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Secure loan with life

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Securing a loan with term life insurance

A useful tool for individuals and businesses

What 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 policy...no loan. 

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 pass away.

In 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. 



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DISCLAIMER   -   Information provided on this page is intended as a general overview.  Your situation regarding life insurance may be different and we strongly          
 recommend speaking with a license life insurance agent.  This information is solely the opinion of etermlifeinsurancequote.com and may not be suitable for you.