When starting a business, the banks will often require you to purchase a business loan collateral life insurance policy. This helps protect the bank and generate the funds to pay off the remainder of your loan should you die unexpectedly.
Starting a business requires varying amounts of capital investment. There are real estate costs, inventory costs, equipment costs, office equipment costs, and a myriad of other expenses required to get your business moving forward.
It is rare that a business owner has enough money in their bank account to cover all expenses needed to start a business. In cases like these, a business owner will often approach a bank or lender for business loans to start the company.
Unfortunately, qualifying for a business loan is easier said than done. Banks are often reluctant to accept a business loan risk if their investment is not financially protected with business loan collateral life insurance to cover business loans to the borrower.
Why do lenders want you to get business loan collateral life insurance?
Your lender wants to make sure they will get their money back if you die unexpectedly. Many business people applying for loans do not notice the “ business loan collateral life insurance” or “life insurance as business loan collateral” requirement in the loan documents until the last minute. This can create problems getting their loans approved in a timely manner.
How does a business loan insurance policy work?
You, or your business, would purchase a business loan collateral life insurance policy (a term life insurance policy) to cover the face amount of the loan.
You, as the business owner, would be the insured person; you would also be the owner of the policy. The bank or lending institution that loaned you the money would be the primary beneficiary (until the loan is fully repaid).
You would need to sign a loan collateral assignment form to specify the bank would receive the life insurance death benefit. This assignment will last as long as the loan has an unpaid balance.
Upon your death, if the loan principal amount were lower than your life insurance policy death benefit, your secondary (or contingent) beneficiary would receive the difference once the primary beneficiary (the bank or lending institution) received the funds to pay off your loan.
Example: The bank issued you a $100,000 business loan, and five years later you died unexpectedly with a loan balance of $60,000. The bank, as the primary beneficiary, would get a check for $60,000 from the insurance company. Your secondary (or contingent) beneficiary would receive the remaining $40,000.
How much business loan collateral life insurance will I need to purchase?
The amount of life insurance required by a lender for a business loan will depend on the lender and the size of the business loan. Some lenders will require you have a matching amount of life insurance that equals the value of the loan. Other lenders will allow negotiation on this sum.
No medical business loan life insurance policies are often issued in the $250,000-$400,000 maximum face value range by the insurance companies. If that is not enough insurance coverage for your loan, and you can always purchase multiple life insurance policies.
There are now a few life insurance companies that will issue up to $1 million medical life insurance policies (if you qualify).
What do I need to do to get a small business loan life insurance policy or large business loan life insurance policy?
One – Let your insurance agent or broker know right away that you need an insurance policy as business loan collateral. This way, your insurance agent can set you up with the best insurance company and be ready to handle the extra loan paperwork requirements.
Two – Determine the time for the life insurance policy you will need. If you were taking out a 15-year business loan on a piece of investment property, a 15-year term life insurance policy would be appropriate.
Three – Start the process early. Life insurance policies can sometimes take one to two months to be issued. If everything the moves smoothly with a fully underwritten life insurance policy, it may only take three to four weeks to approve your policy. If you have health issues or the insurance company requires doctor’s records review, it can often take 6 to 8 weeks to get a life insurance policy approved.
Four – Once the insurance company issues you a life insurance policy, you still must make sure the proper “assignment of policy” documents are issued to your lender. This can take from 3 to 7 business days. Once your policy is issued, you will need to fill out the correct lender assignment form and return it to your lender immediately. Do not forget to do this, as this will add extra time to the loan process.
If you get the life insurance process started earlier, rather than later, it will speed the loan process with your lender.
The bank will not issue your business loan without a “proof of policy” document showing you have secured the appropriate amount of business loan collateral life insurance, for the proper amount of time.
What if I can’t wait 4 to 8 weeks for a business loan collateral life insurance policy?
For business loans that will move quickly through the application process, a no medical life insurance policy is often a great policy to purchase. These can often be approved within days, versus months, for a fully underwritten life insurance policy.
We would recommend a non-medical term life insurance policy. The benefit of a non-medical business loan life insurance policy is these types of insurance policies do not require you to submit to a full paramedical examination.
The insurance company will review your current health status and your past medical and prescription records to decide if you are eligible for a life insurance policy.
A non-medical life insurance policy may be slightly more expensive than a term insurance policy, but often, you can get a life insurance policy issued in days versus months.