Why Bikmo Opted for Key Person Insurance
A case study detailing the success of cycle insurance company Bikmo and why they felt Keyman Insurance was important...
Whether you’re launching a new venture or expanding an existing one, you may have taken out a loan to help you achieve your goals.
But what happens if you were unable to make your loan repayments as a result of death, sickness, or injury? That’s where Business Loan Insurance comes in. But what exactly is it and what do you need to think about before taking it out?
In this guide, we’ll tell you everything you need to know. You can also compare quotes in seconds from Aviva, Vitality and other top UK insurers.
Business Loan Insurance is a form of both Life Insurance and Business Protection. It insures the life of a key person for any company debts they’re responsible for. These debts might include:
Defaulting on any company loans can have serious consequences for the health of your business. A business loan policy can help make sure this doesn’t happen.
If a key person becomes critically ill or dies before any business debts are repaid, the funds will need to be made available from elsewhere in the business. This could have serious implications on the solvency of your organisation and your business’s profits.
By putting Business Protection in place, you can ensure your business is financially protected should the worst happen.
Business Loan Insurance provides cover if an employee who is key to these repayments is unable to work due to illness, injury or death.
The insurance provides a lump sum cash injection to help you repay business loans the key person held. As with most forms of insurance, there are different kinds of cover you can take out:
The level of protection you need will depend on your organisation’s individual circumstances. You’ll need to consider how many key employees you have and their role, as well as the sum of the outstanding debts.
Policies can be owned by either the business, an individual director, or by the lender. The policy owner is usually the business owner, as they’re responsible for paying the premiums.
If you’re a sole trader, you’ll own the policy and be the only person insured.
Samantha Haffenden-Angear
Independent Protection Expert
Often, it’s the business owner who needs this cover, because they’re responsible for repaying any outstanding loans. However, that’s not always the case. If there’s another key employee who is crucial for the business’s profits, they may need this protection, too.
Essentially, you can take out Business Loan Protection Insurance for each key person whose role helps your business pay off its commercial loans.
Protecting a business loan is not a legal requirement. However, many lenders and venture capital firms insist on you having some form of business protection in place when you arrange business loans. This gives them assurance that you’ll be able to repay what you owe.
EXPERT TIP 🤓
Many businesses can’t repay their loans if a key employee dies or develops a terminal illness. In fact, according to Legal & General, 52% of directors expect their company to fail within a year of such an event.
Often, if a key person responsible for repaying a business debt passes away or becomes seriously ill, a creditor will demand that any outstanding debt be repaid there and then. Unprotected businesses run the risk of being declared insolvent in the event of the death of a key person if they can’t repay the money owed.
It’s essential to evaluate the risks involved with taking out a business loan. While no one can predict the future, being prepared can help mitigate the impact of unexpected events, such as the death of a key employee.
We’ve used Office for National Statistics (ONS) data for the table below detailing the risk of death in the next 10 years for men of varying ages.
Risk Of Death In 10 Years | Age | Risk |
|---|---|
35 Years Old | 1 in 62 |
45 Years Old | 1 in 29 |
55 Years Old | 1 in 12 |
The same data helped us to build a Life Expectancy Calculator where you can work out your own personal risk of death. We realise this can be sad to think about, but it’s important to be prepared and protect what matters to you.
It’s not just the risk of death that needs to be considered. Cancer, heart attacks, and strokes make up around 80% of Critical Illness claims.
While Critical Illness Insurance covers serious illnesses, it doesn’t include less serious conditions, even if they stop you working. Common causes of time off work include mental health conditions and musculoskeletal issues.
EXPERT TIP! 🤓
Not every case of the above conditions is covered by Critical Illness Cover. Less severe cases may not be included in your business loan protection, or may only trigger a partial claim. It’s essential you check the policy wording or ask your adviser for assistance.
For protection against a greater range of illnesses, many directors and small companies turn to Executive Income Protection. This offers a continuation of income if you’re unable to work due to accident or sickness. What’s more, it can also protect your personal finances as well as a business loan.
You’ll want to match the outstanding loan balance to the sum assured so you’ll receive a lump sum to cover your debts.
Depending on the type of loan you have, you can take out either Level or Decreasing insurance.
The term of the insurance you take out will last as long as your agreed loan repayment. For example, you might take out a commercial mortgage and agree to repay it over 10 years. In this case, your Business Loan Protection policy will also have a ten-year term.
The cost of business loan protection will vary depending on a range of personal and policy factors. It’s important to understand what these are when taking out a policy.
Our online calculator will retrieve personalised quotes from the top UK business loan insurance providers and provide you with real time pricing.
Using our own calculator, we’ve outlined some of the key factors that impact the price and provided examples of how costs can vary.
Each provider is unique. They will have a different appetite for risk, as well as different underwriting processes. Because of this, the premiums they charge will also vary. To give you an idea, we’ve provided an example based on:
Providers | |
|---|---|
£10.17
| £15.20
|
The type of cover you choose will also impact the amount you pay in premiums. As mentioned above, decreasing cover reduces the benefit amount over time in line with the debt you are repaying.
Level cover, on the other hand, sees the benefit amount remain fixed over the life of the policy. As a result, you can expect to pay more for a policy with level cover than you would for one that is decreasing. Taking our healthy 35-year-old from above, we’ve provided an example below.
Decreasing VS Level | Type of Cover | Monthly Premium |
|---|---|
Decreasing
| £10.11
|
Level | £18.19 |
How long the term of the policy is will also affect how much you pay in premiums. This is because as the individual who is insured gets older, the risk of them passing away or getting a critical illness increases.
Length of Term | Term | Monthly Premium |
|---|---|
10 years
| £11.13
|
20 years | £13.93 |
By adding Critical Illness, the insured individual will also be protected if they develop a condition listed in the policy terms. As a result, you can expect to pay significantly more in premiums as again the risk of having to pay out increases.
Using the same healthy 35-year-old from above, we’ve provided an example below, using the same policy terms. However, we’ve added a £250,000 critical illness benefit.
Adding Critical Illness | Life Only | Life & Critical Illness |
|---|---|
£11.27 | £50.20
|
Age plays an important factor when it comes to the cost of Business Loan Protection. This is because unfortunately, as we get, older the risk of us passing away gets higher.
To give you an idea of just how much age affects premiums, we’ve provided examples below. The quotes are based on £500,000 benefit amount, decreasing cover, with a 10-year term. The individual in question is a healthy 35-year-old non-smoker.
Impact of Age On Premiums | Age | Monthly Premium |
|---|---|
35
| £12.45
|
45
| £23.25
|
55
| £57.14
|
When taking out Business Loan Protection, providers will assess the medical history of the individual being insured. If they have existing health conditions, it’s likely that the policy premiums will increase.
It may impact the level of cover you can get. In a worst-case scenario, some providers may exclude the condition from the cover completely. This is because pre existing conditions can be classed as higher risk.
There are a number of conditions that would class someone as high risk in the eye of an insurer. However, these conditions can vary from one provider to another. What one sees as high risk another might not, so it’s important to compare providers when doing your research.
Due to the health risks associated with smoking, some providers will charge higher premiums for Business Loan Protection. In fact, it’s not just if you are a smoker, vaping is also seen in the same light. This is because providers will class your status on whether you have consumed nicotine in the last 12 months.
Smoker VS Non-Smoker | 🚬 | 🚭 |
|---|---|
£31.48
| £18.11
| ☝️ 74% increase in monthly costs for smokers |
Premiums can also be affected by the job role that you do. Again, like with the above factors, this is because insurers base the cost of premiums on the level of risk you present. Some occupations are higher risk than others. A scaffolder, for example, is more at risk on a daily basis compared to someone who is sat at a desk all day.
If the key person looking for cover has a high-risk job, the likelihood is that they’ll face higher premiums.
It’s not just occupation that insurers will look at. They’ll also look at whether you partake in any hazardous hobbies which would put you in a higher risk category. These include:
Most online quote tools won’t consider any additional risk, such as hazardous hobbies, therefore the quotes you receive may not be accurate.
If you do take part in extreme hobbies such as those listed above, pop us a call on 02084327333 or email help@drewberry.co.uk.
Bradley Fedarb
Health & Protection Expert
You won’t be able to claim tax relief on your Business Loan Protection premiums. This is because any money paid out will go to the lender, rather than the business.
As such, HMRC does not class the policy as ‘wholly and exclusively’ for the benefit of the business. Instead, HMRC treats premiums as part of the cost of raising capital.
Although you usually have to pay tax on insurance premiums, the payout is typically tax free when it is paid to the lender.
A trust is a separate legal entity from your business. Businesses might use trusts to keep an insurance policy separate from the organisation. This could be to receive money from certain insurance policies for tax purposes or other reasons.
However, generally speaking, you don’t need to write Business Loan Protection into trust. This is because a trust would actually complicate matters in the event of a claim.
The funds are paid straight to the lender to settle your outstanding debt, not to be held up in a trust. Moreover, as there’s not usually any tax due on a payout from such a policy, writing it into trust is of little use.
At Drewberry, we work with every single leading UK insurer offering this type of cover. When undertaking a market review, we’ll source quotes from:
It’s really important to compare quotes from all the leading insurers. If you take the quote offered by your bank or lender, you may not get the benefit of whole-of-market research. As a result, you could pay more in premiums than necessary.
Another comparison point to look out for is the additional benefits that come alongside the core cover. Depending on the provider, you could benefit from some of the following extra services:
It can take a lot of time to research & compare providers, particularly when taking account of their extra features. However, being thorough is important, as you’ll end up with the best protection to suit your specific needs.
There’s a lot to consider when taking out Business Loan Protection. You need to know the total sum of your commercial debts, your term to repay them, and identify the key employees in your organisation.
On top of that, taking out the right protection means researching providers and comparing quotes. This can be a lengthy process.
Here at Drewberry™, our qualified advisors will listen to your needs, research providers, and make an expert recommendation. We can negotiate the best possible rates for you and set everything up smoothly on your behalf.
We started Drewberry™ because we were tired of being treated like a number.
We know that our clients give so much to their businesses. They therefore deserve first class service when it comes protecting that business and their interest in it. Here are just a few reasons why it makes sense to talk to us:
If you need help setting up a Business Protection policy, give us a call on 02084327333, or email help@drewberry.co.uk.