Personal Guarantee Insurance (PGI)
Personal Guarantee Insurance provides insurance cover for those who have signed a Personal Guarantee on a new, or existing loan.
If your business has no assets and you wish to apply for finance, the bank or finance provider is likely to request that a personal guarantee is signed.
Usually signed by a company director, this means that the loan is guaranteed by the individuals personal assets, commonly a house.
Personal guarantee insurance protects the guarantor in the case of the loan being called in, offering peace of mind in the meantime.
With many lenders requesting a personal guarantee before approving finance, they are commonplace and not, in themselves, problematic. It is important to realise, however, that personal guarantees are legally binding and, as such, taking insurance at the point of signing can be a worthwhile endeavour.
In this article we’ll explain the details around personal guarantee insurance and why it’s worth it.
What are the Key Features?
- Annual Insurance Policy
- Prices vary depending on individual circumstances and the level of risk
- This type of insurance is regulated by the FCA
- Insurance 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
- Cover is based on a fixed percentage of the guarantee amount
- It is possible to insure multiple guarantors on a single policy
How Does Personal Guarantee Insurance Work?
Applying for the insurance is straightforward via a simple online form. The level of cover available will differ, depending on whether your personal guarantee is against a secured or an unsecured loan.
Once you’ve submitted the application, the insurers will assess your circumstances and provide you with a policy to review.
How Much is Covered
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 it Cost?
The cost of personal guarantee insurance varies depending on how large the guarantee is, what assets are being used as security, the timeframes involved, and the overall level of risk to the insurer.
Prices vary from around £750 p.a. to 12,000 for the largest guarantees.
Can My Company Pay?
Yes. Since the finance for which the personal guarantee is needed is for the limited company, the costs of the insurance can go down 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.
The insurance is available to limited company directors or members of partnerships within the UK.
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
Should I take out Personal Guarantee Insurance?
As insolvency practitioners, we deal every day with directors who are facing financial crisis. Because of the limited company structure, the personal ramifications of this situation – while stressful – are usually relatively limited. While a director may lose their company, the law prevents business debt affecting family finances.
But when a personal guarantee has been signed, all of this changes. These agreements are specifically designed to breach the corporate veil which means the normal separation between personal and private money no longer applies.
As a result, insolvency suddenly becomes significantly more stressful than it could have been, and many directors have found their company liquidation also precipitates personal bankruptcy.
With personal guarantee insurance, all of this can be prevented. We consider it a prudent decision and one which should be seriously considered by anyone considering signing a personal guarantee for company finance.