- How life insurance impacts your business
- June 4, 2015
By Karla Sullivan
As a business owner, anything that stabilizes the financial present and future of a company improves its credit rating. Insuring the lives of key personnel assures prospective lenders that the business will have a financial cushion if the key person dies. Insuring their lives is essential to improve the firms liquidity through the accumulation of cash values. As a result, the firm is able to command more credit and life insurance.
Pledging life insurance for collateral can protect the lender only against loss arising out of the death of a key person or borrower or the inability to repay a loan according Edward Graves, McGill’s Life Insurance.
Let’s say the firm would like to borrow money for a business opportunity and the bank has confidence in the firm but is concerned about the livelihood of the business head. It can assign to the bank a life insurance policy in an appropriate amount on the life of the proper official. It is generally a term policy and provides protection of the loan in case of death. Keep in mind these are common business practices.
A loan based on cash values is different. The security lies in the policy values and the amount of the loan. If the borrower dies before the loan is repaid, the lender recovers funds from the death proceeds with the difference paid to the insured’s designated beneficiary. It the borrower lives and the loan reaches maturity but is not paid, the lender can recover the funds by surrendering the policy for cash.
The Savings Bank Life Insurance (SBLI) Company of Massachusetts provides a detailed guide to helping build a strong financial future of small business with life insurance and the first series of questions needed to be addressed by business owners.
· How would your company operations be affected by the loss of a key employee?
· Would your business be able to continue in your absence?
· Would surviving partners and your family members be able to work in unison?
· Would the business be sold and how much would the sale command?
More information that SBLI provides includes choosing between whole life coverage and term as well as buy and sell agreements that work.
According to Guardian Life, small business owners recently surveyed felt confident about the present and future much more so than they did a few years ago. Small business owners in 2014 place a greater emphasis on building a legacy than they did in 2011, but there is still a significant number that does not have a comprehensive financial plan for retirement and succession planning.
Obtaining a financial planner or trusted retirement specialist is a necessary step. Many small businesses owners surveyed found that good financial planners can assist in a retirement plan for business and personal needs.
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