Personal Guarantee Insurance (PGI) is a type of insurance that is famed to provide protection for personal assets to small-to-medium-sized business owners and commercial real estate investors. It is only provided when they sign a personal guarantee for a commercial loan.
Therefore, Personal Guarantee Insurance provides insurance cover for only those who have signed a Personal Guarantee on a new, or current loan.
What is a Personal Guarantee?
Starting with the introduction of personal guarantee insurance, personal risks are managed in business and personal guarantee insurance acts as a guarantee that personal assets will not be used to cover the loss if their business fails. Therefore, offering the directors moderation.
Features of Personal Guarantee Insurance (PGI):
- Annual Insurance Policy is offered by personal insurance.
- The price of personal guarantee insurance is formed by individual circumstances. moreover, the risk involved also hampers the prices.
- The Prices fluctuate as we buy the policy.
- The insurance policy is issued within six months of a loan origination
- It is delimited by the FCA
- Personal guarantee adds up to the cost of an overall loan transaction
- It may offer you a more attractive interest rate on the loan
- This option is usually available to the directors of limited personal guarantee insurance companies, or to the partners of an LLP
- It is offered for personal guarantees which are taken against both secured and unsecured loans
- It is typically to be an underwritten based
- There is a fixed percentage of the amount guaranteed associated with the policy.
- You Can even insure multiple guarantors and that too on a single policy
Exclusions of Personal Guarantee Insurance (PGI):
What all is not covered in the personal insurance policy is depicted here. Moreover, if you have read the summary of the policy these points are also mentioned in the insurance policy. Therefore, Personal Guarantee Insurance Exclusions:
- The uncertainty involved when you were aware of a potential bankruptcy event which is held either before or at the time of taking out the insurance cover
- In case you are involved in any dishonest or fraudulent behavior, where a personal guarantee is called
- Whether the personal guarantee is enclosed by any other insurance
- Where the guidance of the insurance support is not represented upon the following of any Notification
What is Covered in Personal Guarantee Insurance (PGI)?
The insurance covers 60 Percent during the first year of cover. And this rises to up to 80 Percent as the business proves its stability and the risk with time. 80 Percent is the maximum available cover.
Advantages of Personal Guarantee Insurance
Opting for personal guarantee insurance means that risk involved can be minimized. Agreements formed are usually to breach the corporate veil which indirectly indicates no separation between personal and private money. As, a result of which the insolvency rate is minimized or becomes nil. It also gives personal guarantors a substantial piece of mind as they are safe in buying the personal guarantee insurance and putting their house on the line.
- Minimised risk
- Newer personal guarantee insurance products
- One or multiple guarantors
- Annual premium
- Covers up to 80 Percent of the total
- Family assets are not threatened
Who Pays the Personal Guarantee Insurance Premium?
Covering the term commercial finance, directors while opting for Personal Guarantee Insurance are concerned that maybe they have to pay the premium by themselves, but the costs can be covered by the business.
How Much Does Personal Guarantee Insurance Cost?
The cost of personal guarantee insurance is typically based on several factors which can be summed up as follows:
- Guarantee period
- The financial situation
- Stability of the company
- Loan transaction
- The overall level of risk to the insurer
- The timeframes
As the price of personal guarantee insurance Premium varies from £750 per year, up to around £12,000 for the biggest guarantees.
Types of Personal Guarantees
Now that we are aware of what is personal guarantee let’s take a look at the types of personal guarantees., which are covers two types of personal guarantee that areas:
Unlimited Personal Guarantees
In the case of Unlimited Personal Guarantee the lender can recover up to 100 Percent of the total loan amount. Moreover, apart from the loan amount he can also recover any associated legal fees with the loan amount.
The lender can even hire lawyers in case you fail to make the payment due. Thus, all your savings and funds such as your life savings or even your retirement or else your kid’s college fund, your own house, your owned car, and any other assets which the company find useful in repaying the loan amount are utilised by them in order to cover the entire associated cost of the loan with interest as well as the legal fees involved.
These Personal Guarantees are called unlimited as they do offer you zero financial protection in case you fail, or your plan or business fails.
2. Limited Personal Guarantees
Contrary to the other comes limited personal guarantees that set the limit on what can be collected or covered from you in case you fail, or your plan or business fails.
This type of personal guarantee is issued when more than one person is involved in a business. Thus, a clear percentage of debt sharing ratio is also discussed between them. Further, their limited guarantee can be classified into two parts:
- Several guarantees
- Joint and several guarantees.
In several guarantees, each person has a predetermined percentage of liability. That is usually a fixed percentage of the loan, which is equivalent to the personal stake in the company. Whereas, a joint and several guarantees, says that each party is potentially liable for the full amount of debt. Therefore, in this, the lender can seek out the full sum of the loan amount from any of the parties.
How to Limit a Personal Guarantee?
Eliminating the need for personal guarantee insurance is quite difficult as insurance has nowadays become a specific need for the people. Thus, we cannot eliminate it but surely can reduce or limit its impact for this some points are worth considering:
- Limit a guarantee
- Modify the reporting requirements
- Eliminate certain assets
- Do not include the spouse as a guarantor.
- Acquire personal guarantee insurance
- Avoid “joint and several” language
- Suggest terms of relief
- Decrease guarantee
- Improved business performance
How does Personal Guarantee Insurance Work?
Personal guarantee insurance works to protect you from this risk associated in case your business fails. But what is to be considered here are some points on which Personal guarantee insurance or PGI works:
- Annual premium which is calculated on individual circumstances
- You choose the amount to be insured
- Cover starts from 60 Percent of the guarantee
- More than one director can be covered under one premium
- Works well when directors have different levels of shares
- Involve significant costs if called upon
Personal Guarantee Forms for Loan
Personal Guarantee Form is a document that enables a guarantor, to take charge for a personal loan of the borrower in case it is not paid back. With the high risks involved nowadays, by unsecured loans, the role of a guarantor is enhanced.
Here, the guarantor insurance definition depicts that the guarantor puts his assets as a guarantee indicating to guarantee the loan. And in case the loan amount is not met, the guarantor assets are taken up to cover the loan amount.
Thus, here Personal Guarantee Form is filled up by the guarantor and allowing his consent to do so.
Contents of a Personal Loan Guarantee Form
The form signed by the guarantor holds many specific things mentioned that are outlined as:
- The loan balance
- Specifying the place, the loan originated
- Clarify its legal context
- Explicit provisions of the loan
- Parties involved and their addresses.
- Authenticated, and dated
While the issuance of the contract or insurance a copy of personal loan guarantee form is also attached to the insurance and a copy of the form is to be handed to each person involved.
Commercial Lease Personal Guarantee Insurance
Landlords do carry risk when they rent out their commercial space. Here arises the need for a commercial lease personal guarantee.
So, in case if you default on your lease you are now individually liable for the remaining balance of the rent but this could be eased with the help of a personal guarantee. Where personal guarantee insurance providers would cover all your lease amount.
Tips to Get Out of a Personal Guarantee
We have suggested some points that would help you to lessen the burden of a Personal Guarantee:
- Consult with an attorney
- Ask for an amendment
- Proof of consistent revenues and profits
- Renegotiate the guarantee terms
- Proposal to prepay
- Compromise to set up a letter of credit
- Give a security deposit
Before getting personal finance insurance one should note down their business and finances, as despite the best efforts involved business could fail, so in that scenario, one should be ready for the assets they are offering for guarantee. Thus, do consider the option of Personal Guarantee Insurance to safeguard yourself from the risk involved in the near future.
There are several ways available or options that you can opt to protect yourself from the personal guarantee. You can choose to Limit the guarantee, Decrease guarantee, request specific carve-outs, Remove spousal guarantee, etc.
A personal guarantee can not be enforced unless it is in writing and signed by the guarantor. Thus, it is a legally binding agreement.
Yes, of course, a business is a guarantor. For qualifying as a guarantor one should be a person or a corporate body. Moreover, the company should also be in a financial position to pay the amount.
The main requirement for a personal guarantee is that it should be in writing only then it will be seen as enforceable. Thus, the written format makes it valid.
If guarantor refuses to pay then it means they are indirectly breaking the contract.