Loan Protection
Written by Check Financial · 3 min read
The short answer
Business loan protection pays the business a lump sum to repay its borrowing if a key person or owner dies or becomes seriously ill. It can cover loans, commercial mortgages, overdrafts and money a director has lent to the company.
Who It's For
Loan protection suits businesses with borrowing that relies on particular people. It is often worth considering when:
- The business has a loan, commercial mortgage or overdraft that a lender could call in.
- A director has given a personal guarantee on business borrowing.
- A director has lent money to the company, and their family would want it repaid.
- Losing an owner or key person would make it hard to keep up repayments.
Personal guarantees matter. If a director has guaranteed a business loan, their family could be asked to repay it from their estate. Loan protection can clear the debt first.
How It Works
- The business lists its borrowing, including loans, commercial mortgages, overdrafts and any director's loan accounts.
- The business takes out a policy on the life of each person the borrowing depends on, usually with serious illness cover too.
- The cover is set to match the debt. It can stay level, or reduce over time in line with a repayment loan.
- If that person dies or is diagnosed with a covered illness, the insurer pays the lump sum to the business, which uses it to repay the debt.
How Much Cover, What It Costs and Tax
How much cover. Usually the total borrowing the person's loss would put at risk, plus any money they've lent to the company. The cover should be reviewed when the business borrows more or repays debt.
What it costs. The price depends mainly on each person's age, health and smoking status, the amount of cover, the length of the policy, whether the cover is level or reducing, and whether serious illness cover is included.
Tax. How premiums and payouts are treated depends on how the policy is set up and the business's circumstances. We'll explain the options, and your accountant should confirm the treatment for your business.
What It Doesn't Do
- It doesn't replace lost profit or pay for a replacement. That's key person cover.
- It doesn't buy a departing owner's shares. That's shareholder and partner protection.
- It doesn't automatically cover new borrowing. Cover needs reviewing when your loans change.
- It doesn't cover a director's personal debts, such as their own mortgage. They need personal life insurance.
Real Scenario
Example scenario, not a real client
A Personal Guarantee That Would Have Fallen on the Family
A company director has personally guaranteed a business loan for new premises. If they died, their family could be asked to repay it.
Outcome: The company takes out loan protection on the director's life for the outstanding balance, so the loan could be cleared and the guarantee released.
Common Questions
Who owns the policy?+
What is a director's loan account?+
Can the cover reduce as we repay the loan?+
Does my lender require it?+
Can I combine it with key person cover?+
Related Guides
Protecting Your Business If the Worst Happens
Business protection explained, key person cover, shareholder protection, relevant life and loan protection. What every business owner should consider.
Read guide →Key Person Cover
Read guide →Shareholder and Partner Protection
Funds for the remaining owners to buy the shares of an owner who dies or becomes seriously ill.
Read guide →This guide is general information, not personal advice. Check Financial Ltd is an appointed representative of Capital Protect Ltd, authorised and regulated by the Financial Conduct Authority.