I’ll explain how personal guarantee insurance works and why I feel it’s a good idea for any director considering putting a personal asset up as collateral.
Personal guarantee insurance (PGI) offers protection against the risks of a personal guarantee default.
In the event of default, the insurance policy covers a large percentage of the outstanding amount owed, including interest, legal fees, and any other costs associated with the debt.
This allows you to keep whatever asset the financial provider has the charge on, and dramatically lessen the personal impacts of a loan default.
To our knowledge, there’s only one PGI provider in the UK currently, Purbecks.
What are the Key Features of Personal Guarantee Insurance?
Here are the key features of this type of personal guarantee insurance to help you decide if it’s right for you:
PGI is an annual Insurance Policy
It’s safe and FCA-regulated
PGI is available to the directors of limited companies, or partners of an LLP
Can be offered for personal guarantees taken against both secured and unsecured loans
PGI cover is based on a fixed percentage of the guaranteed amount
You can insure multiple guarantors on a single PGI policy
Benefits of Personal Guarantee Insurance
Peace of Mind
PGI provides you with reassurance that personal assets are safeguarded to a degree in case the business becomes insolvent. This can give you more confidence to take the finance you need to grow your business.
Coverage for Multiple Guarantors
PGI policies can cover multiple directors providing personal guarantees for the same loan.
Legitimate Business Expense
Premiums paid for PGI are a legitimate business expense.
Applicable to New or Existing Loans
PGI can be obtained for both new and existing loans, offering flexibility for businesses to manage risk at different stages.
How to Apply for Personal Guarantee Insurance?
Applying for personal guarantee insurance with Purbecks is a simple and straightforward process. Here’s how to get started:
Apply online: To begin the process, visit Purbecks’ website and complete the online application form. The form will require some basic information about you and your business, including the amount of the personal guarantee you wish to insure.
Get a quote: Once you’ve submitted your application, Purbecks will calculate your annual insurance premium based on your individual circumstances and requirements.
Annual coverage: Purbecks provides personal guarantee insurance on an annual basis, meaning you’ll need to renew each year.
A fixed percentage of coverage: Purbecks’s level of coverage is based on a fixed percentage of the personal guarantee and is determined based on your individual circumstances.
Protection in case of insolvency: If your business becomes insolvent and your personal guarantee is called in, Purbecks will be there to support you.
How Much is Covered by PGI?
Usually, the insurance covers a lower percentage of the overall guarantee, e.g. 60%, during the first year. This rises to up to 80% after several years, though never to cover the full amount.
How Much Does Personal Guarantee Insurance Cost?
The cost of personal guarantee insurance varies depending on the size of the guarantee, the assets being used as security, the timeframes involved, and the insurer’s overall risk level.
Prices vary from around £750 p.a. to £12,000 for the largest guarantees.
Can My Company Pay as an Expense?
Yes. Since the finance for which the personal guarantee is needed is for the limited company, the insurance costs can be listed as a company expense.
This makes personal guarantee insurance even more of a good idea for directors as there is no impact on personal finances.
What are the Insurance Criteria?
The insurance is available to limited company directors or members of partnerships within the UK.
Exclusions
These are covered in detail in the policy summary you will receive. Some of the key exclusions to your insurance include:
If you were aware of a potential insolvency event either before or at the time of taking out the insurance cover
Where a personal guarantee is called in for dishonest or fraudulent behaviour
If the personal guarantee is covered by any other insurance
Where the advice of the insurance support is not acted upon following a Notification
Is Personal Guarantee Insurance Worth It?
PGI is valuable if:
You have significant personal liability: It can cover a large portion of the debt if your business defaults, including interest and legal fees.
Your business can handle the cost: Premiums range from £750 to £12,000 annually. If this cost is manageable for your business, PGI can provide substantial protection.
You need peace of mind: PGI reduces personal financial risk and provides reassurance in case of business failure.
However, PGI might not be worth it if:
The cost is too high: If your business cannot afford the premiums, the insurance may not be a viable option.
You require full coverage: PGI typically does not cover the entire guaranteed amount, so some personal financial risk remains.
You face exclusions: If the guarantee involves issues like dishonesty or pre-existing insolvency, PGI may not offer the necessary protection.
In essence, PGI is worth it if you need to safeguard your personal assets and can afford the insurance. It offers valuable protection against personal financial risk, though it may not be suitable if cost is prohibitive or if full coverage is needed.
PGI can be used to cover personal guarantees on both secured and unsecured loans. This flexibility makes it suitable for various types of business financing, including loans, overdrafts, and asset finance.
Does PGI cover 100% of my personal guarantee?
No, PGI typically covers a percentage of the personal guarantee amount. Coverage usually starts at around 60% in the first year and can increase to up to 80% over time. However, it does not cover the full guarantee amount, so some personal financial risk remains.
What happens if my business becomes insolvent?
If your business enters into an insolvency procedure, and a formal demand is made under your personal guarantee, PGI can indemnify you for the covered percentage of the amount owed. This includes covering a portion of the outstanding debt, interest, legal fees, and other associated costs.
Can PGI be used for existing personal guarantees?
Yes, PGI can be applied to both new and existing personal guarantees. This makes it a versatile option for business owners who have already committed personal assets as security for business loans.
What are the main reasons a claim might be denied?
Claims can be denied if:
The claim is not notified within the policy period.
There was awareness of potential insolvency before the policy was taken out.
The claim involves dishonest, fraudulent, or reckless actions.
Advice from the insurance provider’s support services is not followed.
Is PGI tax-deductible?
Yes, the premiums paid for PGI can typically be treated as a legitimate business expense, allowing companies to deduct the cost from their taxable income. This can make PGI more attractive by reducing the effective cost of the insurance.
How do I renew my PGI policy?
PGI policies are generally issued on an annual basis. To maintain coverage, you need to renew the policy each year. The renewal process usually involves reviewing your current circumstances and potentially adjusting the coverage amount and premium.
Can I transfer my PGI to another person or business?
PGI policies are usually non-transferable. This means they are specific to the individual guarantor and the business relationship. If there is a change in the business structure or in the personal guarantors, a new policy may be needed.
