Life insurance: Protecting yourself in the face of Debt
Nothing can ruin a previously flourishing business faster than default action on a commercial loan, or a demand under a loan guarantee. In many cases the resulting damage may extend beyond the business to the owners, their personal assets, family members, minority shareholders, directors and other creditors.
Death 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 serious consequences for the business.
By having adequate life insurance cover in place an insured business owner can claim on their life insurance policy knowing that the proceeds will create the cash needed to repay or assist with repaying business debt. There are also other insurances, aside from life insurance, such as Trauma and Total & Permanent Disability insurances that will assist the business if the owner suffers a major health event and survives.
Life Insurance: For Sole Traders
If you’re a sole trader or member of a partnership, you are personally liable to an unlimited extent for obligations (including loans) incurred in the normal course of business. Should you die or become disabled, your personal assets could be placed at risk by a demand for a repayment of a business loan or to meet a personal guarantee.
Life Insurance: For Limited Liability Companies
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 borrowings or loan, despite the business being the borrower. This requirement enables the lender to bypass the limited liability the shareholders would otherwise benefit from and enables recourse to the unlimited liability of the guarantor and his or her assets while the business debt is outstanding.
So, how do you protect yourself when your business is expanding and you need to borrow money to buy new equipment or fund expansion into a new area? There are several key items that you need to make sure you have covered:
- Seek professional advice from your accountant before you commit to borrowing
- Always read the fine print of any contract or loan documents and if you’re not sure get your lawyer to look them over for you
- Wherever possible avoid personal guarantees – see if there is some other form of security that will suffice
- Keep your shareholders agreement current and if any changes are required in light of the change of business circumstance get them signed off prior to drawing down any new loans
- Off set your risk with insurance policies that provide maximum protection at claim time
Don’t leave protecting yourself, your business and your assets to fate. Have a plan, implement it and update it regularly.
Life Insurance – How Much Is Enough?
