Debt Protection

Debt protection is a necessity for business owners and allows them to protect against the financial consequences of having to repay business loans, overdrafts, credit cards and commercial mortgages following their death. Debt protection will ensure that businesses can successfully continue without them.


 The Questions

The solution

We will evaluate the business needs and establish what your Debt Protection needs are, explain in more detail the consequences of not having adequate protection in place, we will offer an appropriate solution in the form of 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 also choose to set up the insurance to decrease in value as the capital debt decreases. 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, business loan protection can help repay these if the individual covered should die or suffer a critical illness.

The case Study

Being unable to repay loans can present significant commercial problems for any business. A good example of this would be a director’s loan that must be repaid on death. Without business loan protection, the business could struggle to find funds quickly enough to repay such a loan.

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 £79.24 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 repaid the outstanding loan in full, using these funds.

Without business loan protection in place

The business was required to repay the loan immediately from its existing funds.  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.

*This is an example price based on the industry average paid in March 2015 for a five-year insurance policy, for a 46-yr old non-smoker. This case study was provided by AIG insurance company and is used as part of their marketing material.