What business debt can mean for your family
Lenders to small companies often ask the directors to sign a personal guarantee. If the business cannot repay, the lender can then pursue the director personally, and after a death that claim can pass to their estate. A family could find that a house or savings they were relying on are tied up in a business loan.
Even without a guarantee, the loss of an owner can make a lender nervous. Some loan agreements let the bank ask for repayment if a key person dies. Having cover in place shows the lender the business has planned for that event.
What the cover can repay
You decide which debts to protect. Many businesses add up the borrowing that depends on a particular director, then set the cover to match. The policy can run for the length of the loan, or longer if you expect to keep borrowing.
Where more than one director has signed a guarantee, each of them may need cover for their share of the debt, or for the full amount if the guarantee is joint and several. Your loan documents will say which applies, so check them before you choose a figure.
- Bank loans and commercial mortgages
- Overdrafts and revolving credit facilities
- Asset finance and hire purchase on vehicles or equipment
- Personal guarantees signed by directors
- Money a director has lent the company through a director's loan account
Director's loan accounts work in both directions
If you have lent money to your company, that loan forms part of your estate. Your family may want it repaid quickly, which could strain the company's cash flow at the worst moment. A policy owned by the company, on your life, can give it the money to repay your estate without selling assets.
If the company has lent money to you, the business may want that balance settled after your death, and your family would need to find the money from your estate. Cover can help in that situation too. Your accountant can confirm the balance and how it would be treated.
Level or decreasing cover
A repayment loan shrinks as you pay it off, so many businesses choose decreasing cover that falls over the term in a similar way. It usually costs less than level cover, though it needs to follow the loan's repayment pattern closely enough to clear what is left.
Overdrafts, revolving credit and interest only loans do not shrink, so level cover tends to fit them better. If your borrowing changes often, a level policy reviewed every year or two can be simpler than trying to match each facility. We can look at your loan schedule and suggest a mix.
Setting up the policy and the tax position
The company can own the policy and receive the money to clear its own borrowing. Where the aim is to protect a director's family from a guarantee, the director might instead take out a personal policy in trust, so the money reaches the people who would face the claim. The right structure depends on who owes what to whom.
Because repaying a loan is a capital matter, premiums for loan protection are not usually an allowable business expense, and the payout is not usually taxed as income. Tax treatment depends on circumstances, so check with your company's accountant before you choose how to set it up.
How Hi Tomorrow helps you protect business borrowing
We ask for a list of your borrowing, the guarantees each director has signed and any director's loan balances. With that, we can suggest how much cover each person needs, whether it should reduce over time and who should own each policy. Where a guarantee is involved, we explain the difference between a company policy and a personal one in trust.
Then we compare policies from the insurers on our panel and help each director with the application and health questions. If your lender needs confirmation that cover is in place, we can provide the policy details for you to pass on. As loans are repaid or new facilities arrive, we can review the cover with you so it keeps pace with what the business owes.