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Guarantor insurance is simply using the concept of key person insurance to protect the business against the financial risks associated with debt. A business owner may either:
- Take out a loan personally for a business purpose; or
- Give their personal guarantee on the repayment of a business loan.
If the business fails to repay the loan, the lender will generally try to recoup their losses from the business first. However, if this is not possible, they can seek repayment from the guarantor who may be forced to liquidate personal assets.
If the guarantor no longer wants to or is unable to provide the guarantee on the loan due to death, disablement or critical illness, the lender may call in the loan.
The business can protect itself by taking out insurance that can provide the funds to repay debt in the event of the illness or death of a guarantor - not only protecting the business and helping to keep it running, but also protecting the personal finances of the business owner's family.
Consideration needs to be given to the ownership of the policy, as this can have significant consequences from both a control and a tax perspective
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