Business Loan Protection
Enabling a business to pay off a bank or other business loan if a key person dies
If your business has any bank or other borrowings, you may wish to consider taking out life insurance that would enable these debts to be paid-off in the event of the death of a key person.
This is especially important:
- Where the the death of a key individual is likely to have an adverse effect on the profitability of the business
- If there is a risk the bank may enforce the sale of property that was given as security for a loan
- Where a personal guarantee to obtain a loan has been given, because the personal assets of the guarantor are at risk if the loan is not repaid
- Where a personal guarantee has been given by any individual, the bank may demand immediate repayment of the loan on the death of that person, this guarantee may be enforced against the estate of the deceased, thereby reducing the estate for the deceased’s next of kin
As well as death cover, it is possible to ensure that a business loan would be paid off in the event of the key person having a critical illness.
Depending on the nature of the loan, cover could be arranged either on a level (non-decreasing) basis, or on a decreasing basis.
Paying back a Director’s Loan Account
A director’s loan account must be repaid on the death of a director. Business loan cover would provide the business with the money to repay this debt.
Cover for Limited Companies & Limited Liability Partnerships
Limited companies and limited liability partnerships (LLPs) are legal entities in their own right. This means they can own a life insurance or critical illness insurance policy, and be paid the money in the event of a claim to pay off the covered loan(s).
A limited company does not get Corporation Tax relief on the premiums of the business loan cover and should not pay Corporation Tax on the payout. However, an opinion on the tax position should be sought from the local Inspector of Taxes.
For an LLP, the cost of the insurance is not an allowable expense against Income Tax for the partners and the payout should not be subject to Income Tax. However, you should seek advice on your tax position from your local Inspector of Taxes.
Cover for Partnerships (in England & Wales)
A partnership is not a legal entity in its own right, so it cannot directly own any life insurance or critical illness insurance policies. Any such policy would normally be taken out by an individual key person and then placed in a trust for the other partners so they can be paid the money in the event of a claim to pay off the covered loan(s).
The cost of the insurance is not an allowable expense against Income Tax for the partners and the payout should not be subject to Income Tax. However, an opinion on the tax position should be sought from the local Inspector of Taxes.
Contact me for advice or if you’d just like to have an informal no-obligation discussion.