The purpose of a business loan insurance policy is to help a company recover from financial disruption because of the untimely loss of a working owner or any employee who makes a substantial contribution to the business. The company owns the policy and pays the premiums with the lender as the beneficiary. In the event, something happens to the owners or a key employee, the loan insurance policy would step in and make the loan payments up to the terms and limits of the policy.
Loan insurance policies can be set up to make payments for a certain period, or they could be life insurance policies that pay off the remaining balance of the loan. Most companies select term insurance because of the lower premium cost.
When Is Business Loan Insurance Needed?
Business loan insurance makes sense if:
The company’s reputation or financial health depends substantially on the unique skills or reputation of an owner or key employee.
A lender requires the policy to lower the loan risks in the event of losing a key employee or owner.
The death of a key employee, such as a top salesperson, would have an immediate financial impact on the company.
Funds are needed to buy out another partner’s shares in case of an unexpected death.
What Are the Benefits of Business Loan Insurance?
In times of financial crisis, business loan protection policies provide much-needed funds to:
Run the company if cash flow is interrupted when an owner or key executive dies, becomes ill, or incapacitated.
Support working capital needed to continue operations if your bank won’t make further loan advances because of the circumstances.
Pay off outstanding loan balances.
Meet the personal needs of owners, family members, and employees.
Cover personal guarantees on loans or bank lines of credit.