Stop business debt from landing on the family home

Business debt protection NZ, common questions.

Quick answers to what New Zealand business owners ask us most. Something not covered? Give us a call.

• What is business debt protection insurance?

  Business debt protection is life, trauma and disability cover arranged specifically to repay business borrowing if an owner or key person dies, is diagnosed with a serious illness, or becomes permanently unable to work. It's sized to the debt rather than to income or business value, and it's usually the first business cover we put in place because the bank's position sits ahead of everyone else's.

• Why does business debt need its own cover?

  Because business borrowing rarely stays inside the business. Most New Zealand SME facilities are supported by directors' personal guarantees, and often by a mortgage over the family home. If the business can't service the loan, the lender can look to the guarantor and the security – which means a business problem lands on a family's house.

• What about personal guarantees?

  A personal guarantee makes a director personally liable for company debt. It doesn't disappear if the director dies or becomes disabled – the estate can remain liable. Debt protection provides the cash to repay or substantially reduce the facility, which is usually what a lender needs before it will release a guarantee or a second-mortgage security.

• How much cover should we have?

  We start from the actual facility position: term loan balances, overdraft and revolving credit limits, asset finance and leases, shareholder current accounts and any related-party lending. Cover is then sized to what would realistically need clearing to make the business viable without that person, or to release the guarantees.

• Is debt protection tax deductible in New Zealand?

  Generally not. Repaying a loan is a capital purpose, so premiums are usually non-deductible and the proceeds are usually not taxable income. This is the opposite of key person cover written to replace lost profits. Because a single policy can serve more than one purpose, apportionment may be needed – confirm the treatment with your accountant.

• Should the bank be the policy owner?

  Some lenders ask to be noted on a policy or to hold an assignment over it. More commonly the business or the owners hold the policy and the loan is repaid from the proceeds. Assigning a policy to a lender reduces your flexibility if you refinance, so it's worth understanding what your lender actually requires before agreeing to it.

• Does it cover serious illness, or only death?

  Both, if you structure it that way. Life and terminal illness cover handles the worst case; trauma cover pays on diagnosis of a covered condition such as cancer, heart attack or stroke, and total and permanent disability cover pays where the owner can't return to work. Illness and disability are the more likely triggers, so leaving them out is the most common gap we see.

• We personally guarantee a lease, not a loan. Does that count?

  Yes. Commercial property leases, equipment leases and trade credit arrangements are frequently guaranteed personally and can run for years. Those obligations should be counted alongside bank debt when sizing cover, because they behave the same way if the business stops trading.

• What if we already have personal life insurance?

  Personal cover is designed to look after your family, and if it's consumed clearing business debt then the household protection has effectively disappeared. Keeping business debt cover separate means the bank is repaid and the family cover stays intact for its intended purpose.

• Does cover reduce as the loan is repaid?

  It can. Some businesses use level cover and review it periodically; others align cover with the amortisation of the facility so the premium reduces as the debt does. Where a business is likely to borrow again for growth, holding cover level often makes more sense than stepping it down.