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Life Insurance to Secure a Loan

https://www.goodfinancialcents.com/wp-content/uploads/2019/07/MG_5503-150x150.jpg
  • Written By:
    Jeff Rose, CFP®

    Jeff Rose, CFP®

    Jeff Rose, CFP® is a Certified Financial Planner™, founder of Good Financial Cents, and author of the personal finance...

    Read More
  • Updated: September 1, 2021
  • 4 Min Read
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As any entrepreneur can relate, starting a small business is stressful.

There’s so many different things that go into it from securing a loan, getting financing, hiring staff.

Running a small business can be very cumbersome and overwhelming. It’s no surprise that many small businesses fail in their first five years of opening their doors.

Another challenge the small business owner may face, especially if they’re trying to secure a loan for their business, is getting life insurance.

We’ve taken several calls here at our office from business owners that are in the loan process, and they’ve been dropped a bomb. They have to get life insurance coverage for the amount that the loan that they’re trying to obtain, and until they can actually get coverage, the bank will not approve the loan. Therein lies the predicament.

Traditional underwriting, although much less expensive, can take anywhere from four to six weeks, and sometimes longer, to get your decision. If you don’t have the time to apply for a cheap term policy, then you’re going to have to look at a simplified issue.

Fast Life Insurance to Secure a Loan

Simplified issue are policies that don’t require a medical exam, and as long as you can pass some basic health questions and then nothing comes up on your motor vehicle report, your MIB, or any of your doctor records, then you can get approved from anywhere from 48 hours to five to seven business days.

Carriers such as Fidelity Life, Assurity, and Americo are three of the top carriers that offer simplified life insurance policies, and once again these simplified issue policies require no medical exam. The only issue that may come up depends on the size of policy.

For example, Assurity will only offer you up to $350,000 of term coverage on a no medical exam policy, so if you need more than that, then you’re going to have to use more than one carrier to get you the full life insurance coverage that you need.  Assuirty is just one example of a life insurance company, but the majority of companies all offer plans with relatively low values.

The other disadvantage to these simplified issue plans is the price. Because they don’t require a medical exam, there is more risk to the company, which means they have to offset their risk by charging you more every month. If your main goal is to get coverage quick, and money isn’t an issue, then these plans are the best option.

If you’re looking for a cheaper option and you don’t need the coverage immediately, then there are better options for your wallet. If you’re looking for the most affordable monthly rates for a life insurance policy, then a term life insurance plan will be your best bet. These plans only last for a predetermined time, normally between 5-30 years and after that, they are no longer effective and you have to reapply for coverage. They come in just about any amount that you want to purchase in coverage and tend to be much cheaper than other life insurance options.

The biggest problem with these plans is how long they take to get approved. We mentioned earlier that the main disadvantage to traditional policies is the medical underwriting and the application process that you have to go through to get approved, which can take a long time.

Collateral Assignment For Your Business Loan

Once you get approved for the life insurance coverage that you need, make sure to let the carrier know why you’re taking life insurance. The reason is, is that you’re going to want to request a collateral assignment form that makes the lender the beneficiary on the policy. Almost all insurance carriers will offer the ability to assign collateral assignment; you just have to make sure that you make them aware.

Hopefully if you have a family involved, you’re taking out a larger policy that not only covers the amount of the loan, but also it leaves something left over for your family. In that case, with the collateral assignment form, you can list the lender for the beneficiary of the loan amount, and then the remaining portion can go to your beneficiaries.

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Deciding how much life insurance you need

Obviously, you have to get a policy that is large enough to fulfill the amount of the loan, but if you don’t have any other coverage, you should get much more than that. Sit down with your loved ones and discuss all of the debt that you would leave behind.

When you’re looking for an insurance plan to secure your loan, consider getting extra coverage that would pay off any personal debt as well. Things like mortgages, car payments, credit card bills, and more can be extremely difficult for a grieving family to pay for.

Before you can buy a plan, you have to know the right amount of coverage. It’s delicate balance deciding how much to buy.

Getting the Best Rates

If you’re looking to get a life insurance policy to secure a loan, it’s important that you get the best rates possible for your coverage. Sure, the main purpose is to secure the loan, but it also provides security for you and your family if something awful was to happen.

Before you buy life insurance, get several quotes from different companies before you pick the best one. You’ll get different premiums from every company you contact.

If you wanted to get all of those quotes yourself, you could easily spend days on the phone talking to agents. Your time is valuable, don’t waste it comparing rates and answering the same question with dozens of agents. We can help you get the best quotes from the highest rated companies around.

The best piece of advice we can give you when getting a life insurance policy to secure a loan is to plan ahead and have all of the information you need ready. If you plan ahead well enough, you will give yourself enough time to apply for a traditional policy that can save you money every month. There is nothing wrong with a simplified issue policy, but it’s going to come with a price. As a business owner and entrepreneur, it’s vital to get the best products at an affordable price.

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About the Author

Jeff Rose, CFP® is a Certified Financial Planner™, founder of Good Financial Cents, and author of the personal finance book Soldier of Finance. He was a financial planner for 16+ years having founded, Alliance Wealth Management, a SEC Registered Investment Advisory firm, before selling it to focus on his passion - educating the masses on the importance of financial freedom through this blog, his podcast, and YouTube channel.


Jeff holds a Bachelors in Science in Finance and minor in Accounting from Southern Illinois University - Carbondale. In addition to his CFP® designation, he also earned the marks of AAMS® - Accredited Asset Management Specialist - and CRPC® - Chartered Retirement Planning Counselor.

While a practicing financial advisor, Jeff was named to Investopedia's distinguished list of Top 100 advisors (as high as #6) multiple times and CNBC's Digital Advisory Council.

Jeff is an Iraqi combat veteran and served 9 years in the Army National Guard. His work is regularly featured in Forbes, Business Insider, Inc.com and Entrepreneur.

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5 Comments

  1. Nova Cash December 12, 2019

    Thanks for sharing this article. This definitely help me to be more knowledgeable about life insurance. This article is very helpful for me. This is a very helpful article for me.

    Reply
  2. Business Working Capital October 28, 2019

    Great article! I also think that running a small business can be very cumbersome and overwhelming. I also think that life insurance can definitely help to secure business. This article is very easy to understand. Thanks for sharing this article.

    Reply
  3. FactorLoads September 27, 2019

    Yes, I totally agree with what you said. I think that if we’re looking to get a life insurance policy to secure a loan, it’s important that you get the best rates possible for your coverage. I think that by doing this, we can definitely avoid issues. Thanks for sharing this article.

    Reply
  4. Bill June 22, 2014

    I would like to get a business loan using life insurance please let me know
    What I need to do

    Reply
    • Jeff Rose July 23, 2014

      @ Bill Please call our toll-free # to discuss your options. Thanks for the contact!

      Reply

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