For those of you old enough to remember the great comedian Jack Benny, you may recall his long, drawn out pauses when being prompted with questions from bandits that often times concluded with a “Well…?!” from the bandit. Benny, a legendary cheapskate, quickly replies, “I’m thinking! I’m thinking!” As business owners in search of capital, you may face a similar question from a loan officer, “We will need your money or your life… insurance.” Many lenders require a “collateral assignment” of your life insurance as a guarantee that if something happens to you as the business owner or key man that the lender will have a source of repayment for the loan.
If you are seeking access to capital – and we assume you are – lenders may require or be grateful for one of two things:
- They may require you to purchase life insurance as a condition of the loan.
- If you already have a life insurance policy “in force” it will be gratefully acknowledged by any lender as it demonstrates that you understand how to diminish risk to your business and by extensionreduce risk for the lender.
Life insurance, for any purpose, requires underwriting.
That means the insurer will require your medical history and may require a medical workup by an independent third party examiner. Some insurers have “quick close” procedures that can streamline the underwriting process to prevent your loan from being inordinately delayed.
Life insurance policies for collateral assignment may be purchased by the business owner personally or may be purchased as a tax-deductible business expense. “Cash value” life insurance policies, which include Whole Life and Universal Life, may offer tax advantages when properly structured. Your accountant, tax preparer or insurance professional should be consulted if your lender requires a collateral assignment to secure your loan.
When properly structured the same life insurance that gives peace of mind to the bank can ultimately become your personal asset for the protection of your loved ones. That’s a win-win transaction that even Jack Benny would have gone for.
Have questions? Contact Harvey Warren, Harvey@HarveyWarren.com, and I will do my best to either answer you or point you in the right direction.