If you’re taking a business loan, or have one in place, you may be wondering about personal guarantee insurance to mitigate your risks.
In this article, I’ll explore this subject in some detail, explaining how it works, where to get it, plus the benefits and drawbacks.
What is Personal Guarantee Insurance?
Personal Guarantee Insurance (PGI) is a relatively niche type of insurance designed to offer protection to business owners who have provided a personal guarantee to a lender when borrowing for their business.
When a business owner or director personally guarantees a loan, they are essentially offering their own personal assets as collateral against the business debt. If the business defaults and cannot repay the debt, the individual is personally liable for the amount guaranteed.
PGI can cover a portion of this liability.
The main features and aspects of Personal Guarantee Insurance include:
- Coverage: PGI typically covers a percentage of the personal guarantee, which can range from 60% to 80% or even more, depending on the specific policy terms. This means that if the business defaults, the insurance can cover a significant portion of the debt, thereby reducing the personal financial impact on the guarantor.
- Flexibility: Some PGI policies might allow for incremental increases in coverage as the business continues to repay its loan and reduces its debt.
- Premiums: The cost of the insurance typically depends on various factors such as the amount of the guarantee, the nature and financial health of the business, and the creditworthiness of the guarantor.
- Claim Conditions: PGI isn’t an easy way out of debt, and there are conditions that have to be met before a claim is paid. For example, a policy might stipulate that the business must first be declared insolvent before a claim is considered.
- Benefit to Lenders: While it’s primarily seen as a protection for business owners, PGI can also provide some assurance to lenders, as it adds an extra layer of security to the loan.
- Limitations: Like any insurance policy, PGI will have certain exclusions and limitations. It’s crucial to read the policy carefully and understand what’s covered and what’s not.
Advantages of Personal Guarantee Insurance
Personal guarantee insurance offers a range of key features that can benefit individuals and businesses significantly. These include:
- Protection of personal assets from financial risks associated with personal guarantees
- Cost-effective solution with competitive premiums that are typically lower than the potential costs of defaulting on a personal guarantee
- Flexibility to tailor coverage to individual needs and circumstances, such as coverage for new or existing personal guarantees, multiple personal guarantees, or one or more guarantors
- Quick and easy application process, with online forms and fast turnaround times for quotes and policies
- High level of coverage, with policies covering up to 80% of the value of the personal guarantee
Why You Need Personal Guarantee Insurance
Here’s why you might need Personal Guarantee Insurance:
- Protect Personal Assets: The most significant benefit of PGI is that it protects your personal assets, like your home or savings, from being seized by a lender if your business defaults on its loan.
- Reduce Personal Financial Stress: Knowing that a portion of the potential debt is covered can significantly reduce the stress and worry associated with the potential of a business default.
- Facilitates Business Growth: Some business owners might be hesitant to take on necessary loans due to the risk associated with personal guarantees. PGI can make these decisions easier, allowing business owners to take calculated risks that can help the business grow.
- Enhances Borrowing Power: Lenders might be more willing to extend credit or better terms if they know that a portion of the loan is backed by PGI, in addition to the personal guarantee.
- Bankruptcy Considerations: While no one plans for their business to fail, it’s a possibility that should be accounted for. If the worst happens and a business enters insolvency, having PGI could mean the difference between personal financial survival and bankruptcy for the guarantor.
- Dynamic Coverage: Some PGI policies offer dynamic coverage, where the coverage can increase as the business repays its loan, thereby reducing its outstanding debt.
- Confidence to Stakeholders: Knowing that there’s insurance in place can instil confidence in stakeholders, including investors, lenders, and even key employees, indicating that there’s a safety net in place.
- Peace of Mind: Business is inherently risky. While business owners are used to managing risk, PGI provides an additional layer of peace of mind. Even if the business faces unexpected challenges, the owner’s personal assets have a measure of protection.
- Allows for Multiple Guarantors: In businesses with multiple partners or directors, if each has provided a personal guarantee, PGI can be taken out by each guarantor, ensuring that all are similarly protected.
- Negotiation Leverage: In the unfortunate event that the business is struggling, having PGI might provide leverage when negotiating with lenders. It signals that a portion of the debt will be covered, which might facilitate better restructuring terms.
However, it’s essential to remember that PGI typically doesn’t cover 100% of the guaranteed amount. Guarantors should be aware of the exact coverage percentage and any policy exclusions. As with any insurance or financial product, it’s crucial to consult with professionals, such as financial advisors or insurance specialists, to ensure the product is right for your specific situation.
What Percentage Does Personal Guarantee Insurance Cover?
The maximum available is 80%, but during the first year of cover, the figure is closer to 60%. Over time, the cover rises as the business proves its stability and the risk for the lender drops.
Who Pays the Insurance Premium for Personal Guarantee Insurance?
Since personal guarantee insurance is usually taken to cover commercial finance, the business can cover the associated costs. This is a commonly asked question as directors are rightly concerned that they might have to pay the premium themselves, despite the finance being needed for business purposes.
What is the Average Cost of Personal Guarantee Insurance?
Like any insurance, PGI is dependent on multiple factors: the amount of money being guaranteed, the financial situation and stability of the company, the timeframes, and so forth.
Typical rates start from 1.8% to 4% flat.
Our partner on this is Purbeck Insurance Services, a trading name of Purbeck UK Limited who offer Personal Guarantee Insurance (PGI) on behalf of Markel International, an A-Rated Fortune 500 insurance company. They are directly authorise and regulated by the FCA.
What Types of Finance Can You Use Personal Guarantee Insurance For?
- Asset Finance
- Business Finance
- Business Finance
- Commercial Mortgages
- Credit Cards Overdrafts
- Invoice Finance
- Other Secured Loans
- Property Bridging
- Property Development
- Secured Business Loan
- Secured Peer to Peer Loans
- Trade Finance
- Unsecured Business Loan
- Unsecured Loans
- Unsecured Peer to Peer Loans
How to Apply for Personal Guarantee Insurance?
f you’re interested in getting personal guarantee insurance with Purbecks, here’s a step-by-step guide to the application process:
- Visit Purbecks’ website: Start by visiting Purbecks’ website at www.purbeckinsurance.co.uk.
- Fill out the online application: On the website, click the “Get a Quote” button and complete the online application form. You’ll need to provide some basic information about yourself and your business, including the amount of the personal guarantee you wish to insure.
- Receive a quote: After you’ve submitted your application, Purbecks will provide you with a quote for the cost of the insurance. The quote will be based on your circumstances and the personal guarantee amount you wish to insure.
- Review the terms and conditions: If you’re happy with the quote, you can review the terms and conditions of the insurance policy. Make sure you understand the coverage provided and any limitations or exclusions.
- Accept the policy and pay the premium: If you’re satisfied with the terms and conditions, you can accept the policy and pay the annual insurance premium. Purbecks will provide instructions on paying the premium, which can be done online or by phone.
- Receive your insurance certificate: Purbecks will issue you an insurance certificate confirming your coverage once you’ve paid the premium. Keep this certificate in a safe place, as you may need it in the future if you need to make a claim.
Personal Guarantee Insurance FAQs
How long does personal guarantee insurance last?
Personal guarantee insurance is typically provided on an annual basis and needs to be renewed each year to maintain coverage.
Can you have multiple guarantees?
Purbecks can include multiple guarantees on your policy if you have two or more guarantees in place.
What does personal guarantee insurance cover?
Personal guarantee insurance covers the business owner’s personal liability under a personal guarantee following insolvency or failure of the business. It pays out a percentage of the outstanding guarantee amount owed to the lender, protecting the guarantor’s personal assets.
How much does personal guarantee insurance cost?
Premiums vary depending on factors like the loan amount, type of loan, coverage amount, policy term etc. The brochure states premiums are competitive. exact pricing would need to be quoted individually.
What is the maximum coverage amount?
For secured loans the maximum cover is £400,000 and for unsecured loans it is £300,000.
When should claims be made?
Claims should be made as soon as possible after certain specified “notifiable events” occur, such as court judgments against the business or inability to pay debts. The policy documents provide full details.
What business support services are included?
The policy includes unlimited access to business support services such as cashflow management, business recovery, debt management etc. This provides help to try to avoid insolvency.