Life insurance and business loans
[social_share]Life insurance is often required with business loans as a protection for the lender. This usually must be paid for by the borrower, and the beneficiary will be the lender.
The reason for this requirement is that a business loan cannot usually be secured or covered by the business’s assets, as the loan is generally needed to purchase those assets as well as to cover start-up costs and expenses such as advertising. Until the business has been making a profit for a number of years, the business loan will require something else for its security.
In effect, a business loan made to a start-up is a loan against the business’s future rather than its assets. For this reason, the loan is secured on the business founder. If the person behind a business dies during its early stages, then the whole business is likely to fail and in turn the loan will go bad.
This is why many lenders, particularly at a business’s early stage, aren’t willing to lend unless life insurance is purchased. The premiums are paid by the businessman taking the loan, and should be considered an extra loan cost along with the repayments, the interest, and any fees charged.
The beneficiary of this life insurance is the lender. The policy must usually be for the amount of the loan, and any loan surplus will go to the deceased’s estate. Although the loan may be conditional upon the life insurance purchase, many business lenders allow the owner the freedom to choose a life insurance provider.
In many cases such a life insurance policy can still be in force when the loan is refinanced or paid off. At a certain stage in the business’s growth, when it reaches a certain size or earns a certain level of profit, the life insurance may no longer be needed. In these cases the life insurance can be discontinued, sold on to an investor, or redirected so that it benefits the family.
