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Business Planning

Securing Lender Confidence with Term Life

As a business owner, you have probably worked long and hard to help build a successful company. In today's economy, with strong demand for many products and services, you may want to take full advantage of your opportunities to expand. Yet, even when profit projections look good and a project is backed by a sound business plan, your banker may be reluctant to lend the funds necessary for expansion.

The reason for this reluctance could be due to the bank's concern that, despite an excellent credit standing, the success of your venture depends too heavily on your personal involvement. If you were to suffer an untimely death, the bank could stand to lose a significant sum.

On the other hand, the bank is in the business of lending funds. If you have had a close working relationship with your bank, and your banker has confidence in your abilities, it is likely your lender will want to continue to "partner" your business as it grows and develops. So, what can be done to resolve the situation?

A Life Insurance Strategy

Life insurance may offer an answer. Life insurance is an important element in many business arrangements. One of its many uses is help in securing a business loan. If your new or expanding business requests a loan, your lender may require you to secure the loan if your company lacks collateral to back the loan, or if the lender is concerned that your company depends too heavily on the talents of a particular individual.

Term life insurance is designed to help guard against financial risk for a specified period of time in the event of the insured's death. With a term policy on your life for the duration of the loan, say five years, the bank's security requirements may be satisfied. In addition, term life could benefit you by providing a safety net that would protect your estate if things don't work out as anticipated.

Policy Assignments

By assigning your policy, you transfer your rights to all, or a portion, of the proceeds to the bank. The extent to which these rights are transferable depends on the assignment provisions in the policy, the intention of the parties as expressed in the assignment form, and the actual circumstances of the assignment. Two common types of insurance policy assignments are:

  • Absolute assignments—These normally assign every policy right the policyholder possessed prior to the assignment. Once the transaction is complete, the policyholder will have no further financial interest in the policy.
  • Collateral assignments—These are more limited types of transfers. They can protect the lender by using the policy as security for repayment. When the loan is fully repaid, the bank releases its interest in the policy.

Life insurance policies generally can be freely assigned, unless some limitation is specified in the contract. To fully protect the assignee, the insurance company must be notified that the assignment has been made. It is also important to notify the insurer if future assignments are made and/or terminated.

Benefits after the Loan is Repaid

Term life offers benefits even after the loan has been repaid. At that point, you could convert the policy to permanent coverage to be used for a number of other business purposes. These may include funding a buy-sell agreement, a disability buyout agreement, or a deferred compensation plan. If you have no further need for the insurance, you could simply decide to let the term policy lapse.

To succeed in the long run, small businesses need to take advantage of their opportunities to grow. A term policy can be an economical method of making a business loan possible by providing a safety net that secures repayment for a lender. For more information on how life insurance can help meet your company's needs, consult a qualified insurance professional.

Copyright © 2003 Liberty Publishing, Inc. All rights reserved.


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