Owning your own business means having to make difficult decisions to keep your business moving forward. Sometimes that means taking out a business loan to pay for enhancements (e.g. a new facility or enhanced equipment), to take advantage of unexpected opportunities or to cover unplanned expenses.
Many lenders may require that you offer collateral before they approve your loan. Life insurance is a tool that may help you meet collateral requirements.
Protection and possibility
Life insurance's primary role is to provide death benefit protection. This might be used to help provide for the financial needs of loved ones, cover existing liabilities or make sure the business can continue.
While life insurance can offer protection, it may also offer possibility by helping you get approved for a business loan. Many life insurance companies will allow you to assign a policy as collateral for a loan. The process is often called a collateral assignment, where your lender (often a bank) agrees to let you use the death benefit amount as loan collateral.
If you were to pass away before your business loan is paid off, proceeds from your policy’s death benefit are payable to your lender (the assignee) to fulfill the loan. You can also use any cash value as collateral if you own a permanent life insurance policy. The assignee's interest in the policy matches the outstanding loan balance and gradually reduces as the loan is paid down. Once the loan is paid off, the collateral assignment is released, and the death benefit is fully payable to the policy owner's beneficiaries.
Collateral assignment in action
As an example, imagine you need a $150,000 business loan payable over 20 years. You could choose either a term life insurance policy (for a 20-year term covering the duration of the loan) or a permanent policy, both with a $500,000 death benefit. Either option would provide more than enough for the required collateral for your loan.
If you passed away before the loan is paid in full, the policy’s death benefit could be used to pay the remaining balance of your loan. You could also name loved ones as beneficiaries so they receive the remaining amount after your loan is paid off with the lender.
Taking the next step
A great place to start is to talk to a financial professional, who can help you find answers to questions such as:
What type of life insurance should you own?
How much should you own?
Is collateral assignment the best option?
How do you start the process with your approved lender?
The contemporary life insurance market is way more extensive than a source of income for beneficiaries when catastrophe strikes. With a plethora of options, these plans offer you and your entire family peace of mind, and often give your money investment opportunity to allow you to enjoy the money invested during your lifetime.
Choosing the perfect life insurance plan depends as much on your financial needs as it does on your health class rating. We will assess all factors and guide you through every option until we find the perfect plan for you.
Cosmo Insurance Agency is knowledgeable in various options including but not limited to – term, ROP, permanent and whole - from over two dozen A rated carriers. We are familiar with the rate classifications that particular carriers use to determine the health class of enrollees – and there are significant differences between them. No matter what the results of your medical examination are, we will find the insurer that will provide you will the best rating class and thus the lowest premiums.
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