A personal guarantee puts a director’s personal assets at risk if the business defaults on a loan. Personal guarantee insurance has emerged as a way to reduce this financial exposure and offer directors more security.
What is Personal Guarantee Insurance?
Personal guarantee insurance (PGI) offers protection to directors who provide a personal guarantee for a loan, covering a portion of the outstanding debt if the business cannot repay it. This insurance helps reduce personal financial liability by safeguarding personal assets such as homes and savings.
PGI can be applied to both secured and unsecured loans, and it covers a fixed percentage of the guarantee. Directors of limited companies or partners in LLPs can explore directors personal guarantee insurance as a way to manage the risks associated with business borrowing.
How Does Personal Guarantee Insurance Work?
When a director takes out PGI, the insurance typically covers around 60% of the personal guarantee in the first year, which may increase to 80% over time. This ensures that, in the event of insolvency, a significant portion of the debt is covered, easing the financial burden on the director. GOV.UK explains what options companies have in the event of insolvency here:
The cost of directors personal guarantee insurance varies based on the size of the loan and other factors, with annual premiums ranging from Ł750 to Ł12,000. In many cases, the company can list the insurance cost as a business expense.
Is Personal Guarantee Insurance Worth It?
Personal guarantee insurance is worth considering if a director’s personal assets are at significant risk. By covering interest, legal fees, and a portion of the debt, it provides a useful safety net in case the business defaults.
The cost of the insurance must also be weighed against its benefits, particularly for smaller businesses that might struggle to afford the premiums.
Personal guarantee insurance can significantly reduce the personal financial risks directors face when providing a guarantee for business loans. While it doesn’t cover every scenario, it offers valuable protection for those with substantial personal exposure.
