If you or a fellow director, partner or member were to die or fall seriously ill, some lenders may ruthlessly demand full repayment of an outstanding debt.
Business loan protection insurance is a financial safety-net that can help protect your business from financial instability or failure, in these unprecedented and unpredictable times.
What is Business Loan Protection?
Should a business owner suddenly die, be diagnosed with a terminal illness or, if covered, become critically ill, business loan protection is a type of business life insurance that helps a business pay back any type of business debt such as:
- an outstanding loan
- a commercial mortgage
- a business overdraft
- venture capital
- a director’s loan
Should this unfortunate scenario unfold, business loan insurance coverage means that upon a successful claim being made, a cash lump sum (equivalent to the outstanding debt) would be paid directly to either the business or the loan provider.
Standard policies typically include terminal illness cover if life expectancy is less than 12 months.
Some policies can also provide critical illness cover as an optional extra that will pay out in the event of an owner, director, partner or member suffering a critical illness. A policy will specify the critical illnesses covered in the terms and conditions of an insurance policy, such as heart attacks, strokes and certain types of cancer.
What is Business Loan Insurance?
‘Business loan insurance’ means exactly the same as ‘business loan protection’; it’s simply different terminology for the exact same business insurance product that can cover repayment of an outstanding business debt.
Lenders will sometimes offer insurance when you borrow money but you should speak to one of our business insurance experts to make sure that you are not paying more than you need to.
Why get Business Loan Protection?
Statistics show why many SMEs should seriously consider taking out business loan protection:
- According to the Bank of England, one third of small and medium-sized enterprises (SMEs) have debt equal to x 10 the amount of cash they have in the bank (this statistic was only 14% pre-Covid).
- According to the Office of National Statistics (ONS), the number of UK business closures in the third quarter of 2021 (July to September) was 50% higher than quarter 3 in 2020.
- According to Legal & General, despite smaller businesses being the most vulnerable to bankruptcy, only 58% of SMEs insure their debts.
- According to Euler Hermes, a further 32% of UK businesses are expected to fail before the end of 2022 as the government pulls back from offering Covid support.
- According to BDO, 15% of SME directors are more than 66 years old and 10% are over 70.
Some business loans have personal guarantees and if a business fails, following the death or serious illness of a key member of staff, then a lender may seek repayment of a loan from the guarantor directly or, in the case of death, the guarantor’s estate.
What is needed to set up a Business Loan Protection?
To set up a business loan protection policy you will need to provide the following information when you apply:
- the age of the insured (business owner, partner, director or member)
- your type of business (its industry or services)
- the policy holder’s lifestyle choices (extreme sports and smoking status)
- the insured’s medical information (weight, health, pre-existing conditions and family history)
In addition, you will need to consider:
- the level of cover required (how much is required to repay a debt in full)
- the type of cover (whether to have ‘decreasing cover’ also known as ‘reducing benefit’ where the premium payments reduce in size alongside the debt or ‘level cover’ where the premiums remain the same, typically used for interest-only loans where the capital is only fully repaid at the end of the loan agreement period).
- affordability (how much your business can afford to pay every month)
- the policy term (cover needs to match the term of the loan)
- the liability terms of a loan (if owners are jointly, severally or jointly and severally liable for repayment.
- tax and trusts (Inheritance Tax, Capital Gains Tax or putting the insurance in trust)
Depending on your business structure, you will need to submit the following additional information or documents when applying:
- A Limited Company, Limited Liability Partnership (LLP), Scottish partnership or sole trader will need to include ‘ownership of benefits’ information.
- In addition to ownership benefits, a sole trader will need to submit a Discretionary Trust Deed.
- Partnerships will need to submit a Partnership Protection Trust deed.
If you have any queries, you can speak to one of our specialist advisers about business loan insurance or complete and submit the online form below.
In addition to business loan insurance, you may want to consider taking out share protection insurance so that if a shareholder in your business dies or falls seriously ill, the remaining shareholders can afford to buy their shares outright.