Business debt protection

Ask a business owner what the business owes and you usually get the term loan figure. Ask the bank and the list is longer: the term loan, the overdraft limit, asset finance on the ute and the plant, a business credit card — and behind it all a set of personal guarantees signed years ago and not read since.

Business debt protection is cover sized to that total, arranged so the money arrives where it is needed if the owner dies or is permanently unable to work. It is the least glamorous form of insurance and one of the most consequential, because debt survives everything else. A business can lose revenue and shrink. It cannot shrink its way out of a facility that has been called.

Two related events need planning for. The lender reviews or withdraws the facility: banks lend to small businesses partly on the strength of the people running them, and the death or permanent disablement of a principal is usually a reviewable event. Or the loan is repayable and the money is not there, in which case the security gets tested — and for most small businesses, the security is the house.

This gets the least attention and deserves the most, so it is worth setting out step by step.

1. 1The company borrows. On paper the debt is the company’s, and the owner’s liability is limited to their shareholding.
2. 2The bank, knowing the company has few assets, asks the owners to guarantee the borrowing personally. Almost every small business owner signs one.
3. 3The guarantee is usually supported by a mortgage over the owner’s home, turning a personal promise into a secured claim over the family’s largest asset.
4. 4The owner dies. The company’s ability to service the debt drops, and the facility comes up for review.
5. 5The lender calls on the guarantee. It is a personal liability, so the claim is made against the deceased’s estate.
6. 6The estate pays, or the security is realised — and the family home stands behind a business that may no longer be trading.

Two details catch people out. Most owner guarantees are joint and several, so each guarantor can be pursued for the whole debt rather than their share. And many are all-obligations guarantees, covering future advances as well as the loan in front of you when you signed.

Working out the real number, from the documents rather than from memory

• Current term loan balances, not the original amounts.
• Overdraft and credit facility limits — insure the limit, since that is what can be drawn.
• Asset and equipment finance, including anything on a lease with a residual.
• Business credit cards and trade credit accounts, which usually sit behind a guarantee too.
• Shareholder current accounts in credit, which the estate may call for.
• Any lending the owner took personally and injected into the business.
• The guarantees: who signed what, whether they are joint and several or all-obligations, and what security supports them.

Add it up, then decide how the cover should be owned. If the exposure is the guarantee and the point is to protect the estate, personal ownership is often more reliable than company ownership, because company-owned proceeds are company assets with other creditors in the queue. Ask your accountant and lawyer — the answer changes the tax analysis.

These are the details that decide whether the cover does what you expected. Read them before you compare on price.

• Whether the cover matches the exposure today. Debt moves, and revolving facilities move fastest.
• Whether guarantees are joint and several — if so, each guarantor may need cover for the whole debt, not a share.
• Whether the guarantee is an all-obligations guarantee capturing future lending as well as the current facility.
• Whether disability is covered. A permanently disabled owner cannot service debt any better, and is still alive to be pursued.
• Whether the bank has required an assignment of the policy. An assigned policy pays the bank first.
• Whether the estate has liquidity before the insurance arrives. Probate takes time; overdrafts do not.

Every New Zealand insurer writes business debt cover to its own wording, and the words are where the money is. Two policies that look identical on price can pay very differently when it matters. Closing that gap is the entire job of an adviser.

• An adviser can read the facility documents and the guarantees alongside you, which a bank’s own insurance arm has little incentive to do carefully.
• Where a bank requires cover as a lending condition, an adviser can usually place it more competitively than the bank-branded option offered at the same meeting.
• Decreasing sums insured track an amortising term loan but are the wrong shape for a revolving overdraft. Matching structure to facility saves real money.
• An adviser can coordinate ownership and any assignment with your accountant and lawyer.

There are three ways to buy life cover in New Zealand, and they are not equivalent. You can buy direct from one insurer, which means you see one product range and one underwriting appetite. You can buy through your bank, which usually means a single insurer’s product sold under the bank’s brand, often with narrower definitions. Or you can go through an adviser, who quotes several insurers at once and is required to put your interests first.

The premium you pay is the same either way. Insurers build adviser commission into their pricing whether or not an adviser is involved, so going direct does not get you a discount — it just removes the person whose job is to argue your corner at application and at claim time.

• An adviser can see which insurer is currently taking your health history on standard terms, and which one will load or exclude it.
• An adviser can structure cover across two insurers if that produces a better outcome than putting everything with one.
• An adviser handles the underwriting back-and-forth, and is the person who chases the claim when a family is least able to.
• An adviser has to document why the recommendation suits you, which is a written record you can hold them to.

We are a referral service, not an insurer. We do not quote premiums and we do not sell policies. What we do is put you in front of one licensed New Zealand adviser who can compare the market properly.

1. 1

   You tell us what you are looking at

   The form takes about a minute. Nobody asks for your medical history on a web form — that conversation happens with the adviser, properly, and only once you have decided to proceed.

2. 2

   An adviser calls you

   A licensed New Zealand adviser talks through your situation: who depends on you, what you owe, what you already have in place, and what you are actually worried about.

3. 3

   They compare the market

   The adviser quotes across the major insurers, checks which of them will take your health history on the best terms, and puts the options side by side in writing.

4. 4

   You decide, in your own time

   There is no obligation and no cost to you. If the answer is that you already have enough cover, a good adviser will tell you that.