Business Loan Protection is a form of Life Insurance which pays off outstanding corporate debt should a person key to the business pass away.
It is designed to protect against the risk of the death (and potentially a serious illness if you add Critical Illness Insurance) 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.
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 an individual having less than 12 months to live.)
Although Critical Illness Insurance covers serious illnesses such as cancer, heart attacks and strokes it won’t cover less serious conditions that could nonetheless prevent you from working, such as mental health conditions and musculoskeletal issues.
If you’re a small business or sole trader being unable to work and earn an income due to any illness or injury can be just as devastating to the financial position of your business as a more serious illness.
To protect themselves from a greater range of illnesses that could render them unable to work many directors and small companies turn to Income Protection.
Income Protection provides a continuation of income if you are unable to work due to any accident or sickness. The benefit of Income Protection over Critical Illness is that it can also protect your personal finances as well as covering a business loan if you were to fall ill.
If you are considering Income Protection there are Executive options which can be paid for by the business.
When directors and small businesses are made aware of this type of cover many see it as a more comprehensive form of illness protection than Critical Illness Insurance.
Sam Barr-Worsfold
Business Protection Expert at Drewberry
Although protecting a business loan is not a legal requirement many business lenders and venture capital firms are starting to insist on having some means to repay a loan should a key person die or become seriously ill.
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.
According to Legal & General, 39% of company directors expect their company to fail within 18 months of the death / serious illness of a key person – how would your business cope?
Based on ONS life expectancy data (2012-14), the chances of a healthy male passing away within the next 10 years are as follows:
Age 35
| Age 45
| Age 55
|
|---|---|---|
1 in 62
| 1 in 29
| 1 in 12
|
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.
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.
Whether you need level or decreasing cover will depend on the nature of your loan.
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.
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.
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:
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.
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:
We have calculated the monthly cost of a decreasing Life Insurance only policy for a £150,000 business loan to be repaid over 5, 10 and 15 years for a healthy non-smoking individual aged 35, 45 and 55.
Age | 5 Year Loan
| 10 Year Loan
| 15 Year Loan
|
|---|---|---|---|
35
| £5.51
| £5.65
| £5.91
|
45
| £7.46
| £9.23
| £9.80
|
55
| £21.40
| £26.78
| £33.55
|
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 typically tax-deductible as a business expense. Rather, premiums are treated as part of the cost of raising capital.
However, should a claim be made the benefit from Business Loan Insurance is not taxable for the business in most cases, as it is destined for the lender and won’t be retained in the company account.
Essentially, while you usually have to pay tax on Business Loan Protection premiums, the payout is typically received free from any tax because it is a benefit for the lender, not the business.
Business loan insurance is not always compulsory however some lenders require evidence you have suitable protection in place before the funds can be released.
As a minimum many lenders require Life Insurance covering the outstanding loan amount while some may require Critical Illness Insurance which will provide financial protection against serious illnesses such as cancer, heart attacks and strokes.
The person who is responsible for the loan repayments takes out a Life Insurance policy which mirrors the length and the amount of the outstanding loan.
Should this individual die during the term of the loan the Life Insurance policy will pay out an amount equal to the outstanding loan which is earmarked for the lender.
The premiums for a business life insurance policy to cover loan is not usually tax deductible.
Should a claim arise the benefit payment is usually received tax free as it is covering an outstanding debt and earmarked for the lender.
Taking out business loan protection can often be a little more complicated than a personal life insurance policy with many insurers recommending you seek advice.
Our business loan insurance calculator compares premiums from the top UK insurers and are expert advisers are here to help make sure your policy is set-up in the most appropriate way and meets your lenders requirements.
It’s always worth comparing quotes from the UK’s leading insurers rather than just taking out the option offered by your lender.
Often these options offered by lenders are restricted and some may even only be offering you a quote from one affiliated insurer. As a result, the cover they recommend can often be significantly more expensive than the most competitive in the market.
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.
We started Drewberry because we were tired of being treated like a number and not getting the service we all deserve when it comes to things as important as protecting our health and our finances. Below are just a few reasons why it makes sense to talk to us.
If it is all getting a little confusing and you are looking for some help with your Business Loan Insurance then please don’t hesitate to pop us on 02074425880 or email help@drewberry.co.uk.
Tom Conner
Director at Drewberry
Josh was brilliant, very quick process, simple, regular updates and reliable. Would highly recommend.
Or call us on 0208 432 7333
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