Guarantee insurance is a form of security an insurer uses for the performance of a piece of work. It is also used as a security for the advance payments for the services that you agree upon in a contract. The guarantee could be limited or unlimited. In case of unlimited guarantee, the full amount of liability needs to be paid while in case of limited guarantee only a portion of the liability needs to be paid.
What Are Some Types of Guarantee Insurance?
There are three types of guarantee insurance. We have explained them in detail here.
Type #1: Personal Guarantee Insurance
Many small businesses find it difficult to finance their business. So they apply for a business loan to continue their journey. Now, in order to get a loan, they need to provide the lender with some sort of guarantee for repayment. With small businesses, the problem lies at this step. They don’t have much income to guarantee the loan. So they provide a personal guarantee. The business owner signs it pledging his personal assets in case he fails to repay the loan.
Also read: Guide to What is Insurance and its Types and Components!
New business owners are always in a dilemma that whether they must use personal guarantee or not. If the business fails, they will lose their personal assets. To deal with such a situation, the personal guarantee insurance came into the picture.
Personal guarantee insurance is a policy that works to provide commercial real estate investors and small-to-medium-sized business owners protection. When they sign a personal guarantee in their loan agreement the insurance policy guards their personal assets.
We know personal guarantees have been a fact of life for all those small business owners to get a commercial loan. This puts the business owner’s assets at high risk. If you apply for the personal guarantee insurance it will cover up to 70% of the liability amount. So in a way the insured individual gets a safety net without compromising with the business needs.
Personal guarantee insurance is usually an annual policy. The premium amount depends on the size of the loan and the risk factor of the underlying business. However, the coverage is available for a limited period once the loan closes.
Type #2: Financial Guarantee Insurance
If you apply for a loan and there are no assets to lend as a guarantee then you have to take the help of a guarantor. The guarantor promises to take responsibility for the repayment of the loan if the borrower fails to do so. For example, a company A promises to pay back the loan amount in case the company B fails to repay. Now, company A needs to pledge its assets that can cover the company B’s default payments. A financial guarantee is known to increase the borrowing company’s credit rating.
In the above example, company A or guarantor is at high risk. Financial guarantee insurance will provide the guarantor with insurance that will pay the principal amount and interest. This occurs if the investors or guarantors are unable to meet financial obligations.
Financial guarantors have been playing an active role in many securities markets. This includes the very large US municipal bond market. So they need this policy in order to save themselves from huge losses. The largest share of the financial Guarantee Insurance market in the USA is held by Assured Guaranty.
Type #3: Rent Guarantee Insurance
It is a form of underwriting through which the landlords get protection. Yes, even the landlords need protection if the lessee fails to pay rent. If you think of your friends and family, you will get multiple examples of people surviving on rented apartments. So there are multiple landlords out there who might be surviving on the rent amount. That’s why they need protection too.
In fact, there is a merger of Legal Assistance Insurance and Landlord Rent Guarantee Insurance to provide more benefits. The landlord can even evict the people who live on rent if they fail to make the payment. It is a risk management product that pays the monthly rent for a certain period of time if the tenant is not able to make payment.
Rent guarantee insurance is a new import from the United Kingdom that is now part of the United States too. These products are mainly designed to protect a landlord’s income. Tenants who stop paying rent remain liable for the rent owed and for any sort of legal fees. The landlord can start legal proceedings against a negligent tenant that includes reporting to credit agencies.
Here are Some Benefits of Guarantee Insurance
Guarantee insurance helps the business owners in being more confident about signing a personal guarantee. It reduces the risk factor that leads to a better mindset eventually resulting in better business results.
With guarantee insurance, you know that even your guarantee is not at risk.
It helps the people who may deal with financial issues like the guarantors in feeling more secure.
Also read: Complete guide to Fire Insurance and it’s benefits
If the tenant loses his or her job and needs time to pay rent, the landlord can survive on rent guarantee insurance. It gives the tenant more time to pay rent and the landlord doesn’t have to suffer.
Final Words
Guarantee insurance serves as additional protection for the people who may suffer in the future. It makes taking a loan a more attractive deal. Even if you want a guarantor who can sign on your behalf, he will feel secure with the financial insurance. There are multiple ways in which guarantee insurance proves to be the best deal. All three types provide security in various areas and provide excellent benefits to the people.
We are sure you will definitely apply for one of these insurance policies in the future. We hope the concept of guarantee insurance along with its various types and benefits is clear to you. In case, you feel that you need to know more about it and there is any sort of doubts then contact us. We are here to help you in any way possible. You can even go through other articles that cover other aspects of insurance and loan. The comment section is for you to ask queries and give your suggestions.
