A business will often take out a loan and it is quite common for the bank or lending institution to insist that Business Loan Protection is in place.  The loan could be for:-

• New machinery
• New premises
• General development
• Credit or an overdraft facility

Business Loan Protection is where the bank or lending institution may insist that an insurance policy is taken out on the business owner/ director’s life applying for the loan.  This policy is designed to pay out on death but critical illness can be included within the policy too.  Most banks or lending institutions will offer a Business Loan Protection policy at point of sale but rarely are these policies competitive.  Business Loan Protection policy re-broking is common as there are often savings to be made.  It is also common to find a policy with better benefits if critical illness is included within the plan.

So Why Would A Business Need Business Loan Protection?

Imagine a business that has been trading for 5 years.  There are 3 directors.  One of the directors applies to the bank for a loan to expand the company.  The bank agrees to the loan on the proviso that the director takes out a Business Loan Protection policy so that in the event of his death the money is immediately paid back.  This protects the other directors and the company. 

Imagine what would happen if the company didn’t have Business Loan protection and the director died?  Let’s assume that director was key to the company’s success and contributed a large amount to the annual turnover of the company.  If he died the company’s turnover and profits would immediately suffer.  The bank could ask for the loan to be paid in full.  The company probably wouldn’t be able to pay the loan back so quickly without having to sell off a lot of company assets.  The chances of refinancing would also be slim if one of the key directors had just died.  It would not be an attractive lending proposition for most banks.

Having Business Protection Insurance in place would also protect the director’s assets too.  A lot of the time directors have to use their own property and assets as personal guarantees.

Business Loan Protection Tax Position

The premiums for the Business Loan Protection policy are not an allowable deduction from profits.  Any benefits paid by the policy would not be subject to corporation tax as the policy would be used to pay off the loan in its entirety.

The taxation of Business Loan Protection insurance should not be used as a reason to decline cover.  Business Loan Protection is there to protect the company and its directors, not to save on tax.