Personal Guarantee Insurance helps out those who have signed a personal guarantee (usually company directors) on a new or existing loan, by providing them with cover. It protects the guarantor in the case of the loan being called in. Typically, the loan is guaranteed by the individuals’ personal assets i.e. a house.
Why do I need this?
When you need to apply for finance, the bank or finance provider is likely to request you to sign a personal guarantee if the assets of the company cannot cover the loan. Personal Guarantee insurance provides protection for your personal assets, hence if the worst happens, and the company became insolvent, you can be reassured that your own personal and family assets are safe and not at threat.
What are they key features?
- An Annual Insurance Policy, regulated by the FCA
- The level of risk and individual circumstances determine the price
- Insurance is available to directors of limited companies or partners of an LLP – you can insure multiple guarantors on a single policy
- It is available for personal guarantees against secured and unsecured loans
- Cover is based on a fixed percentage of the guarantee amount – usually a low percentage and never to cover the full amount. The maximum is 80%. Over time, the cover rises as the business become more stable and show they are less risky to the lender.
How does Personal Guarantee Insurance work?
It is very straightforward and simple – apply via an online form (the level of cover available depends on if the personal guarantee is for a secured or unsecured loan). Once you have applied, insurers assess your circumstances and will provide you with a policy to review.
To apply, you must be a member of a UK partnership or a Limited Company Director.
How much does it cost?
The cost of PGI depends on how large the guarantee is, what assets are being used as security, the timeframes involved and the overall risk of the insurer.
Typically, it varies from £750 p.a. to £12,000.
The costs of insurance can be categorised as a company expense when the finance the personal guarantee is needed for, is for the company. This means there is less impact on personal finances for taking out the insurance.
Are there any exclusions?
Exclusions tend to be included in the detailed policy summary you receive. However, some typical exclusions to your insurance are:
- If the personal guarantee is covered by another insurance
- If a personal guarantee is called in due to dishonest, fraudulent behaviour
- When, following a notification, the insurance support advice is ignored
- If you are aware of a potential insolvency event, before or at the time of taking out the cover
So, should I take out Personal Guarantee Insurance?
Being licensed insolvency practitioners, we hear from directors facing financial struggles, daily. When you have a Limited Company structure, you are prevented from your own personal possessions being taken. When you take out PGI, this changes. The corporate veil is lifted, meaning there is no separate legal entity for the director and the company, instead they are seen as one. From this, directors see their company liquidation lead to personal bankruptcy.
Taking out personal guarantee insurance prevents this. It protects your personal possessions if ever a situation like this occurs. However, it is not cheap and it might be a drain on yours or the company’s cashflow. At least the choice is there.