No Life Insurance...No Credit!

Life Insurance Can Help Assure Access To Credit

The bank president looks at you. He's hesitating, undecided. It's a lot of money. You need that business loan. Your mind is racing. How can you tip the scales...just enough to make it happen? You clear your throat. "Of course, I'll be assigning life insurance for the unsecured balance of the loan... with the bank as beneficiary." He smiles, then nods. You exhale.

"How important is credit? You can't run a business without credit!" snapped Jim Kirsten who, with his wife Judy, runs the Hotel Stebbins in the Lake Michigan charter fishing community of Algoma, Wisconsin. "We depend on access to capital when we need it," he told New York Life in an interview.

Business runs on credit...or at least ready access to it. Without credit at reasonable rates, many businesses would find it nearly impossible to carry out expansion plans or get through times of tight cash flow. That's one reason businesses watch interest rates so closely. A lower rate means better access to more credit at lower rates.

Life insurance is often a player in the credit game. "Any time a lender is dealing with a business with a key employee whose loss would disrupt the business, we often look for life insurance as a means of secondary collateral," explained Gary Harrop, bank president and Past President of the Wisconsin Bankers Association.

"Especially in situations involving a sole proprietorship or other closely held business," Harrop told New York Life, "a lender is going to look at the need for life insurance" to help guarantee the loan. "It's not uncommon to make the purchase of life insurance part of the approval process, with benefits assigned to the bank. We may also look at the overall presence of life insurance as a sign of character and willingness to meet responsibilities."

Specifically, the presence of life insurance can help in the following ways:

1. It can make a lender more willing to grant credit or a loan. With life insurance, "the bank's risk is lower," said Harrop.
2. It can open access to higher amounts of credit. "The first thing we look for is collateral," explained Harrop. "If a business has assets worth, say, $100,000, we might be willing to lend that amount because the loan is secured. But we can often go beyond that amount if there is life insurance."
3. In some instances, it can result in a more competitive loan rate, boosting the borrower into the preferred customer ranking.

• Needs are short-term or limited, such as to cover a single loan for a specific period of time.
• The situation calls for a high dollar amount of coverage.
• Premium dollars are tight. Term insurance provides coverage for the lowest immediate premium dollar. "When I was younger, I always used term insurance," retired entrepreneur John Trager told New York Life. "I couldn't afford whole life. In the long run, it cost more. But I had to get through the short term first."
• The business owner wants pure insurance protection without frills. You can buy it when you need it and drop it when you're done.

However, term life insurance has its drawbacks.

• It's pure cost. Unlike with cash value life insurance, term provides no living benefits in the form of cash value accumulation.
• If you need coverage for more than a short period of time, keep in mind that the cost is likely to increase over time. Eventually, as you get older, the cost may become prohibitive. "In the long run," said Trager, "the cost got very high, especially as I got older."
• If you experience health problems and become uninsurable, you may not be able to buy coverage when you next apply for it.

That's why many business owners prefer cash value life insurance, especially if they routinely depend on credit. "We rely on credit on an ongoing basis," said the Hotel Stebbins' Judy Kirsten, "so I own cash value life insurance. When we go to the bank, it's part of the process to assign benefits to the bank to cover the loan. That way, if anything happens to me, the bank is covered. Using cash value life insurance makes better financial sense than using term, especially as we get older."

The biggest advantages of cash value life insurance:

1. Once you buy it, you can keep it for life as long as you continue to pay premiums. There is no question of insurability as you get older. With term coverage, on the other hand, there is always the risk that you may become uninsurable as you get older. Then you might not be able to purchase insurance, which threatens your access to credit.
2. The premium doesn't go up. It remains level. The premium you pay at age 30 is the same one you pay at age 60.
3. The cash value that accumulates can be used for any purpose...even as your own private line of credit. Cash value can be borrowed from the policy at a competitive rate and without publicity^*.

The reality of business: Business relies on credit, and credit often depends on the presence of life insurance.

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