What is Business Loan Insurance?
A form of Life Insurance which is designed to cover outstanding corporate debt, such as:
- Corporate overdrafts
- Business loans
- Commercial mortgages
- Directors’ loans
- Venture capital funds.
It will protect against the risk of the death or potentially a serious illness of a key individual who has a level of responsibly for repaying the outstanding debt.
Essentially anyone with a part to play in repaying an outstanding company loan can be covered for the remaining amount of debt should they die or become seriously ill.
Neil
Pensions Advice
Robert
Income Protection
How Does Business Loan Insurance Work?
Business Loan Protection works in the same way as individual Life Insurance to cover a personal debt, such as a mortgage. It can be used to ensure the company can continue to function in the event that a key individual or individuals responsible for repaying a corporate loan dies.
In the event of an accepted claim, the insurer will pay out a cash lump sum to cover your loan.
An uninsured business loan runs the risk of your company being declared insolvent after your death if it no longer has viable means to repay the loan. That’s why lenders and investors such as venture capital firms often expect this cover to be in place to ensure the loan will always be repaid.
Protecting a business loan is not a legal requirement. However, many lenders will look for a company to have loan insurance in place before approving any lending to ensure the loan will be repaid should the worst happen.
Victoria Slade
Business Protection Expert at Drewberry
What Does Company Loan Insurance Cover?
Corporate Loan Repayment Insurance is designed to cover the full amount of an outstanding business loan if one of the key people dies or becomes critically ill (if you’ve added Critical Illness Cover to your policy).
Most insurers offer terminal illness cover as part of their Life Insurance cover. That means you’ll receive a payout early if you’re diagnosed as terminally ill. (The definition of terminal illness is usually defined as having less than 12 months to live.)
Can I use Business Loan Insurance to cover accidents and sickness?
Should you choose or be required to include Critical Illness Cover, in addition to passing away a claim will also be paid if you suffer a serious illness as defined in your policy terms and conditions. There are often over 40 illnesses covered with the vast majority of claims being paid for cancer, heart attacks and strokes.
Critical Illness Insurance is designed to cover serious illnesses. It won’t cover less serious conditions that could nonetheless prevent you from working, such as mental health conditions and musculoskeletal issues.
Business Loan Protection doesn’t offer cover for more minor illnesses and injuries. As a result, if you’re a small business or sole trader, some lenders may require you to have additional cover to protect the loan against the risk of you developing such conditions.
For protection against less serious illnesses and injuries, you’d likely need to consider a product such as Income Protection or Executive Income Protection. The former is paid for by you personally, while the latter is paid for by your business.
Income Protection provides a continuation of income, allowing you to keep up with the loan repayments while you’re too ill to work. The benefit of having Income Protection is that it can also protect your personal finances as well as covering a business loan if you were to fall ill.
Sam Barr-Worsford, DipFA
Business Protection Expert at Drewberry
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
- Profits
- 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 premiums vs Business Loan Insurance premiums – see below for more.
How Do I Set Up Company Loan Insurance?
While it’s possible to set up Business Loan Protection Insurance yourself, we’d always recommend speaking with an independent expert. We have a team of Business Protection Advisers here at Drewberry who can check the entire UK market for Business Loan Insurance quotes to find you the best deal.
The product can be quite complicated in some areas, so it makes sense to talk to someone who sets up these policies on a regular basis and knows them inside out.
It is always worth comparing quotes from the UK’s leading insurers rather than just taking out the option offered by your lender. Often these lenders options are restricted and some may even only be offering you a quote from one affiliated insurer. As a result, the cover they recommend can work out very expensive.
By coming to an intermediary such as Drewberry we’ll check the whole UK market on your behalf. That means we can often secure you a better deal than simply signing up to the protection offered by your lender.
Victoria Slade
Business Protection Expert at Drewberry
As mentioned, a Company Loan Insurance policy is usually owned and paid for by the business, with the payout going either directly into the business or straight to the lender, depending on how you’ve set up the policy.
However, it’s worth noting that in the event of your death, creditors, such as a business lender, have priority. That means they can usually extract the benefit straight from your estate with relative ease and speed, so there’s not always a need to assign the loan directly to the lender.
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 number of variables to consider that will have an impact on the amount of Business Protection Insurance 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. A straightforward capital repayment loan, where you repay the principle capital alongside the interest, will fall in value over time to zero once you’d repaid the loan in full.
- Decreasing cover will fall alongside your outstanding company debt, also reaching zero by the time the loan is repaid. As the amount of cover you’re insured for falls over time the risk to the insurer decreases over the life of the loan, so it tends to be cheaper than having a fixed level of cover.
- Level cover sees the benefit staying fixed over time. This 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. Keeping the benefit fixed over time, even as the risk to the insurer rises over time as you age, means this type of cover tends to be more expensive than decreasing cover.
Can I Get 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.
Where the loan is held severally, it may sometimes make sense to have two separate policies to cover the two separate liabilities, especially 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.
How Much Does Insurance for Business Loans Cost?
The cost of Business Loan Protection depends largely on the amount of cover you need and whether the cover needs to be level or decreasing.
As with all Life Insurance written on individual lives, each person will need to be medically underwritten for Company Loan Insurance. This will involve an application where you’ll be asked a series of questions relating to:
- Your health and medical conditions
- Your age
- Your lifestyle (e.g. smoking and drinking habits)
- Your job (riskier occupations tend to cost more to insure).
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How is Business Loan Insurance Taxed?
Some Business Protection policies, such as Keyman Insurance, are usually an allowable business expense for corporation tax purposes so long as the policy meets the principles of the “Anderson Rules”. However, this means the money that is paid back into the business in the event of a claim is taxable as a trading receipt.
The taxation of Business Loan Insurance is treated very differently from Key Person Insurance, however.
Given that the insurance is not technically for the benefit of the business (rather it is the lender who will receive the funds and whose capital is at risk), Business Loan Insurance premiums are not tax-deductible as a business expense in most instances as they are treated as part of the cost of raising capital.
However, unlike Keyman Insurance, the benefit from Business Loan Insurance is not taxable for the business in most cases, as it’s destined for the lender and won’t be retained in the business.
Josh at Drewberry was extremely helpful and friendly in answering my many questions about the policy before I went ahead.
Get Expert Business Loan Insurance Advice
When it comes to making sure your business is protected against the risk of not being able to repay an outstanding debt if a key person passes away or becomes critically ill, Business Loan Protection can ensure the survival of your business.
Considering how complicated corporate finance can be and how important your company is to you it is best you speak to an expert to ensure you have the most suitable cover.
If you are looking to take out Business Loan Insurance and would like advice please do no hesitate to call us on 02074425880 or email help@drewberry.co.uk. Our advisers will be happy to talk through all of your options.
Tom Conner, MSc, MPhil
Director at Drewberry
Why Work With Drewberry™
- We placed over £1 billion worth of risk with insurers for our clients in 2017
- We were nominated for Protection Intermediary of the Year at the Protection Review Awards in 2016, 2017 and 2018 and the Cover Excellence Awards in 2016 and 2017
- Our ethos is to provide the best possible service demonstrated by the growing number of 5-star rated reviews with 98% of our clients saying they would recommend us
- Tom and the rest of our insurance experts are frequently quoted in leading papers such as The Independent and Financial Times with a reputation in the media as an authority in our industry.
