Guarantor Protection: Life and Disability Insurance
Starting or expanding a business often requires loans. Since these loans can be significant, lenders frequently ask for a personal guarantee. This means personal assets, like the family home, are on the hook if the business can’t repay the loan. Life and disability insurance can help protect these assets by covering the loan in case of unforeseen events.
Importantly, these guarantees don’t disappear when the business owner dies or becomes disabled. Family members or other guarantors may take on the responsibility to repay or negotiate the debt.
Life and disability insurance will provide the funds to repay any existing business debt and helps minimise the impact to business operations. This reduces the risk of personal assets like the family home being sold to pay for business debts and expenses especially if the business owner is the guarantor.
Guarantor protection ensures the loan is repaid in full upon the death or total and permanent disability of a business owner who guarantees the loan.
How it works
Most businesses use debt to start up and grow their operations. Examples include:
- bank loans that are secured by the family home.
- proprietor loan accounts, and
- significant trade creditors.
Problems arise if the business owner is lost to the business temporarily or permanently. The business may struggle to meet loan commitments.
The lender may have concerns regarding cash flow and could require immediate repayment of the outstanding loan. To clear the debts, the business may need to sell personal or business assets used as security.
Benefits
One way to reduce these risks is to insure key people in the event of death or permanent disability.
If these events occur, the lump sum insurance payment can cover the following:
- reduce or repay debts.
- release any loan guarantee or security provided.
- protect personal and business assets, and
- ensure the business can continue as a viable operation.
Case Study
Tragically, Nathan was only 43 when he suffered a sudden brain hemorrhage and passed away. He had worked hard to build his business to the point it provided a financially stable environment for his family.
- Like many small business owners, Nathan had taken a significant loan and gave personal guarantees without fully realising the potential consequences.
- Nathan’s business debts did not disappear with his death. His estate became fully liable for the loan.
- Nathan’s wife had insufficient funds to discharge the loan, so she sold the family home to meet the liability.
How Much is Enough?
As a general rule:
Where there is joint and several liability, each owner is responsible for 100% of the loan. Therefore, regardless of individual assets, each owner should insure the full 100% of the loan. Although this may seem excessive, keep in mind that the personal assets of all the guarantors remain vulnerable until the loan is repaid. However, if liability applies to a set proportion of the loan, then only that proportion needs insurance.
| Term | Calculation | Example | Values |
| Total business loans (property, investment, leasing etc.) | $750,000 | (A) | |
| Share of business life insured is responsible for | 50% | (B) | |
| Suggested term cover for purpose of guarantor protection | (A) x 100%* | $750,000 | (C) |
| Existing term cover for purpose of guarantor protection | 0 | (D) | |
| Term insurance shortfall | (C) -(D) | $750,000 | |
| Total & Permanent Disability | |||
| Suggested TPD Cover | $750,000 | (E) | |
| Existing TPD Cover for guarantor protection | $0 | (F) | |
| TPD shortfall | (E)-(F) | $750,000 |
Consider other types of insurance to cover events where a business owner is unable to work. For further information, please click on the following link.
To book an appointment and find the right insurance solutions to protect your business and personal goals, please click on this link.
