Personal Guarantee Insurance – Everything You need to Know
Company executives are required to sign personal guarantees on new loans that a company takes on. Personal guarantee shifts the liability of the loan from the business to the executives who sign the Personal Guarantee. They in effect become the guarantors of the loan.
Signing a personal agreement usually gives the guarantor responsibility of the debt of the business in case the company cannot pay the debt. Since most lenders require the signing of a Personal Guarantee to approve loans, business directors willfully waive the legal separation between the company and the financiers.
However, the personal guarantee puts the assets of the directors in jeopardy, as they could lose finances and also suffer a tremendous financial strain in case the business takes a dip and is unable to pay its loans. Luckily, Personal Insurance guarantee exists to mitigate challenges that could potentially face business executives.
What is Personal Guarantee Insurance (PGI)?
PGI gives cover to individuals with a personal guarantee. The cover is there to shift liability from the business executive to the insurance firm. PGI is often used on new loans though it can be used on old loans with personal Guarantee.
Though nobody wishes to see a business fail, some studies have found that that only 25% of businesses make it to the 15th year; most close down within the first few years. As such, it makes much sense to get Personal guarantee insurance to reduce risks placed on the assets owned by guarantors.
Insurance will be critical in making sure that the financial turmoil of the business doesn’t flow into your personal space.
Some of the main features of Personal guarantee insurance in the UK include:
- The Financial Conduct Authority regulates all the policies offered in the UK.
- Premiums are charged on a case by case basis depending on individual circumstances and the risk level of the guarantor.
- A single policy may be named to several guarantors to cover all executives who need cover.
- The policy is fixed on a fixed percentage of the amount guaranteed, typically 70% of the loan amount.
- It is available to directors of limited companies or directors of Limited liability partnerships.
- The premiums are typically paid out yearly.
Cost of the insurance policy
The price of the insurance policy varies significantly with the policyholder and the value of the loan guaranteed. The asset used to secure the loan, the loaning period and the level of risk given to the insurer by the loan are other factors considered when giving assessing policies.
In monetary terms, the premium can vary significantly from £750 per annum to £12,000 per annum for the huge guarantees. As a bonus to the policyholder, these expenses can be listed in the company expenses since the company itself takes the loans.
How PGIs work;
At least 40% of small business owners are at risk of losing their hard-earned property due to their businesses defaulting loans. It is because lenders require business owners to sign personal guarantees to secure loans. In signing the personal guarantee, the business owner (guarantor) becomes responsible for loan terms in case of business liquidation. Several assets, mostly homes, retirement accounts, cars are on the line if the business cannot clear its loan.
Most lenders will go after the company’s resources to repay the loan amount. After liquidating business assets, the lender will now go for the personal finances of the guarantor to pay for the expenses of the loan. However, with PGI, the cover will cover up to 70% of the insured liability hence giving the less strain to the guarantor in repaying the remaining amount of money to the lenders.
Because PGIs cover up to 70% of the guarantor’s total liability, it gives a safety net without eliminating financial options for businesses to revamp and grow bigger. The cover is taken up to the end of the loan period.
Loans eligible for PGI
Many business loans are eligible for personal guarantee insurance. Both secured and unsecured loans can be used with PGI. Unsecured loans are the loan types which are given based on the creditworthiness of the borrower, rather than based on the size of collateral. In these types of loans, the lender uses the personal guarantee and associated charges as security for the loan. Here are examples of loans covered in this category:
- Peer to peer loans
- Credit cars
- Bank overdrafts
- Short term capital loans
Secure loans, on the other hand, are loan types that have collateral attached to them in addition to the Personal Guarantee. These loans include:
- Invoice finance
- Qualifying peer to peer loans
- Asset finance
- Commercial mortgages
How to apply for PGI
Application for PGI is often simple and can be done in less than 30 minutes. Its simplicity is because the application is completed on an online form. Once the application is submitted, the insurer assesses the different circumstances of the loan to give you a policy review.
The level of cover afforded to the guarantor depends on whether the loan is secured or unsecured, and the risk the guarantor poses to the insurer.
When is one Ineligible For PGI?
There are times when getting a PGI will be useless as you may lose the premiums plus the paying for the liabilities of the loan. Go through the insurance policy to find out the exclusions to the policy. The following are the most common exclusions:
- In case another insurance firm covers the personal guarantee. Double insurance is dangerous as you can lose payments from both insurance firms you have diligently paid premiums.
- If getting the Personal Guarantee Insurance is due to insider information of potential insolvency either before or at the time of taking the insurance cover.
- In case the personal guarantee is called in for fraud.
- When you fail to take advice from the insurance firm.
Taking loans is an inescapable part of growing new businesses. However, the risks involved with taking business loans such as Personal Guarantees give undue pressure to executives and at times lead to the loss of their hard-earned wealth. Personal Insurance Guarantee ensures that no matter what businesses face the guarantors can weather the storms unscathed.