Personal Guarantee Insurance (PGI)
A personal guarantee is a common requirement in business transactions, especially for small and medium-sized enterprises (SMEs).
It involves a commitment made by an individual, usually a director, to take on personal liability for the debts or obligations of the business. While a personal guarantee can help secure financing or favourable credit terms, it also exposes the guarantor to significant financial risks, including bankruptcy and loss of personal assets in case of insolvency.
Personal guarantee insurance is a solution that provides protection against these risks, but many individuals and businesses are unaware of its existence or benefits.
This article will delve into personal guarantee insurance, its definition, how it works, who needs it, and how to obtain it. We will also explore the importance of personal guarantee insurance in protecting your personal assets from corporate insolvency.
- What is Personal Guarantee Insurance?
- What are the Key Features of Personal Guarantee Insurance?
- How to Apply for Personal Guarantee Insurance?
- How Much is Covered
- How much does personal guarantee insurance cost?
- Can My Company Pay?
- Insurance Criteria
- Should I take out Personal Guarantee Insurance?
What is Personal Guarantee Insurance?
Personal guarantee insurance is a type of insurance that protects an individual, typically a business owner, who has provided a personal guarantee for a loan or business transaction. The insurance policy provides coverage for any losses incurred by the guarantor if the borrower defaults on the loan or cannot fulfil their obligation.
In the event of default, the insurance policy will cover the outstanding amount owed, which may include interest, legal fees, and any other costs associated with the debt.
Personal guarantee insurance can provide peace of mind to business owners who may be hesitant to provide a personal guarantee due to the financial risks involved.
What are the Key Features of Personal Guarantee Insurance?
- 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 guaranteed amount
- It is possible to insure multiple guarantors on a single policy
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. You’ll receive a detailed quote that outlines the terms and conditions of the policy, including the level of cover provided.
- Annual coverage: Personal guarantee insurance with Purbecks is provided on an annual basis. This means that you’ll need to renew your policy each year to maintain coverage.
- Fixed percentage of coverage: The level of cover provided by Purbecks is based on a fixed percentage of the personal guarantee and is determined based on your individual circumstances. The policy will cover the amount specified in the personal guarantee up to the agreed-upon percentage.
- Protection in case of insolvency: If your business becomes insolvent and your personal guarantee is called in, Purbecks will be there to support you. The policy will cover the outstanding amount owed, including interest, legal fees, and any other costs associated with the debt.
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 personal guarantee insurance 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.