Two kinds of director's loan balance
Your director's loan account records money moving between you and your company outside salary and dividends. When you put your own savings in to fund a launch, buy stock or cover a quiet month, the account is in credit and the company owes you. When you take out more than you are entitled to, it is overdrawn and you owe the company.
Both balances survive you. A credit balance becomes an asset of your estate, and your executors can ask for it back. An overdrawn balance becomes a debt your estate has to settle. Either way, a sum that sat quietly on the balance sheet for years can suddenly need paying in cash.
When the company owes you
Picture a director who lent their company a large sum to buy equipment. If they die, their family may need that money for the mortgage or living costs, and the executors are entitled to call it in. The company, meanwhile, has just lost a director and may be short of cash. Repaying the loan at that moment could mean selling assets or borrowing at short notice.
A policy owned by the company, on the director's life and sized to the loan balance, gives the business the money to repay the estate in full. The family receives what they are owed and the company keeps its working capital.
When you owe the company
If your loan account is overdrawn, the company will want that balance back after your death. Your executors would have to find the money from your estate before your family inherits anything, and the remaining shareholders may be keen to see it settled quickly.
In this case a personal policy usually fits better. You own it and place it in trust for your family, so they receive a lump sum they can use to clear the balance, or simply to replace what the repayment takes from the estate. Overdrawn accounts also carry their own tax rules while you are alive, which your accountant will already be watching.
- Check the current balance with your accountant before choosing a cover amount
- Decide whether the balance is likely to grow, shrink or stay steady
- Consider critical illness cover if a long illness would force repayment
- Review the cover each year when your accounts are prepared
Keeping the cover in line with the balance
Loan account balances rarely stand still. You might draw a little extra in a busy year, or the company might repay some of what it owes you once profits pick up. A policy sized to last year's figure can drift away from what is really owed.
A simple habit helps. When your accountant finalises the year end figures, compare the balance with your cover. If the gap has grown, you can usually take out an extra policy for the difference. If the balance has fallen, you may be able to reduce the cover, depending on the insurer's terms. Talk to us before cancelling anything, because new cover depends on your health at the time you apply.
How Hi Tomorrow helps directors protect their loan accounts
We ask for the latest balance from your accounts, which way it runs and how you expect it to change. From there we suggest who should own the policy, whether level cover suits or the amount should be reviewed as the balance moves, and how long the cover should last.
We compare the insurers on our panel and help you with the health questions. Where the company owns the policy, we can explain how it is set up so your accountant can confirm the tax treatment. Premiums for this type of cover are not usually an allowable business expense, because repaying a loan is normally treated as a capital matter, but your accountant should check that for your company.