“Do you understand the ramifications of these were you to die prematurely or become totally disabled?”
“In the event of a proprietor’s death/disability will the bank call in all guaranteed loans because of concerns about the capacity of the business to stay viable?”
Why is Business Loan Protection Insurance needed?
Business Loan Protection Insurance is a form of business insurance that ensures that upon the occurrence of an insured event (death, trauma or total and permanent disability) with respect to a director/guarantor, the business debt guaranteed by that director/guarantor is fully repaid. The proceeds can be used to protect business owners and guarantors from the ramifications of giving a guarantee for a business loan should an event occur which impinges their ability to make good the liability.
When a director signs a guarantee, it generally means the director has secured a loan for the business directly or indirectly using all or some of his or her personal assets.
The guarantee is usually extinguished only when the loan is repaid in full. A lender may be able to call on the guarantee in the event of death, disablement or trauma.
One purpose of business loan protection insurance is to protect the guarantor and their estate. The availability of proceeds ensures that the funds are available to extinguish the guarantee, releasing the guarantor and their estate from the lender’s security over the family’s assets.
The second purpose is to benefit the business and the remaining business owners – if the debt is wholly or partly repaid, the financial burden on the business is reduced and other guarantors could be released from the bank’s security over their assets.
The Sleep Easy Test
- The Problem – On the death of a person responsible for the success and profitability, a business may have difficulty in meeting its commitments under a loan. The lending institution may then need to call on personal guarantees and supporting security.
- The Questions
– Who is the person on whom the firm’s success and profitability mainly depend?
– If something happened to that person, would your firm have difficulty meeting its commitments under the loan?
– If that happened, you wouldn’t want the personal assets to remain encumbered to be sold, would you?
– If there was a way to guarantee that the funds would be available on death to repay the loan and free assets, would you want to know about it?
- The Solution
A plan to provide:
– Cash to repay the loan on the death of someone on whom the success and profitability of the business depend.
– Cash to repay the loan on the death of someone who has given a personal guarantee or lodged personal assets as security.