Business Loan Protection
Clear the borrowing,
not the family.
Business loan protection repays company borrowing if a key individual or guarantor dies or becomes seriously ill. It matters most where a director has given a personal guarantee, because that guarantee does not die with them.
Without cover, a lender can call on the guarantee and the debt can land on the director's estate, reaching the family home. A grieving family should not inherit a commercial loan they never took out and cannot service.
For the full detail, read our business loan protection guide →
What is business loan protection?
Business loan protection is life cover, frequently with critical illness cover added, arranged specifically to repay a company's borrowings if the person behind them dies or becomes seriously ill.
The cover is usually written for the amount of the debt and for a term matching the repayment schedule, so the policy and the loan run down together. On a claim the lump sum clears or substantially reduces the balance, removing the borrowing from the equation at precisely the point the business is least able to service it.
Directors' personal guarantees
This is the part that catches people out. Lenders routinely require a director to give a personal guarantee before advancing funds to a small company. It is signed at the start, often with limited thought, and then forgotten.
A personal guarantee is a personal liability. If the company cannot repay, the lender can pursue the director personally, and if the director has died, the lender can pursue their estate. The family home is frequently the asset that ends up exposed.
Business loan protection removes that exposure by repaying the borrowing, so the guarantee is never called upon. For any director who has signed one, this is not an optional refinement.
What borrowing it can cover
The obvious candidates are commercial loans and a commercial mortgage. It also commonly covers overdrafts and other revolving facilities, invoice finance and asset finance, and directors' loan accounts; money a director has lent into the business, which the estate becomes entitled to reclaim on death.
That last one is regularly overlooked. If a director has funded the company from their own pocket, their estate can demand repayment, which may be exactly what the business cannot afford at that moment.
How much cover and for how long
Set the sum assured against the outstanding balance rather than the original advance, and the term against the remaining repayment period. Decreasing term cover suits an amortising loan, since the cover falls roughly in step with the balance and costs less. Level term cover suits an interest-only facility or a rolling overdraft where the balance does not reduce.
The cover needs reviewing whenever facilities are refinanced or extended. A policy written against a loan that has since been replaced by a larger one leaves a gap nobody notices until a claim.
The tax position
Where cover is arranged to protect a loan rather than to replace lost profits, premiums are generally not treated as an allowable business expense; the conditions HMRC applies to key person cover are not met, because the purpose is a capital one.
The corollary is that the proceeds are not usually taxed as a trading receipt either. The ownership structure matters too: cover on a personal guarantee is often better arranged personally and written in trust so the money reaches the estate rather than the company.
Tax treatment depends on your individual circumstances and may change in the future. Structure this with your accountant and an adviser before the policy is placed, because it is difficult to unpick afterwards.
Who needs it
You should consider business loan protection if…
- ✓A director has given a personal guarantee on company borrowing
- ✓The company has a commercial mortgage or a substantial term loan
- ✓You rely on an overdraft or invoice finance facility to fund working capital
- ✓A director has lent money into the business through a directors' loan account
- ✓A lender has made cover a condition of the facility
- ✓Your borrowing has grown or been refinanced since any cover was arranged
Key benefits
Why it matters
The debt is cleared, not inherited
A lump sum repays the borrowing so the lender is satisfied and no guarantee is called on the director's estate.
The family home is protected
Removing the debt removes the route by which a personal guarantee reaches personal assets, which is usually the property the family lives in.
The business stays solvent
Clearing borrowings at the moment the company has lost a key person keeps it trading rather than facing a demand it cannot meet.
Decreasing cover keeps it affordable
Matching an amortising loan with decreasing term cover means you pay for the exposure you actually have, not the balance you started with.
Can cover a directors' loan account
If a director has funded the company personally, cover means the estate can be repaid without draining the business.
Reassures the lender
Cover in place is often what allows a facility to be granted or renewed on reasonable terms.
Key considerations
Things to weigh up before you apply
Business Loan Protectioncan be valuable, but it isn't right for everyone in every situation. Cover is subject to underwriting, and a policy only pays out if it is kept up to date and set up correctly, so it's worth understanding the limitations before you decide.
- !Premiums on loan protection are generally not an allowable business expense, unlike some key person cover.
- !Cover written against an old facility can leave a gap once the borrowing is refinanced or increased.
- !Decreasing cover is the wrong shape for an interest-only facility or a rolling overdraft.
- !Getting the ownership wrong can send the money to the company when it was needed by the estate, or the reverse.
- !Cover is medically underwritten, so the guarantor's health and age drive the premium.
- !A claim can be declined if health and lifestyle questions were not answered fully and accurately.
FAQ
Common questions about business loan protection
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