For Owners and Partners of SME's: Loan Insurance

Are you an Owner or a Partner in an SME? If you are, then it is likely that you have inadequate business protection in place. Swiss Re estimates Asia’s “protection gap” to have increased to US$58 trillion in 2014 from US$42 trillion in 2010. Based on current trends, AIA estimates that this gap will grow to US$82 trillion by 2020, of which US$763 billion will relate to Hong Kong.

Credit: Strongarticle

We have created a three part series for important elements of business protection you need to consider: Keyperson Insurance, Shareholder/Partner Protection and Loan Insurance.

Here is an overview of Loan Insurance:

What is it and why is it needed?

Companies need finance for a myriad of reasons, from asset acquisition to product development. If sourced externally, they come with various conditions attached and repayment terms. The same is true if a Shareholder or Partner (“Participant”) make a loan to the business but different considerations apply where the lender dies. In this case the deceased’s family would almost certainly require repayment of the loan, which could cause acute problems to the ongoing operations of the business as it is unlikely sufficient liquid asset would be in place to repay. It may be possible to replace the loan from outside sources but this is likely to come with onerous conditions such as personal guarantees, harder repayment terms and time-consuming scrutiny of the business.

What is the Solution?

This is the simplest of the business protection cases and is solved by simply taking out life insurance cover on the lender for the amount of loan. If there are repayments being made then decreasing term insurance is generally the most cost-effective; if not level term is the answer.

Neil Stokes, a partner at Just Service, is a UK Chartered Accountant. He was for many years a partner in medium-sized Accountancy Practices dealing with these issues on a regular basis. If you feel you need more advice on the subject please contact us and he will be happy to assist in any way he can.

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Just Service Hong Kong is a member of the Hong Kong Confederation of Insurance Brokers in Hong Kong, transacting Long Term (including linked long term) Insurance business. Nothing in the comments above should be taken as offering investment advice or making an offer of any kind with regard to financial products or services of any kind. It is therefore important to reinforce that all comments above are designed to be general in nature and should not be relied upon for considering investment decisions without talking to licensed advisers.