Business Debt Protection

Life and permanent disability insurance on the key people and/or owners of the business ensures that you can clear all debts.

 

Nothing can cripple a business faster than default action on a commercial loan or demand under a loan guarantee if any of your key people were to die or become permanently disabled. Life and permanent disability insurance on the key people and/or owners of the business ensures that you can clear all debts.

 

Often the resulting damage impacts beyond the business entity and creates unnecessary stress and additional financial burden on its principals, their private assets, family members, minority shareholders, directors and other creditors. The untimely death or serious disablement of a key person who is wholly or partially liable for servicing and repayment of a commercial loan or who has provided a personal guarantee for borrowed funds can have devastating effects.

 

It's a risk that all businesses and organisations can and should protect against. Business Debt Protection is designed to create cash to repay or assist in repaying business debt. The payments can be used to protect business owners and guarantors from the ramifications of an untimely death or serious disablement.

 

Why do you need Debt Protection?

If you are a sole trader or a member of a partnership you are personally liable to an unlimited extent for obligations (including loans) incurred in the normal course of business. If you should die or become disabled, your personal assets could be at risk to a demand for repayment of a business loan or to meet a personal guarantee. However if you are properly covered against such an eventuality your share of business debt can be promptly settled and any business liability extinguished.

 

The purpose of Debt Protection

  • Protects the guarantor and their assets. The payout can be used to repay the loan (in full, or in part).
  • Protects the business and remaining business owners (often banks make shareholders or directors personally responsible for the whole debt)
  • Reduces the risk of company or personal insolvency or administration.
  • Meets all legal obligation.
  • Reduces the risk of losing personal wealth and assets.

 

Consider

  • On whom does the business success and profitability depend?
  • If something critical happened to that person would your business have difficulty meeting its commitments under any loan arrangement?
  • What would become of the assets associated with the loan?
  • Would they be sold to repay the debt?
  • Are any of your (or other directors) personal assets (such as a home) linked to the business loan?
  • Did the lender require loan guarantees?
  • Who is actually responsible for a loan?

 

In the case of a limited liability company, the business lender may have required the directors and/or shareholders to personally guarantee repayment of the borrowing or loan despite the business being the borrower on record.

 

This requirement enables the lender to bypass the limited liability the shareholders would otherwise enjoy and enables recourse to the unlimited liability of the guarantor and his or her assets while the business debt is outstanding. In addition, the lender's standard form documentation may create a greater degree of liability for the guarantor than he or she originally anticipated.

 

Example

The guarantee documentation may provide that each guarantor is -jointly and severally liable". This means that each guarantor is liable for the full debt not just a proportionate share - although he or she might seek to recover the proportionate share of the debt from any co-guarantors' where possible.

 

If a guarantor dies the guarantee may prevent or hinder distribution of his or her estate to dependants until the guarantee has been released.

 

The release of the guarantee depends on the demands made by the lender at the time. It may be necessary to reduce or repay the commercial loan. Similarly if a guarantor is disabled and the business fails to meet the loan terms, the guarantor could be called upon.

 

The immediate effect of Debt Protection on your business:

  • In the event of the death or disablement of a business principal or loan guarantor the claim proceeds of Debt Protection Cover.
  • Repayment of business debt, thereby reducing or eliminating debt-servicing costs.
  • Funds to meet or assist in meeting, any key person needs that may arise in the business.
  • Any increases in the business value following receipt of the policy claim proceeds, which may have to be taken into account in a business or share buy/sell agreement.

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