Business loan protection

Why business debt needs its own cover

When a guarantor or key director dies, three things can happen at once: the lender reviews the facility, the estate calls in any director's loan account, and trading wobbles. A business that was comfortably servicing its debt can become distressed within months. Business loan protection puts a lump sum into the right hands at exactly that moment, clearing or paying down the borrowing so the survivors deal with grief and succession, not creditors.

Matching the cover to the debt

The shape of the policy should follow the shape of the borrowing. A repayment commercial mortgage suits decreasing term cover, where the sum assured falls broadly in line with the balance. An interest-only facility, overdraft or revolving credit line suits level term cover, because the exposure does not fall. A director's loan account is usually covered with level term sized to the account balance, reviewed as the balance moves. Terms are matched to the loan term.

Director's loan accounts, the overlooked one

Money a director has lent the company is a debt of the company, and on the director's death the estate can require repayment. Many otherwise well-run companies could not repay a six-figure loan account at short notice. Cover on the director's life, paid to the company, lets the company repay the estate promptly, which is usually exactly what the family needs.

Ownership, trusts and lender assignment

Usually the company owns the policy on the relevant individual's life and receives the pay-out, mirroring key person cover. Some lenders require the policy to be assigned to them, so the proceeds go straight to the loan. In partnerships, partners typically hold policies on each other or use business trusts. Getting the ownership right at outset matters more than the premium; we set the structure with your accountant's input.

Tax treatment

Because the policy benefits the business rather than a family, premiums are generally paid from company funds and the tax treatment of premiums and proceeds depends on the purpose and structure of the cover, in a similar way to key person insurance. Treatment is fact-specific, so confirm it with your accountant rather than assume relief or assume a tax-free receipt.

Adding critical illness

A guarantor disabled by serious illness cannot meet a guarantee any more easily than an estate can. Adding critical illness cover to business loan protection covers the more likely event at working ages. Many businesses insure the full debt on death and a partial figure on illness to manage premium cost. We model both routes.