Business loan protection

Business loan protection insurance will provide funds to repay a loan, commercial mortgage, or a director’s loan if one of the business owners dies or suffers a critical illness.

Your client can protect the full loan or mortgage amount with life cover, or life and critical illness cover. When they make a claim, the sum assured is either paid to the business or directly to the lender if the policy has been assigned.

Why it’s needed

Many businesses take out loans to start up a company or to expand their operation. And their ability to repay often rests on a few key people. Insurance helps to pay an outstanding loan if any of those key people were to become critically ill or die.

What it covers

Most types of business loan can be protected, including:

• Commercial loans and mortgages
• Venture capital loans
• Director’s loans
• Personal guarantees

Things to consider

Before you arrange business loan protection cover, it’s important to understand each individual’s liability. Under the terms of a loan, owners may be jointly liable, severally liable, or jointly and severally liable for the repayment of the loan.

Once this information is clear, you can set up a suitable policy for anyone responsible for the repayment of the loan. A loan protection policy can be taken out to ensure repayment of a business loan in the event of the death or critical illness of a shareholder, partner, member, director or sole trader.

You can select a decreasing or fixed sum assured, but the term of the cover needs to match the term of the loan.

We have a dedicated specimen business trust document. We cannot advise on whether putting any particular plan into a trust would be suitable for the client’s particular circumstances and would recommend that they take professional legal advice on the suitability of these specimen documents.

Making a claim

When a claim is made, the proceeds are paid to the policy owner, who can then decide to pay off the loan in full or to continue repayments according to the initial agreement. If the policy has been assigned to a lender, the claim proceeds can be paid directly.