Smart Move: Term Life Insurance for Business Loan Collateral

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Tim is a licensed life insurance agent with 23 years of experience helping people protect their families and businesses with term life insurance. He writes and creates stuff for QuickQuote and other insurance and financial websites. You can find him on Twitter.

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UPDATED: Aug 19, 2020

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Starting and growing any type of business requires some degree of capital—for real estate, inventory, office equipment, the list goes on and on. Not too many business owners have enough in their bank accounts to cover those expenses.

Unfortunately, qualifying for a loan doesn’t always come easy. Banks are sometimes hesitant to take the risk unless they can ensure their investment is protected if you default on what you owe or die before the loan is paid back.

That’s where one of the four main types of life insurance to reduce business risk can help.

Life insurance for business loan collateral can help get you the nod of approval from lenders by giving them some assurance you won’t default on your payments.

How Life Insurance for Business Loans Works

With a term life insurance policy for the purpose of securing a business loan, you, the business owner, are the insured person and can also be the owner of the policy. You pay the premium for the policy. The bank or lending institution is the primary beneficiary while the loan is outstanding.

If you pursue this type of life insurance, you’ll need to sign a loan collateral assignment form to assign the bank as the recipient of the policy’s death benefit as long as the loan is in effect. Usually the bank will work with the insurance company to coordinate the execution of the form.

If the loan principal amount is lower than the policy’s death benefit at the time that a payout is made, your secondary beneficiary (for example, business partner or spouse) will receive the difference after the primary beneficiary (the lender) receives its payout.

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A Few Tips to Help You Get the Right Policy

  1. Inform your agent or broker upfront that you need the policy as loan collateral. That way, they’ll know to prepare for the extra paperwork involved.
  2. Take out a term life policy that’s long enough to cover the loan repayment period. For example, if you’re getting a 20-year business mortgage loan, you will need a 20-year term life insurance policy.
  3. Don’t drag your feet! Because most lenders won’t finalize a loan until you’re able to show “proof of policy,” don’t wait until the last minute to talk with a life insurance agent if you don’t already have a policy. On average, it takes four weeks for policy approval. If you have medical conditions, the review process could take longer. Your bank may not want to wait that long.

Note that you can expedite the process of securing life insurance if you opt to apply for a non-medical term life insurance policy. By going that route, you won’t have to take the paramedical examination otherwise required (if you do have to take the examination, understand what to expect from a life insurance medical exam here). These types of policies generally receive approval in 24 to 48 hours. The drawback is that they cost a bit more because the insurer is assuming more risk.

Got Big Plans for Your Business?

If you have dreams for your business and you need funding to help them come true, keep the option of a term life policy as loan collateral in mind as you talk with lenders. Talk with a qualified agent to learn more.

Because of its affordability and flexibility, term life insurance can give the bank the assurance it requires without putting undue strain on your business budget.

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