Business Loan And Capital Protection Cover

Published: August 30, 2013

Are you a small or medium business owner and recently taken out a loan? If you have taken out a loan or you are thinking about taking out a loan to grow your business, make sure your small business is protected. Our Keyperson Capital Protection Guide will take you through:

  1. Keyperson Definition
  2. Why is Capital Protection Necessary?
  3. How do I know how much Capital Protection my business needs?
  4. Capital Protection Reviews
  5. Who receives the benefit?
  6. Taxation of Keyman Insurance – Capital Protection

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Keyman Definitions

Keyman insurance

An insurance type designed to protect the small to medium business if a keyperson is no longer able to continue in the business due to death, total and permanent disablement, critical illness or total disablement.

Keyman Capital Protection

Keyman Capital Protection allows a business to receive a benefit to help pay any outstanding loans or capital expenses for which a business partner who was forced to exit the business, was a guarantor for.

Why is Capital Protection necessary?

As a small business owner, you will understand the cash flow challenges your business faces. If a creditor requires the repayment of an outstanding loan due to a guarantor no longer being able to carry out his or her responsibilities, you may not have the cash available to repay your obligation. 

A Capital Protection benefit would allow you or your business partner to re-pay the loan amount, extinguishing their obligation to the business without you needing to dip into your businesses limited cash reserves.

How much Capital Protection does my business need?

Unlike Revenue Protection, working out how much Capital Protection insurance your business needs may be easier to work out. Generally, you will want to make sure that the benefit paid out will cover any outstanding debt and loans for which you are a guarantor for. While you may only be responsible for 50% of the debt, taking out a policy that pays off the entire debt may be worth considering.

  • Ensure your policy covers the full length of the loan – you do not want your insurance expiring before your loan expires.
  • Make sure the debt is current and your Capital Protection policy reflects this.
  • Understand the structure and nature of the debt and who the guarantors are.

Businesses can change rapidly – they can expand, take on more staff and take on more debt to grow the business. They can also reduce staff and office space and reduce their debt. Whatever the case may be, it is always important to make sure the level of capital protection you have is suitable for your needs.

Who receives the benefit?

Generally, the business will be the policy owner and the beneficiary. This means that the business will be responsible for paying premiums and will also receive any benefit that is paid out as a result of the policy. This benefit can then be used to pay off any debt as required.

Taxation of Keyman Insurance – Capital Protection

As Capital Protection does not protect against the loss of revenue, it is generally not tax deductible. However, any benefit that the business receives is generally not tax-assessable. It is also important to note that if the person who receives the benefit is not the original owner of the insurance policy, there may be a capital gains tax liability.

Please consult with your tax agent or accountant before making any decisions on Capital Protection, in particular, the ownership and beneficiary structure.

If you are a small business owner and would like more information on Keyman Capital Protection, it might be beneficial to compare quotes so you can make an informed decision. 

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