What Happens to Your Debts If Something Happens to You?
Most of us have financial commitments.
There might be a mortgage on your home, a personal loan, credit cards or other lending. If you own a business, there could also be business loans, equipment finance, overdrafts or other borrowing.
We usually think about debt in terms of making the next repayment.
But there is another question worth asking:
What happens to those debts if something happens to you?
Because while your circumstances can change, your financial commitments may not.
The repayments don't necessarily stop
Imagine you're paying off a mortgage.
Every month, a portion of your income goes towards reducing what you owe.
Now imagine that you become seriously ill, suffer a significant injury or die unexpectedly.
The circumstances have changed.
But the mortgage hasn't.
The same can apply to other personal lending. There may still be repayments to make, regardless of what has happened to your ability to earn an income.
For a family, this can create significant financial pressure at a time when they may already be dealing with other changes.
And the same principle applies to businesses.
Business debt can be different
Business owners may have borrowing that is closely connected to the operation of their business.
Perhaps you've borrowed money to purchase equipment, expand premises, buy another business or fund growth.
Maybe there is lending associated with the business itself, or borrowing that you've personally guaranteed.
If you become seriously ill and can't work, the business may face a reduction in revenue while its financial commitments continue.
If you die, your family and business partners may have to deal with questions about the business, its ownership and its debts at the same time.
The issue isn't necessarily that the debt needs to be paid immediately.
It's that the person or business that was responsible for servicing it may no longer be in the same position to do so.
Personal and business finances can be closely connected
For many business owners, the line between personal and business finances isn't completely straightforward.
You may have personally guaranteed business borrowing.
Your household income may depend heavily on the business.
The business may rely on your ability to work.
Your home may provide security for business lending.
Your family may depend on the income generated by the business.
This means that a change in one area can have consequences in another.
A serious illness could affect your ability to work, which could affect your personal income, which could affect the business, which could then affect your ability to meet personal financial commitments.
It's a reminder that financial protection isn't always about looking at each policy or debt in isolation.
What would happen if your income stopped?
One useful way to think about debt protection is to start with your income.
If you couldn't work for an extended period:
Could your household continue making its mortgage repayments?
Could you continue servicing personal lending?
Could your business continue meeting its borrowing commitments?
Would there be enough cash available to cover expenses while the business adjusted?
And if you died, would the people dealing with your estate and business have the resources needed to manage the debts?
The answers will be different for everyone.
You may have savings, other assets, another household income or existing insurance that could provide some financial support.
The important thing is knowing where you stand.
What is Debt Protection?
Debt Protection is designed to help address the financial impact of certain debts if specified events occur, depending on the policy and how the cover has been structured.
For example, cover may be arranged around particular business borrowing or financial commitments.
The purpose isn't necessarily to eliminate every debt.
Instead, it can be about providing funds that may help reduce or repay debt following an insured event, subject to the policy terms and conditions.
The structure of the cover matters, particularly for business owners where the ownership of the debt, the borrower and any guarantees need to be considered.
What happens to the debt can depend on the debt
Not all debt works in the same way.
A mortgage may have different arrangements from a business loan.
A personal loan may be structured differently from equipment finance.
Some borrowing may be in an individual's name, while other debt may belong to a company.
There may also be personal guarantees involved.
This is why simply adding up your debts isn't necessarily enough.
It's useful to understand:
What you owe
Who legally owes it
Who is responsible for repayments
Whether you've personally guaranteed any business debt
What assets are securing the borrowing
What would happen if you couldn't work
What would happen if you died
What existing resources or insurance could help
Those details can make a significant difference when considering how much financial protection may be appropriate.
Don't forget about the people behind the debt
Debt is ultimately connected to people.
A mortgage might be connected to a family home.
Business lending might be connected to an owner who is responsible for keeping the business running.
A loan might have been taken out to build something for the future.
That's why debt protection isn't simply about numbers.
It's about what those numbers represent.
The home you're trying to keep.
The business you're trying to build.
The opportunities you've invested in.
The future you're working towards.
Planning for a change in circumstances
Nobody takes on debt expecting their circumstances to suddenly change.
Most of the time, everything works as planned.
Income comes in. Repayments are made. The balance gradually reduces.
But financial planning isn't only about what happens when everything goes according to plan.
It's also about considering what happens when it doesn't.
A serious illness, disability or death can change a person's financial position very quickly.
The debt, however, may still be there.
Having a plan in place can give you a clearer understanding of how those commitments would be managed and what resources may be available.
Protecting what you've built
Debt isn't necessarily a bad thing.
A mortgage can help you buy a home. Business lending can help you grow a company. Borrowing can allow you to invest in opportunities that might otherwise be out of reach.
But when you've borrowed money to build something, it's worth considering what happens if your circumstances change before the debt has been repaid.
The financial commitments may continue, even when your ability to meet them changes.
Debt Protection is one potential part of a wider personal or business protection strategy.
The first step, however, is understanding what you owe, who is responsible for it and what would happen if you could no longer meet those commitments in the way you do today.
Because protecting what you've built isn't just about protecting your assets.
Sometimes, it's about making sure the debts attached to those assets don't become an unexpected burden for the people or business you leave behind.
If you've taken on new personal or business borrowing, or your financial circumstances have changed, it may be worth reviewing how those commitments would be managed if you couldn't work or were no longer around. At New Vision Financial Services, we can help you understand the different protection options and how they may fit alongside your wider financial arrangements.
Glen Hatcher
Financial Adviser
New Vision Financial Services
Plan your future and let us help you have peace of mind along the way.