The case for Business loan protection.
Posted on 11/07/2018 by Mark Dunning
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 also choose to set up the insurance to decrease in value as the capital debt decreases. When a valid business loan protection 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, business loan protection can help repay these if the individual covered should die or suffer a critical illness.
The following case study outlines the case for Business loan protection:
Jeremy Hughes is the Managing Director and driving force behind Bright Sparkes Limited, which supplies parts to the aerospace industry. He is one of three shareholders and is looking to negotiate a bank loan of £1million for new machinery to increase the company’s production of aircraft navigational equipment for UK and overseas customers.
The bank has agreed to lend £1 million 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 Jeremy were to die during the loan period.
The bank has agreed to lend £1 million 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 Jeremy were to die during the loan period.
The business agreed to the terms of the loan; 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, Jeremy’s financial adviser advised him to take out £1million in loan protection for a term of five years at a monthly cost of £78.55 per month.
- On Jeremy’s death, proceeds of the life insurance or term assurance claim were paid directly to the business
- The finance director immediately repaid the outstanding loan in full, using these funds.
Without Business loan protection:
- The business was required to repay the loan immediately from its existing funds as per the contract that was in place
- The firm had insufficient liquid capital to make an immediate repayment and was forced to sell some of its assets at below the market value
- This in turn led to a restructuring and downsizing of the business.