Friday, May 27, 2011

Risk Management and PGI

At its heart, insurance is a risk management tool. Whether that risk is loss of income, or damage to a vehicle, or the loss of one's life, insurance is a way to mitigate a risk.

One risk that business owners face is the loss of their personal assets. Say you own Acme Widgets, a small C-Corporation that's looking to expand. One financial option open to you is a line of credit, but the bank wants you to sign for it with your personal signature, not just as the President of Acme Widgets. On the one hand, you really need the money; on the other, now your own personal assets are on the line.

What to do?

Well, Asterisk Insurance may have the answer: Personal Guarantee Insurance (PGI).

What PGI does is to "cover a substantial portion of all guarantors’ net liability to a lender if the underlying business should be unable to repay its bank loan."

You can actually cover up to 70% of that risk (which makes sense: any more and you run into moral hazard). It's pretty simple: if you have this coverage, and your business fails, the carrier will cover up to 70% of any shortfall, potentially saving a substantial amount of personal assets.

The rate's determined by the amount of the loan and nature of the business, so it could be expensive. But for additional peace of mind, and the opportunity to save or expand one's business, it's a pretty cool new tool.

[Hat Tip: FoIB Bill M]
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