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Business Loan Protection Insurance 2024

Elaine Brookes Steve Case

Author: Steve Case - Insurance Expert

Reviewed & Fact Checked By: Elaine Brookes

Updated: 17th February 2024

Business Loan Protection Insurance

Do you own a business? Are you worried about the continuity of the business, particularly the ability to repay any company overdraft or commercial loan, should something happen to you or a key team member?

Did you know that business loan protection insurance is designed to repay any outstanding business debts should you or an important employee die or not work due to a critical illness diagnosis?

This guide will explain how business loan protection insurance works and why it should be considered for businesses and startups.

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Business Loan Protection Providers
security for business loan

How Does Business Loan Protection Work?

When an owner or company director of a business dies or becomes disabled to a level where continuing to work is not an option, corporate lenders may invoke the right to recall any outstanding debt as it may tie specifically to the owner’s finances.

Such a scenario may put the very future of the business at risk, including any staff.

Like a life insurance policy, in return for paying a regular monthly premium correlated to the size of the outstanding debt, business loan protection is a product that will pay out the value of the debts, allowing the business to repay any corporate loans, mortgages or overdrafts.

The life cover can also repay any loans made to the company by business owners or company directors, not just external creditors.

As some business loans may also include an element of personal liability, it is a vital form of insurance to protect individual shareholders from any losses.

Does Our Company Need Corporate Loan Insurance?

Protecting a business from outstanding financial obligations is not a legal requirement. However, many corporate lenders will insist that there is the ability to repay loans if there is an incident by having loan insurance in place.

If a director or shareholder is personally responsible for repaying a business loan, their death or incapacitation can result in the creditor immediately calling in the full amount owed.

A business without protection may risk being declared an unviable or insolvent entity if a director or shareholder dies and the loan cannot be repaid.

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business loan protection benefits

How Much Cover Does Your Business Need?

The level of cover required should correlate to the outstanding loan balance and is known as the sum assured. The lump sum that will be received to pay off creditors should the owner or business partner die will be represented in the monthly or annual premium paid throughout the fixed term policy.

How Much Will A Business Loan Protection Policy Cost?

  • What is the health of the person to be insured? Do they have any underlying medical conditions?
  • Do they have a healthy lifestyle, exercising and not drinking excessively or smoking?
  • How old are they at the policy outset?
  • Is the job they do considered risky, or is it low risk?

For Example:

The cost for a 36-year-old business owner applying for a £140,000 business loan over a fixed term period of 10 years with decreasing cover is around £7 a month. For a 50-year-old, the cost to implement the same policy will be around £25 a month.

Insurance Hero is an independent broker who can provide a competitive quote closely aligned with your and your business’s needs. Contact our sales team today on 0203 129 88 66 for a fast and free quote.

What is The Tax Treatment of Business Loan Protection Insurance?

HMRC does not consider any payout from a business loan policy as benefiting a business, as any payout money goes directly to creditors.

Instead, HMRC considers any premiums paid into a policy as an inclusive part of raising finance. It means that premiums are not considered a tax-deductible business expense.

Only the payout money is usually tax-free, as the ultimate beneficiary of any payment is creditors and not the business itself.

How about Writing the Policy into Trust?

If a request for a payout from a business loan policy takes place, the payout must go directly to any creditors to settle any outstanding obligations.

If a policy is written into trust, this adds a layer of complexity as a trust is a separate legal entity to the underlying business. Writing a policy into trust would only create unnecessary complexity when it aims to pay lenders and settle any debt.

Further Benefits of Business Loan Protection Cover

  • Sessions with a physiotherapist or acupuncture professional
  • Stress-related advice and counselling through a dedicated helpline
  • Full 24/7 access to a GP by phone or video consultation
  • An ability to increase or decrease the level of cover
  • Switching the frequency of premiums between monthly and annual payments
  • Reducing or extending the cover period
  • Removing the insured person from a policy

Increasing or Decreasing Cover

Increasing or decreasing the level of cover can be a useful option depending on the circumstances around any business protection.

Increasing cover

Under this cover, premiums and the size of the sum assured will increase in line with the UK Government’s Consumer Price Index (CPI). It is a benchmark that indicates the change in the cost of living and premiums under a policy with increasing cover will rise accordingly.

Decreasing cover

The premiums and the sum assured will reduce over the fixed-term duration of a policy. Decreasing cover is often associated with a commercial mortgage where the size of the borrowing decreases throughout the loan, meaning the level of cover also needs to drop.

Level Cover

The level of insurance cover remains unchanged for the duration of the fixed term policy.

What about Critical Illness?

Most providers will allow the option to include critical illness coverage as part of overall business loan insurance products. It may be an available option or be added at no extra cost. Critical illness cover is also called disability insurance by some insurers, so it is useful to be aware of differing terminology.

Critical illness is essential as death is not always the outcome that will stop business owners from being able to run a business. Critical illness covers the diagnosis of a disease where the insured will not be able to work with a payment forthcoming should the person survive 14 days from diagnosis.

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  • Kidney failure
  • Liver failure
  • Structural heart surgery
  • Multiple sclerosis
  • Loss of hand or foot
  • Motor neurone disease
  • A stroke
  • Parkinson’s disease
  • Heart attack
  • Coma
  • Certain types of cancer
  • Motor neurone disease
  • Heart valve replacement or repair
  • Coronary artery by-pass grafts
  • Benign spinal cord tumour
  • Progressive supranuclear palsy
  • Traumatic brain injury

These summary tables provide a concise overview of Business Loan Protection Insurance tailored to the UK market, highlighting the unique aspects, considerations, and services available to UK businesses.

AspectDetail
PurposeTo ensure business loans are repaid in the event of the death or critical illness of a key person or guarantor.
Key FeaturesLife insurance or life and critical illness cover that pays out a lump sum to cover outstanding business loans.

Coverage Options

TypeDescription
Level CoverThe insurance coverage amount remains unchanged throughout the policy term, suitable for interest-only loans.
Decreasing CoverThe cover amount decreases over time, aligned with the outstanding loan balance, suitable for capital and interest loans.

Policy Considerations

ConsiderationDescription
Tax TreatmentPremiums are not typically tax-deductible as a business expense, but the payout is usually tax-free.
Trust OwnershipPolicies can be written in trust to ensure the payout is used to repay the loan directly, avoiding probate delays.

Additional Benefits and Features

FeatureDescription
Critical Illness CoverAn optional addition to cover the diagnosis of specified serious illnesses.
Flexible PremiumsOptions to choose between guaranteed or reviewable premiums.

Market Considerations

AspectDetail
Underwriting ProcessIt may vary based on the insurer, with some offering ‘fast track’ processes for smaller loan amounts.
Insurance ProvidersA range of insurers offer tailored products for different business sizes and sectors.

UK Specific Insights

InsightDescription
Regulatory EnvironmentThe UK’s regulatory environment, including the Financial Conduct Authority (FCA) guidelines, influences policy structures and claims processes.
Market TrendsThe evolving needs of UK businesses, such as the increasing importance of digital and tech sectors, may influence product offerings.

Support and Advice

ServiceDescription
Independent AdviceAccess to independent financial advisors (IFAs) who can provide tailored advice based on a business’s specific needs.
Broker ServicesInsurance brokers can help navigate the market to find the best coverage options and deals.

How Do I Find the Best Rates and Deals?

It is essential to shop around when considering insurance cover. Rather than going directly to an insurer, an independent broker such as Insurance Hero, which is not tied to a particular service, will do the heavy lifting and search the market and multiple insurers to get the best advice and quotes.

Insurance Hero has experience providing business protection insurance to different sizes of businesses. As an independent broker, we are not tied to any insurance provider.

We have relationships with all the top insurers, including Zurich, Aviva, Aegon, LV, and L&G, to ensure we offer a competitive quote closely tailored to the needs of your business.

For a fast and free quote contact our professional but friendly team of advisers at Insurance Hero on 0203 129 88 66 today. We want to assist you in protecting your company and staff by providing you peace of mind if something happens to you.

Other Types of Related Insurance

Business loan protection insurance is a critical cover to protect the interests of your business, but did you know that different types of related insurance cover can protect your company:

Keyman insurance

Keyman insurance provides cover should a key member of staff die, or if critically ill no longer be able to work.

Keyman insurance is valid for businesses of all sizes, from sole traders to medium or large limited companies.  It works to maintain the viability of the business should something happen to the critical person, whether the founder or an essential sales manager.

In return for monthly premiums, a lump sum payout would be due, which may be used to maintain the supply chain if costs go up, providing a financial buffer against a fall in profits or the price to recruit and train a replacement employee.

Shareholder protection insurance

Shareholder protection insurance provides other shareholders of a company with lump sum cash to cover buying the shares of a dead shareholder.

It is an essential type of insurance if the existing shareholders need to maintain control so that the organisation can trade profitably without outside interference.

Relevant Life insurance

Any payout from a Relevant life insurance policy differs as it is for the benefit of the insured member of staff and not the business itself.

In the event of the death of the insured, dependents will receive financial payment. Relevant life insurance is considered tax-efficient insurance as UK corporate relief applies both to the premiums paid and the payout.

What happens if I die before the policy sets up?

Most insurers will automatically include an accidental death benefit should you die after an application submission but before the policy is in place. Insurers will usually payout for up to 90 days from the time a business loan protection application has been received.

A similar type of cover called immediate cover similarly allows protection before a policy is fully set up and is typically for up to 60 days.

Can I change my policy once it is in place?

Insurers will typically include the ability to change your policy – known as a guaranteed insurability option as part of the cover.

It means that insurance cover can increase if there is a requirement to add to an existing business loan without requiring further medical evidence.