Business Loan Protection
WHAT IS BUSINESS LOAN PROTECTION?
Business loan protection is a life insurance or life and critical illness policy, usually taken out by the business to insure the loan. You can choose to set up the insurance to decrease in value as the capital debt decreases too. When a valid business loan protection claim is made, the amount claimed or sum assured is paid to either the business or directly to the lender.
If your business has outstanding borrowings such as a loan, commercial mortgage or a director’s loan, then business loan protection can help repay these if the individual covered should die or suffer a critical illness.
Loan Protection Case Study
John Wilson is the managing director and driving force behind a company supplying parts to the aerospace industry. He is one of three shareholders.
He is looking to negotiate a bank loan of £1 million for new machinery, to increase the company’s production of aircraft navigational equipment for UK and overseas customers.
The bank has agreed to lend £1million to the business over a period of five years on an interest-only basis. However, a vital part of the loan agreement is that the loan must be immediately repaid if John were to die during the loan period. The business agreed to the terms of the loan and the loan was completed and the machinery purchased. Sadly, John was involved in a serious car accident 12 months later and died shortly afterwards.
With business loan protection in place:
A few days after the loan was agreed, John was advised to take out £1 million in loan protection by the firm’s financial adviser, for a term of five years at a monthly cost of £60 per month. On John’s death, proceeds of the life insurance or term assurance claim were paid directly to the business. The finance director immediately arranged for the funds to repay the outstanding loan in full.
Without business loan protection:
Had the business not taken out loan protection they would have been required to repay the loan immediately from their existing funds. The firm had insufficient liquid capital to make an immediate repayment and would have been forced to sell some of its assets. This could have forced the aerospace business to sell some of its assets at below the market value, which could then have resulted in a restructuring and/or downsizing of the business.