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What is Business Loan Protection

(a subset of Keyman Insurance)

And why all businesses should consider it

Page Summary:

Keyman insurance and in turn Business Loan Protection falls under the umbrella of Business Protection Insurance.

Find out on this page what it is and how it works, as well as its advantages and disadvantages.

What is Business Loan Protection

Important explanation

Keyman insurance falls under the main insurance umbrella of Business Protection insurance and there are 3 different policies available -

  1. Loan protection which is discussed on this page
  2. Profit Protection, and
  3. Ownership Protection

You also might like to read The introduction to Keyman Insurance page

What is Business Loan protection insurance

As its name suggests it's a form of insurance designed to repay all or part of a company's debts should a key employee die or suffer a critical illness.

It is a more restrictive policy than another form of keyman insurance called profit protection as the money can only be used to repay debt, including an overdraft facility rather than for general use such as shore up profits or retrain and recruit staff etc.

The type of Keyman the policy is designed for
  • Managing Director/CEO or Executive Chairman etc
  • Other Directors with shareholdings who may have a personal guarantee in place
  • Head of sales/Marketing
  • Star salesmen
  • IT and Finance Directors

Or anyone else the company considers a key person.

Why insure company debt

Corporate banking experts suggest that around half of all corporate debt, especially among smaller firms and start-up, have some sort of personal guarantee in place undertaken by the directors. One of the most common is a second charge on a director's property.

Bankers are generally hard businessmen especially when their loans are under threat. This often means the small print has certain clauses which can be enacted if the company's operations are threatened, perhaps by the death of a key employee.

Clauses such as -

  • Early repayment - The responsibility for early repayment of any loans including overdrafts
  • Bank takes control of some assets - Company assets might fall under the control of the company's bankers should any debts not be repaid immediately

And in turn this can lead to loan defaults - insolvency (even of a healthy business) - major cash flow problems - the bank calling on personal assets even from the estate of the deceased Director/Partner.

Who pays the premiums and are they tax deductible

The company pays the insurance premiums and tax-relief isn't normally available.

In the case of a payout the cash isn't usually subject to tax. However, corporation tax is normally complex and so guidance should always be sought from the company's Finance director as well as from The Inland Revenue.

How to work out the level of cover needed

Obviously every company's debt obligations are different so how much to insure will be up to the Directors and other senior staff.

Companies often have different types of debt such as mortgages, overdrafts and business loans. And because a loan protection policy is highly customisable only certain types of debts can be insured for different percentages. For example -

  • The company has an overdraft facility of £150k and £50k (33%) is insured
  • But insurance is taken out on 80% of the business loan (£750,000), and
  • The Director's deem it unwarranted or unnecessary to insure the mortgage on their office

Highlights the need for a specialist broker

Business loan protection is a good example of not so much how complex the insurance can be, rather the thought process that has to go into deciding what should be insured and for how much as well as what shouldn't.

This is why it's important to work closely with your keyman insurance broker. See below for more details.

Advantages to Business Loan protection insurance
  • It's sensible future planning - A well run and successful company is as much about preparing for the future as it is running the everyday operations

  • Protects your family if you've given personal guarantees - Even if your shareholding is worth a considerable amount of money that doesn't mean the company won't suffer cash flow problems if a key person dies or suffers a critical illness. The company's bankers could for example call in their loans hence causing a major cash flow problem which in turn massively reduces the value of any stake left to your family

  • Peace of mind for the company's bankers and backers - It's only common sense to reassure your banks and bankers that in the event of the death of a Keyman the company will have the problem covered

  • Cost - Many view Keyman insurance as money well spent, not because of its actual cost, rather the real cost to the company if a Keyman dies and in turn the financial turmoil that it might cause
  • Often bundled with a corporate loan - Watch out for this as some banks will try to add on protection insurance with any loan or credit they grant. The better strategy is to shop around and buy this insurance independently

  • Thought is needed to get the right policy - Each business is different, each has different aims, obligations and of course different key people. For this reason a loan protection plan is not so hard to setup but a lot of thought has to go into who needs to be covered, what cover is needed and in turn to what degree.

  • Specialised insurance - Business protection insurance is obviously not as popular as car or home insurance. It's far more specialised and so it can take time to set up and organise the right policy
Do you need it
A good way to determine if you or your business needs a Keyman insurance policy is by asking some of the following questions -
  • Do you have at least 1 key person in your firm?

  • If a key member of your company dies or suffers from a critical illness and is out of action for a long period of time would the business still be operating in 12 months?

  • And if still in operation after 12 months would the profits be serious affected?

  • If your fellow executives or partners have a substantial shareholding in the firm, who would these shares be transferred to in the case of their death? If it's a child or spouse that might cause the business problems especially as they would be unlikely to have commercial experience.

  • Is your company's debt and loan obligations insured? And if not what would happen if a key person, especially a major profit generator, dies or suffers from a critical illness?

  • Is there a risk of any personal guarantees being called in by your banker's if a key person passes away or suffers a critical illness?

  • If one or more of your top sales team were lost would your company's sales take a serious hit? Also, do your salesmen have invaluable contacts?

  • How many employees does your firm have? As a rule of thumb the less employees the more the firm will rely on 1-2 key employees
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