Starting a Business? Life Insurance that Can Be an Asset

Starting a new business on a shoestring? If you are, you may feel alone, but you're far from it. That's how many new businesses start out. But it'll come as no surprise that, for the best chance of success, you need some solid financial backing, possibly through a business loan. The trouble is the age-old chicken and egg story. How do you get a business loan unless you are creditworthy, and how can you prove you are creditworthy until you've had a chance to show it with a business loan?

There is a way to qualify for a business loan that is surprisingly easy and affordable:

While you're starting out, profits are likely to be lean, and you need to be focusing as much attention as possible on your target market. So how can you convince a bank that you are a good credit risk? You may not be able to. But you can provide collateral. Smart business owners know that life insurance does several things. It demonstrates that you are committed to the financial well being of your family and your company. If you purchase the policy through your company, it becomes an asset on your balance sheet… a document much scrutinized when you're in the market for a business loan. And, if you are willing to make the bank the beneficiary (up to the amount of the business loan) it can serve as collateral. This can work whether you have an existing policy or you take out a policy for the express purpose of repaying the business loan if you should pass away. Depending on the type of policy you buy, it can also enhance your ability to repay while you're living, since its accumulated value can be drawn on if you have a financial emergency.

A cash value policy does yet another service to your company. Because you can borrow against it, it becomes a source of emergency cash, like a business loan which does not require permission from a bank to achieve. Drawing on the value will not have immediate tax consequences, since the value grows tax-deferred. In fact, if you don't borrow more than the premiums you've paid in, there is likely to be no taxable event at all.

If you should pass away, the amount of the policy that exceeds the balance of the debt will be paid to your other beneficiaries. And if you pay off the business loan while you are still around, this policy can serve you in other ways. According to the American Institute for Certified Public Accountants, it can:

- be a secure source of funding for a retirement plan.

- it can also provide key man insurance for your business. If used for key man insurance, it can pay expenses incurred by the sudden death of the key person. Of course, if you don't need it to collateralize a loan you could take out the policy specifically for either of the other purposes.

- if you have a buy-sell agreement with a partner, it can protect you in case your partner passes away. If you are obligated to buy your partner's share of the business in case he or she should die, would you have the funds to do that? You may be planning to deal with that eventuality by taking out a business loan at that time. But keep in mind, your partner's death could cause a serious loss of business revenue, or possibly a complete inability to function for a period of time. That may make it impossible to get a business loan. Life insurance on both you and your partner would cover that possibility. Plus if you buy permanent cash value policies, you can draw on those funds to purchase your partner's share if he or she retires or becomes incapacitated.

If the price of the policy is a major issue, you can probably buy it for less by getting a policy with a value that declines over time (though it's doubtful you could borrow against the value).