Using Life Insurance as Collateral on Business Loans
Can a business use life insurance for a loans?
Access to a line of credit and timely funding is crucial to the function and expansion of any business. Without a high credit rating and proof of consistent revenue, access to a low interest loan with favorable terms can be difficult. When this is the case, the lender usually only offers secured loan terms. This means that the applicant must put up assets of value (vehicles, homes, retirement accounts, business assets) in order to guarantee the loan can be re-payed to the lender in case of default. Often applicants find a few complications with securing the loan with these types of assets;
Majority of assets may be tied up in inventory for the business and fall short of the value needed to secure the loan.
Personal assets like homes and vehicles present a large risk of loss to the family and heirs of the applicant if re-payment of the loan becomes unlikely.
The unknown future value of physical assets used as collateral can be un-attractive to lenders.
Collateral assignment of Life Insurance
Many institutions and loan applicants use the collateral assignment of a newly issued life insurance policy as the answer to both parties concerns. This is Life insurance owned by the applicant, on the life of the applicant, temporarily assigned in value of the loan to the lender. This transaction provides security of immediate payment of the loan balance to the lender without having the applicant risk their physical assets. The collateral assignment feature means that the lender is only able to collect on what is owed and nothing more, all other proceeds are payable to the beneficiary of the client. In our experience, the more favorable terms offered on the loan when secured by life insurance allows thousands of dollars of interest to be saved over the life of the loan. Here at Bay Life Brokerage we heavily promote the Living Benefit features that the more innovative insurers in the industry have started providing on their policies. With these features, not only can the loan be secured in the case of the death of the business owner, but now also can be used for the same purpose and more when the owner experiences a critical illness or disability. If your client or friend is exploring options for a loan for their business, give them the insight of using life insurance as collateral!
