Why purchase loan protection cover

Why purchase loan protection cover

When taking out a loan for your business, it is common to want to keep the associated costs as low as possible.

Providers will always up-sell additional insurance and benefit, some of which you may not need. But others like loan protection cover should be seriously considered.

What is loan protection cover?

Business loans are usually secured against guarantors (owners, directors or other key individuals) within the business. In the result of their death, the loan would still need to be repaid. Would your business survive in this scenario?

Many lenders request loan protection cover as a matter of course, as this type of insurance allows companies to repay outstanding loans if the worst were to happen to one of the guarantors. A lump sum is usually paid out when an insured individual is diagnosed as critically ill or dies. That sum can then be used to clear the loan in full.

The level of cover taken should reflect the amount needed to be repaid across your whole loan portfolio so that all outstanding borrowings are covered. Your policy should be set up to decrease as the loans are paid off, in line with repayments.

Why is loan protection cover important?

When you take a loan out you'll be required to pay off the full amount even if the worst-case scenario happens. If this happens it is likely that the lender, to protect their investment, will ask for the loan to be repaid in full, immediately.

This will put an intense financial burden on the company at a time when it has just lost an important key individual, in some cases the person that the company relies on to operate. Without protection, how long can that company realistically sustain itself after paying off the lump sum?

Loan protection cover removes the worry and risk (or at least one set of risks) from navigating the worst-case scenario. If you have outstanding loans it is the safety net to catch a falling business and could be the difference between the company surviving or collapsing.

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