How to Set Up Business Loan Insurance
Business Loan Protection works in a similar way to Mortgage Life Insurance but instead of covering a personal debt, such as a mortgage it protects a business debt.
In the event of an accepted claim, the insurer will pay out a cash lump sum into the business to be used to cover your loan. Given the policy is owned by the business it can be a little more complicated because of the tax implications on premiums and potentially the payout if you don’t set it up correctly.
How Much Cover Do I Need for Business Loan Protection Insurance?
The amount of cover you need to insure a business loan will depend obviously on how much the loan is for.
However, there are a couple of variables to consider that will have an impact on the amount required for your loan.
Level or Decreasing Business Loan Insurance?
Whether you need level or decreasing cover will depend on the nature of your loan.
- Decreasing cover
Falls alongside your straightforward capital repayment debt, reaching zero by the time the loan is repaid.
- Level cover
The benefit stays fixed over time and is therefore usually used for an interest-only loan, where you don’t repay the principle capital until the end of the loan. Level cover will ensure that the outstanding loan balance will always be covered, right until the end of the loan’s term.
Joint Business Loan Insurance
If there’s more than one person in the business with responsibility for repaying the loan, you’ll have to look at the original loan agreement to determine how the loan is held before you can proceed with getting cover.
Why the structure of your business loan is important…
How your loan is structured may have an effect on the type of insurance you need. If the two parties are jointly liable, it is possible to have a single policy written on a joint life, first death basis.
This will pay out to cover the entire loan if one party to the loan passes away or becomes critically ill.
If multiple key people are responsible for the loan it may sometimes make sense to set-up individual policies to cover the individual liabilities. This is especially true where there’s a wide discrepancy between the ages and health of each party, as well as the percentages of the loan each party is responsible for.
Is Business Loan Insurance the Same as Keyman Insurance?
There are a number of similarities between Business Loan Protection and Keyman Insurance, but they’re not the same product.
Although both cover key individuals within the business, Company Loan Insurance is designed specifically to protect an outstanding loan and those responsible for repaying it.
Where Business Loan Insurance will only cover any outstanding debt, Key Person Insurance may have a higher benefit to cover a wider array of eventualities resulting from the death or critical illness of a key person.
For Keyman Insurance, the key individual or individuals may be insured to protect against loss of:
- Supplier / customer confidence
- Important personal or business contacts
- Detailed knowledge of business processes and systems.
It can cover any key individual within the business in a major profit generating role. Unlike with Business Loan Insurance, someone insured under Key Person Cover doesn’t have to be responsible for repaying a loan, just pivotal to the ongoing success of the business.
Most importantly, there are significant differences in the tax treatment of Keyman Insurance and Business Loan Insurance premiums.