Using Life Insurance to Help Cover Your Business

This "Life Insurance Special Handling" series has covered prequalification and underwriting and some of the challenges the life insurance process can pose for different situations. It has also defined who qualifies as high-risk and how the life insurance marketplace works. This installment addresses some of the concerns surrounding life insurance for businesses purposes.

How Much Life Insurance Should I Apply for?

Many people want life insurance, but they worry about how much it will cost them. As such, they want to see some rates and “back into” a purchase by balancing the amount of life insurance they would like to have with the amount of money they are willing to spend.

To help you make your decision, a life insurance carrier should either give you a reliable quote or estimate as soon as possible. This number should represent an educated opinion as to what the lowest possible premium would be. If it works for you, then the pre-qualification process continues until the price is solidified. If you don't like the number, you can reassess your purchase, possibly identifying an additional source of premium or reducing the guarantee period for the coverage you want. (For related reading, see: How Much Life Insurance Should You Carry?)

Can the Policy Cover a Business Loan?

The typical way to make sure this happens is to collaterally assign the benefits. Once your policy has been delivered and all delivery requirements have been submitted to the carrier, such as premium payment and signed receipt, coverage will go into effect. At that point, the carrier will assign the benefit to your bank.

Should you pass away before the loan is paid off, the claims department will notify the bank and require proof of the balance due. The bank will be paid the balance to clear your debt, and your beneficiary will receive the rest of the death benefit, if any exists. In these circumstances, both the client and their banker are usually anxious to close the deal. The underwriting of your application can be fast-tracked, and your banker should be updated on the status of the policy. Reassurance that the process is moving along is usually sufficient for them.

Can My Life Insurance Be Owned by A Trust?

Yes. The number one concern in this situation is to make sure the trust has been completed by the time your life insurance application has been approved. This way, the policy can be issued to the appropriate owner with the correct beneficiary designations. The application cannot be submitted without the trust.

It’s important to avoid a scenario in which you get a good offer from the insurance carrier, but can't accept the policy due to delays in finalizing the trust. You would then run the risk of something happening to your health, or otherwise affecting your eligibility for coverage, and losing the good offer. (For more from this author, see: Your High-Risk Life Insurance Questions Answered.)

Does Having My Partnership Be the Policyholder Make Things More Complicated?

The underwriting will be more complex in this case. You will need to provide basic financial data about your business, then an underwriting team will coordinate with your controller or accountant. The underwriters will also need information regarding coverage on your partners to make sure there is parity. 

Does Pre-Qualification Obligate Me to Do Business With That Carrier?

The simple answer is no. You do not sign a contract, nor do you pay for the pre-qualification service. However, the quote you receive should be competitive and reliable, and will require a significant investment of time by the carrier. The service of pre-qualification is reserved for “ready buyers,” those who know they have a need for life insurance, have the means to pay for it and want to obtain a policy now. 

(For more from this author, see: Answers to High-Risk Life Insurance Questions.)