Protect your directors against debt obligations
Taking out insurance for the purpose of guarantor protection ensures that if death, TPD or a trauma event occurs to a business owner who has provided a guarantee for a business loan, that the loan can be repaid.
This cover can be structured in different ways with varying pros and cons.
Purpose of personal insurance to cover business debt
This strategy benefits the guarantor by protecting personal assets which have been used to secure business loans. It also ensures that the business does not face an unexpected financial burden if the lender requires the loan to be repaid or renegotiated.
Ideally a guarantor should be insured for 100% of the loan whether they are jointly or severally liable for the debt to provide the best protection. Also note that premiums paid on insurance policies used to repay debts are not tax deductible.
Structuring your insurance cover
Policies can be self-owned (by the person who acted as guarantor) or be owned by the business entity. The tax implications on claim proceeds can vary depending on the option selected.
Other important considerations
A written agreement should be in place setting out the respective parties’ obligations. This may result in further tax implications and the debt reduction agreement should exclude ‘rights of contribution’ from arising.
With this strategy, care should be taken with any contractual arrangements to ensure capital gains tax is not triggered. The use of insurance to repay debt may also affect valuations of the business. You should seek specialist legal and tax advice.
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