happens to your creditors if you pass
away and you're the driving force (if
not only force) behind your business'
success and future? If the
company's strength is significantly
dependent on you and your ability, any
creditor will be more hesitant to loan
you funds unless they are the
beneficiary of a life insurance policy
in case you pass away. Let's take
a look at how term life insurance can be
used to secure a loan.
People forget that the average size of
companies in the U.S. is very small.
It usually ranges between three and five
employees. Many of these companies
are family run or small partnerships.
The range of businesses that fall in
this category includes everything from
the local plumber, attorney, to cake
bakers. What's true for all these
businesses is that the very survival of
the business usually rides on the
talent, effort, or experience of one
person (or two in the case of a
partnership). Banks and creditors
are more conservative when loaning to
these business as their ability to
recoup the loan and interest/gain is
dependent on the health and wellbeing of
that one person. If that person
passes away, there is significant risk
of losing the principle amount.
What's the solution?
Term life insurance fits the bill.
The amount of term life can match the
value of the loan which is almost ideal.
Let's say there's a loan of $100K for
expansion of a distributer's business.
The note is due to be paid back with
interest over a 10 year window.
This is perfectly matched to term life.
You simple purchase $100K of term life
for a 10 year period of time with the
creditor being the beneficiary.
You may even be able to write off the
premium as a business expense which
ultimately discounts it by your tax rate
(figure an average of 20-30%).
Term life is inexpensive already but
this tax treatment makes a good deal
better. The creditor may even
require the term life purchase in order
to secure the loan. No term life
Whole life doesn't work for this
situation. Aside from being much
more expensive, whole life is based on
the premise of a small amount of life
coverage up front and slow build of cash
value which supplements that base amount
over time. That does nothing for
the creditor mentioned above. If
they loan $100K and you pass away in
year two, they may get back $10K.
They lost $90K. They don't want
cash value and a guaranteed payout.
They want to minimize the risk of losing
their principle in the case that you
many ways, using term life to secure a
loan is similar in its root need to the
Key person life policy. With a key
person life insurance arrangement,
business partners or owners are
protecting themselves in case the other
partner(s) or key employee passes away.
This is contingent on the fact that the
partner/employee's loss would have a
significant if not irreparable effect on
the business' ability to continue as a
going concern. The only difference
with securing a loan is that the
beneficiary party is a creditor and they
just want to protect their principle
investment. They are not concerned
with the ongoing success of the
business. They are similar in that
the need for life insurance arises from
the potential loss of a person who's
integral to the success of the company.
Term life insurance is an inexpensive
and useful way to secure a loan.
It may even allow for better terms or
rates which partially pays for the cost
of it anyway.