It’s one of the key ways an enterprise can protect itself and its employees, and yet many people in business fail to develop a thorough understanding of the concept – let alone take out a policy. Damian Youell is here to stop you making that simple yet serious mistake.
Today’s businesses exist in a cutthroat world. Any enterprise that fails to arm itself with the right protection is simply asking for trouble, even when trouble seems far away. Business loan insurance is a key component of such protection, yet one of the least widely understood. So we’ll start by going back to basics.
What are business loans?
To understand the concept of business loan insurance, it’s important to have a good grasp of what a business loan actually is. Similar to a personal loan, a business loan involves being lent a sum of money intended for business use. This includes overdrafts, cash loans and commercial mortgages. Interest rates and monthly payments are generally fixed throughout the term of the loan.
Why take out a business loan?
Business loans are popular both with SMEs wanting to kick-start operations and with established businesses wanting to fast-track growth and expansion. They can also be taken out when a business needs to tide itself over during difficult times, to cover unexpected costs. They can be incredibly useful – but they are not without their risks, especially if the key person is no longer around to manage the paying off of debts.
What is business loan insurance?
When a key person within a business dies or falls seriously ill, the financial implications for their business can be severe. This is even more the case if they have taken out business loans. Without the presence of the key person in question, the remaining members of the company may encounter difficulty meeting loan repayments. In a worst-case scenario, business loan insurance offers financial support to the remaining owners and directors which can then be used to repay any debts.
Is it a legal requirement?
In the UK business loan insurance is not a legal requirement. However, some lenders may request that individuals take out life insurance before approving a business loan.
What are the key benefits?
The core purpose of business loan insurance is to ensure the longevity and stability of an enterprise should a key person die or fall critically ill. Even companies that believe they have enough savings, investments and capital to cover any costs should consider taking out business loan insurance. Below is an overview of the key benefits on offer:
From high up directors and fellow stakeholders to everyday employees, having a business loan insurance policy in place offers every member of the team the complete peace of mind that their livelihood is 100% protected. This can help to boost productivity, increase staff retention and heighten overall staff morale.
When business loans are protected by an insurance policy, key persons enjoy total reassurance that in a worst-case scenario their enterprise will endure. Furthermore the knowledge that fellow directors, employees and family members will be financially secure also offers invaluable peace of mind.
One of the major implications of a key person’s death is the after-effect it has on their family. Despite the fact that they may have virtually nothing to do with the business or the loan, their lives can be seriously affected. For example, if the key person used their home as security for the loan, then the family may be forced to sell or take out a bigger mortgage. Personal savings may be demanded by lenders, while credit ratings can also be affected if debts are not paid off.
Types of business loan insurance
In general there are two main types of business loan insurance:
Under life insurance only policies, an insurer pays out a lump sum should a key person pass away during the term of the cover.
This is the most comprehensive policy. It offers a financial lump sum should a key person pass away or fall critically ill. Critical illnesses are usually pre-defined and can vary from policy to policy.
How much cover is needed?
The most stringent business loan insurance policies should be equal to the outstanding amount of the loan. Under level term plans, the lump sum pay-out amount remains the same for the duration of the loan. Key persons can also choose to take out a decreasing term plan which sees the lump sum pay-out decrease throughout the length of the loan. The depreciation should align with the outstanding balance of the loan and the frequency/rate of repayments.
What about indexation?
For key persons wanting to protect themselves against inflation, indexation cover can be added to business loan insurance plans. However, keep in mind that this also means that premiums will increase on a yearly basis.
Is it worth it?
Taking out business loan insurance is entirely up to the key person in question, although they would be expected to discuss this with their fellow business partners. That said, statistically speaking business loan insurance is a savvy move for any enterprise, no matter what the size. Research has shown that 39% of directors expect companies to fold within 18 months of the death or serious illness of a key person. For businesses that don’t want to become part of that statistic, business loan insurance is a must-have suit of armour.
A final thought. Recent research from MetLife reveals that 21% of people have encountered long-term ill health during their working lives. This is reason enough for the shrewder business to choose business loan insurance policies that offer both life insurance and critical illness cover.