What happens to your personal guarantees if you die?
Usually, business owners are required to sign personal guarantees to secure their business loans. This gives the finance lender access to all of your personal assets in the event that you default on a loan.
A personal guarantee means that the loan is secured against personal assets, most commonly your home, and are not extinguished until the loan is repaid in full or revoked by the bank or creditor. In the event of a sudden death, the guarantees and loans do not die too. Repayment or renegotiation is a critical financial issue that is inherited by other guarantors or your family.
You are able to protect your family from this situation by putting in place a guarantor (debt) protection insurance policy.
Business Insurance is a simple concept that aims to remove the worry and financial hardship that these unplanned events can cause. There are three areas of business insurance:
- Key Person Insurance
- Business Succession Planning
- Guarantor/Debt Protection
The harsh facts are, approximately 130,000 Australians die each year and no business, occupation or age group is immune. For a four partner business the chance of one partner dying or being totally disabled before age 65 is over 70%.
What is Guarantor (debt) Protection Insurance?
Guarantor Protection ensures that on the death or total and permanent disablement of a guarantor, the debt can be fully repaid. The business owners and guarantors are protected from the ramifications of being forced to liquidate their assets to repay the loan.
While this primarily benefits the guarantor and his or her estate in protecting personal assets, it also has benefits for surviving principals. With the debt repaid, the business owners and guarantors are freed from further financial burdens at a time of emotional stress.
A case study
Nathan borrowed substantially to help fund the rapid expansion of his business. He was aged 45, married to Margaret and they had two young children.
Nathan was tragically killed in a car accident driving home one day after work. He had worked hard to build his business to the point where it provided a financial stability for his family.
As with many businesses, Nathan took out a significant loan and gave personal guarantees without realising the full ramifications of those guarantees. Nathan's business debts did not disappear with his death, as many people think will be the case. His estate became liable for his loan, Margaret was left with insufficient funds to discharge the liability and was forced to sell personal assets and the family home to meet his liability.
Guarantor Protection would have provided the financial security for his family that he had originally intended.
To discuss transferring this risk away from yourself and your family, please contact Chris Davis, Wealth Protection Adviser at PKF Wealth [email protected] or 02 4928 7000.