Usually when people think of a term life insurance plan beneficiary, family members come to mind.  This is in fact the way that the majority of policies transact on the market.  There is, however, another type of use for term life insurance in a business sense.  This use is to secure credit on behalf of a creditor.  Let's take a look at how term life can be used to secure credit and allow people to move forward with their business and financial opportunities. 

You are a small business owner who happens to be very successful.  A great deal of the success is a result of your own ability, creativity, and hard work.  You have big plans to expand your business and you apply for a business loan to help finance this expansion.  The bank loves (maybe that's a strong word for a loan officer's disposition) your plans and potential but requires that a term life insurance policy be taken out naming the bank as a beneficiary.  Aside from conspiracy theories envisioning criminal banking cartels, this is actually a valuable use of term life insurance.  Let's look a little closer.

A critical term in life insurance is "Insurance interest".  This essentially means that a person has some vested interest in the life of another person.  Since term life insurance deals with money, the vested interest is usually of a financial nature.  For example, I can't take life insurance out on my son's 1st grade teacher...unless of course he/she is my spouse.  Conversely, that teacher can't take a policy out on my son.  As for the situation above where a bank requires a life policy on a potential debtor, the insurable interest is pretty straight forward.  The bank is requiring the life insurance in order to secure the loan they will issue.  The loan may be $100K for example.  It's not out of the question to require a life insurance policy of $100K to secure the loan.  It's a back-up option for the bank in case the person they are "investing in" passes away.

Let's look at the situation that the bank is trying to avoid.  They loan the debtor above $100K.  The person has spent $80K of the loan amount and the expansion is moving along.  The unexpected happens and he/she passes away. The debts of the creditor may not be paid or paid in full depending on how his/her estate was managed.  If the bank has a term life insurance policy to cover the loan amount, they are protected from such an event.

Luckily, term life insurance rates are very inexpensive.  The cost of such a policy may even be built into the loan amount or packaged together.  This is similar to mortgage insurance required on some home loans when not enough equity or down-deposit is put up front.  The good news is that a term life policy used to secure credit allows many small business owners and companies the ability to participate in the credit market in a way that might have been able to without such a policy.