Can life insurance help your creditworthiness? You better believe it.
As a business owner, you want lenders to know you’re a good risk and will pay back their money. One way to demonstrate that is by owning a life insurance policy.
Indeed, according to a 2014 Harvard Business School study, 40% of businesses that applied for credit were rejected or received less money than initially requested.1
When you apply for a loan, lenders look at a number of factors, including your balance sheet, length in business, the company's overall track record, and its general stability. The results help a lender decide if you get the loan, how much you receive, and the interest rate.
But, numbers aren't the only criteria. Character counts, too. Lenders want to see that you’re a dependable and reliable person and have confidence in you as a capable business manager who honors their financial responsibilities. There are many ways to demonstrate this aspect of credit worthiness, such as your length of time in the community and your ongoing relationship with the lender.
Owning life insurance, specifically—whole life insurance—can also play an important role in helping you secure a line of credit or loan. While whole life is primarily purchased for death benefit protection, if your death benefit needs decrease, it can also provide living benefits. In fact, whole life insurance, can enhance your credit worthiness in several ways:
- It provides tangible evidence that you value your responsibilities to your business, your creditors, and your family. Even though ownership of life insurance may not be directly related to the loan itself, its presence may help enhance your credit standing.
- It is a true business asset, with the cash value listed on your balance sheet. If a lender sees cash value on your books that may tip the scales in your favor.
- Cash values of life insurance can be used as collateral to secure the loan against the possibility of default.
- Depending on your face amount and how long you have had the policy can serve as your company's own private, “in-house line of credit.” Policy loans of cash value from your insurer can serve as valuable sources of credit without the hassle of seeking a loan through a lender—there’s no need to obtain a loan approval on your life insurance cash value. (Note: Not repaying a policy loan will reduce the death benefit payable to beneficiaries and the policy’s cash value. It also accrues interest.)
Life insurance can also directly help your successors when you die.
Does this sound like something that can help your business? Then contact a New York Life agent and learn how you can get started.
1"The State of Small Business Lending: Credit Access during the Recovery and How Technology May Change the Game," Harvard Business School, July 22, 2014. http://www.hbs.edu/faculty/Publication%20Files/15-004_09b1bf8b-eb2a-4e63-9c4e-0374f770856f.pdf