What is Business Debt Cover?
Business debt protection is aimed at protecting a business entity from potential financial loss due to, the inability to service the debt or the forced repayment of all or some of the outstanding debt, arising from the loss of the life insured. However, from an underwriting perspective it is important that the level of benefit should relate to the financial loss and not be such that it is greater than the debt or the applicant’s share of the said debt.
Quantifying the level of cover is relatively straight forward as it is directly linked to the actual amount of debt and the life insured’s share thereof.
Please note in instances where the business is a sole trader or one in which the life insured has a controlling ownership interest (directly or otherwise) the cover may be as much personal protection as debt protection. This is because if when you step back and look through the business structure at a high level, ultimately the protection is for the life insured and/or dependants (on a personal basis). This cross-over of business and personal is important to keep in mind when considering business debt protection.
From a financial underwriting perspective it is important that the:
- debt is current and the amount of cover reflects the outstanding debt;
- cover reflects the term of the debt (considering the nature of the business and historical debt levels);
- business (including all entities) are solvent and trading with ability to service the debt;
- purpose of the debt is not merely refinancing existing debt;
- the financier is a main stream lender, otherwise if not, why not?; and
- level of cover does not exceed the financial loss that will result from the death or disablement of the life insured (taking into account their share of the debt and earning capacity used to service the covered debt).
These are all factors that need to be considered collectively.
Financial Information
It is important to understand (and outline for underwriting):
- the nature of the occupation and/or business;
- how the business generates income and how the life insured fits in;
- the business structure and ownership details; and
- what the financial effect of the loss of the life insured would be on the business and hence the serviceability of the debt.
