses have some kind of business debt. Based on this logic, business loan protection appears a worthwhile consideration for the majority of UK firms.
How much cover do I need?
If you’re taking out business loan protection insurance, the sum insured on the policy must reflect the amount of the outstanding business debt. There are two principal ways that you can structure a business loan policy:
- Decreasing cover, sometimes known as reducing benefit. This type of cover falls in line with your capital repayment loan. When you make repayments to your debt, the amount of cover will reduce to reflect the sum remaining, and will reach zero by the time the loan has been repaid in full.
- Level cover. This amount remains fixed over time and covers the entire loan until the end of the loan term. It is typically used to cover interest-only loans where the capital funds are not repaid until the end of the term period.
Alternatively, companies can opt for a policy taken out on a guaranteed insurability basis, where the cover adjusts in line with the loan, to ensure that if the debt grows, the protection extends to match. With guaranteed insurability, typically the company needn’t inform the insurer of a loan increase or seek approval before accepting larger loans. The most important thing to remember is that the period of cover needs to match the term of the loan, to ensure the company has protection throughout the full duration of the loan agreement.
Before choosing a policy, you must check the terms of the loans you wish to cover to understand who has responsibility for the funds. Business owners may be jointly liable, severally liable or jointly and severally liable for the repayment of a loan. The liability of the individuals affects the type of policy suitable. Insurance consultants and brokers can advise on an appropriate policy structure for your loan type, depending on the distribution of liability.
How much does business loan protection cost?
How much you will have to pay for business loan protection depends principally on the size of the outstanding debt, and thus the amount of cover you need. Decreasing cover tends to be cheaper, as the sum insured reduces over time, and this decrease is mirrored in the price of the premiums. The most expensive type of business loan protection policies are those taken out on the basis of guaranteed insurability, as the insurer promises to protect an amount which may grow without their express approval.
As business loan protection insurance is a life-based policy, the price of the insurance is largely determined by information relating to the persons insured. The insurer will work out the rate of your premiums using the following information about those named on the policy:
- the state of their general health
- any current medical conditions
- their medical history
- smoker status.
Typically, the younger and healthier the person to be insured on the policy, the cheaper the premiums: a healthy 45-year-old would expect to pay almost double the monthly premiums of a healthy 35-year-old. Sometimes, insurance providers offer health schemes that provide financial incentives for customers that take part. Participation might include following exercise programmes, taking out gym memberships or making other lifestyle changes, which the insurer may reward with reduced premiums.
The extent of coverage you choose also has a bearing on the price. Critical illness cover is typically far more expensive than life assurance cover, as it can provide coverage for a large number of severe illnesses and conditions, usually around 40. Some insurers may cover over 100 conditions, though these policies may be more expensive. Other factors which may affect the price include the occupation of the insured, as riskier jobs tend to result in higher premiums.
How to find a business loan protection insurance provider
Business protection insurance can be the make or break of a company’s survival following the death of a key member. Most insurers offer business protection insurance as a package policy which can cover a range of liabilities that a business may face following a team member’s unexpected departure. Business loan protection is just one of these types of policy, typically offered alongside key person protection, shareholder or partnership protection and, sometimes, relevant life.
When looking for a business loan protection policy, companies should consider the risks they’d face if they were to lose anybody in the company to determine the types of policy they require. Businesses can save money on premiums and receive more extensive cover from insurers who can offer them a packaged plan. Once you’ve established the types of policy and the level of protection you require, there are three ways to find an insurance provider.
Approaching suppliers directly
Business protection products are some of the more confusing insurance solutions on the market, as they are determined based on the personal risk profile of each insured person, taking into account lifestyle choices and their medical history, as well as their individual liability for each loan. For loans guaranteed by multiple business partners, more than one policy may cover the same debt, each insuring a different amount depending on how much the individual is liable. Due to the complexity of the product, it is a type of insurance often offered by specialist business protection providers, or by suppliers that only provide life assurance products.
You can find details of the policies offered by various providers by looking on their websites and contacting them over the phone. When comparing policies, you should consider the features of cover each supplier can offer, the price of the premiums and any additional benefits that may come with the plan, such as access to medical experts, further treatment or complimentary counselling services. Many insurers will have specialist advisers available over the phone to build a policy which caters to your company needs.
Going through a broker
Brokers act as an intermediary between you and the insurance provider. They have access to a far broader portion of the market than the general public, which puts them in a strong position to find you exclusive deals with more extensive cover, often for more competitive prices. With such an intricate policy, it can be helpful to capitalise on the experience and expertise of trained brokers, who can help find appropriate cover to suit the unique needs of each person to be insured. They are often able to find flexible solutions and negotiate terms which offer your business the maximum protection for the best price.
The British Insurance Brokers’ Association (BIBA) regulates more than 1,800 firms in the UK, ensuring that their members adhere to strict industry guidelines. All their members are also authorised and regulated by the Financial Conduct Authority, which sets out exacting standards for its members to protect consumers. You can find a BIBA regulated broker through their website.
It can be both time-consuming and challenging to compare multiple policies from countless providers. Comparison websites can be a helpful starting point for anybody beginning their research into business loan protection insurance, as these sites can show a range of policies on offer in one place. You can also filter the search results according to specific criteria to find products that better correspond to your insurance needs.
Final thoughts & FAQs
Losing a valued member of any team can be challenging enough, without the financial pressure that comes with it. Even large businesses can be at risk of financial ruin should they lose an intrinsic member of their team to death or critical illness. Having a plan in place to protect the smooth-running of the company should the worst happen is essential for any business to survive.
Companies are most at risk when they lose individuals responsible for large business loans or other commercial debt. Business loan protection insurance can be essential in these cases, enabling companies to repay the debts of the deceased and continue trading as normal. Without it, businesses can face severe financial turbulence, and even insolvency. Consider taking out a business loan protection policy to secure the future of your business through difficult times.
Still have questions on business loan protection? Check out answers to common queries, below.
What is the tax treatment of business loan insurance?
Typically, insurance premiums for business loan protection are not tax-deductible as business expenses for corporation tax purposes. This is because HMRC tends to consider the premiums part of the cost of raising capital, as well as not being wholly and exclusively for the benefit of the business.
That said, while you usually have to pay tax on business loan protection premiums, the payout itself is often tax-free, as it is typically treated as a capital receipt, a benefit to the lender rather than the business.
Should I write my business loan insurance into trust?
Many companies wish to keep the payout from a business protection insurance policy separate to the business, for tax purposes or other reasons. To this end, many people choose to write a business loan insurance policy in trust, which is a separate legal entity to the business itself.
It is not common practice to write a business loan protection policy into trust if the business is a company, limited liability partnership or Scottish partnership as the company is the beneficiary. In these cases, it can even complicate and delay the payment if funds are tied up in a trust. Policies tend to be written in trust in the case of a business partnership where the two business partners are jointly liable for the debt. You must seek professional legal advice to determine whether it is appropriate for you to put a plan into a trust.
Who receives the payout?
When a claim is made, the insurance supplier pays out a lump sum to cover the outstanding debt of the deceased. Typically, the proceeds go to the policyholder, who can choose to pay off the loan in full or continue to make regular instalments to repay the debt according to the initial agreement signed between the deceased person and the lender. However, some insurers can assign a policy directly to the lender, which can simplify the process as they can pay the proceeds to them straightaway.
What is the difference between key person insurance and business loan protection insurance?
Both key person insurance and business loan protection insurance can safeguard businesses financially against liabilities they incur following the death or critical illnesses of an essential member of staff. However, key person insurance can cover any financial losses that this might cause for the company, including the cost of hiring and training replacements and any loss of revenue that comes from losing the person’s expertise or contacts. Business loan protection insurance covers only the outstanding borrowings for which the person is responsible, such as a loan, overdraft or commercial mortgage.
The treatment of tax also differs between the policies. The taxation of business loan protection tends to be relatively straightforward. With key person cover, taxation depends on the discretion of the tax authorities, who will take into account the purpose of the cover and the type of insurance.
What other types of business protection insurance should I consider?
Companies commonly take out business loan protection as part of a packaged business protection insurance policy, together with shareholder or partner protection and key person cover. Shareholder or partner protection can ensure that the business has a succession plan in place for each shareholder or partner’s business equity, should one of them die suddenly or fall ill unexpectedly. This allows for greater business continuity and stops shares from being tied up in probate, which may prevent the surviving owners from moving the company forward. Key person cover can account for financial losses following an essential employee’s death or inability to work due to illness, including costs for lost revenue and hiring replacement staff.