Business Loan Protection

Clear any outstanding debts e.g. overdraft, loans or commercial mortgages and eliminate financial pressure from creditors. Protection is vital to allow your business to recover quickly and minimise the impact should the worst happen.

The loss of a key person (you) can put a lot of pressure on the remaining owners. Apart from increased workloads and potential loss of profits, there may be the added burden of financial commitments such as outstanding business loans.

Lenders usually require this cover and you may have given personal guarantees – using your home as security. So there is the added need to make sure that your dependents are protected too.

You’ve worked hard to build your business. Make sure you protect it.

Have you made loans to the company, either by cash injection or by leaving salary, bonus or dividends in the business?

Known as director loan accounts, these become repayable to the estate if you die and therefore need to be included when calculating the amount of cover needed. In a partnership there may be similar loan accounts owed to individual partners and these need to be covered in the same way.

28%* of owners aren’t aware that their Director Loan Accounts need to be repaid on death.

It makes sense to include the director’s loan account when calculating critical illness cover too, so that if you suffer a critical illness, the company would be able to repay the loan and give you much needed personal financial security.

What are the chances of suffering a critical illness or dying before age 65?

Ask yourself these questions:

Do you have a Director/Partner’s Loan Account for your business?

Do you have a bank loan or commercial mortgage for your business?

Have you provided a personal guarantee for such a business loan?

Does your business have an overdraft or any other type of borrowing?

If the answer is yes to any of these questions, have you considered the implications of being unable to repay these debts during a difficult economic environment?

What are the chances of suffering a critical illness or dying before age 65?

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Case Study – Business Loan Protection

Arancini Limited is an Italian restaurant in south Wales with an outstanding reputation for its food. Managing Director, Giuseppe Donatello, plans to expand Arancini’s empire by opening a deli and bakery. The shop next door has just become vacant and presents Giuseppe with an ideal opportunity to expand the company.

To achieve this the company needs to borrow £800,000 from the bank.

The bank insists on a Life Insurance policy on Giuseppe’s life, as he is the key person, to protect the loan should he die. Arancini Limited takes out a £800,000 policy over 10 years (matching the amount and term of the loan) on Giuseppe.

The policy is designed to pay out £800,000 if Giuseppe dies within the next 10 years. The policy proceeds can be paid direct to Arancini Limited or it can be assigned to the bank.

Because Arancini Limited owns the life policy on a ‘life of another’ basis, there is no need for Trust documents to be completed. In the event of a claim, the money would be paid direct to Arancini Limited or the bank, therefore it’s not treated as a benefit in kind for Giuseppe.

CaseStudy-BusLoan-240px

Different types of Business Loan Protection

Level Cover for your Interest Only Loan

With this type of loan the monthly payment you make to the lender covers the interest only and doesn’t chip in to the outstanding balance, therefore the amount you owe the lender remains constant. Level Cover ensures that your cover amount also remains constant ensuring your business (or the lender) receives the required pay out to clear the debt.

Decreasing Cover for your Repayment Loan

The amount of cover reduces each year, typically in line with the outstanding balance of your loan. This is the most suitable and cost effective way to protect a repayment loans.

Level v Decreasing Cover - Info - 20.03.2016

Beware of buying Life Insurance from your Bank or Loan Provider!

You can purchase Life Insurance virtually anywhere now, however, the cost for identical cover can vary dramatically. A pint of milk doesn’t cost the same in every shop and insurance isn’t any different either!

When your bank or loan provider are arranging a loan, it’s likely that they’ll use the ‘would you like fries with that’ approach to tag on some insurance. Whilst it may seem logical and convenient to use the same person who’s helping you raise finance, you are unknowingly restricting your options and could end up paying around 50% more than you need to – which can total thousands of pounds over the term of a policy.

Read this article in The Telegraph which explains more.

Here at Vita we can source discounted premiums from all insurers in the UK and are experts in this field.

Frequently Asked Questions

Where does the insurer pay the policy proceeds in the event of a claim?

As the policy is taken out by the business, the proceeds are paid to the business. From here, you will decide what to use the money for and which individuals or financial institutions should benefit.

You can assign the policy to the lender, in which case the proceeds will be paid directly to them.

Can my business pay the premiums?

Yes. The insurer will set up a Direct Debit to collect monthly or annual premiums from your business bank account.

Why should I pay more to include Critical Illness Cover?

You are far more likely to suffer a serious illness than you are to pass away. This is why most lenders will insist that you don’t just cover yourself with Life Cover. Depending on the illness/condition (e.g. heart attack, cancer, stroke etc.) you may be unable to work and therefore this may hinder your ability to service any debts. 

Critical Illness Cover helps ensure that you can repay any debts and avoid unnecessary stress/worry at what will already be a very difficult time.

What if my levels of borrowing/debt change?

In the event that you clear a chunk off or borrow more, it’s worth letting us know so we can review your policy to ensure that you have the appropriate cover in place. You can cancel your Life Cover at any point, without any fees or penalties. 

Is Loan Protection compulsory?

Not always. The majority of lenders will insist that you put the appropriate protection in place to cover their exposure to the debt. More importantly, Business Loan Protection can help protect the future of your business.

How much will it cost?

The cost of Business Loan Protection will vary depending on your age, your health, your job, the amount of cover you want and maybe even your hobbies. This is why price comparison site quotes are often meaningless as they won’t account for your specific individual circumstances.

We will provide you with accurate premiums from the outset. Nobody likes to see a price and then be told it’s not available to them.

The policy you buy is there to protect your business – not anyone else’s – so it’s worth finding a policy that will exactly suit your needs.

Can I cancel my policy if I no longer need it?

Yes. Although it is worth considering that should you need to re-apply for cover at a later date, the same cover is likely to cost more as you will be older. Also, insurers will reassess your Health & Lifestyle at the time, which means you could be charged more if your health has deteriorated, or worst case – may not be able to get any cover at all.

The insurer won’t charge you any cancellation fees and, unlike some competitors, we won’t charge you any fees either.

Our friendly Business Protection Specialists are available to answer your questions, provide expert advice and make recommendations – so please call us on 0800 988 36 37 – or you can request a call back.

 

*Research from Legal & General’s ‘State of the Nation’s SMEs’ report, 2015.