Life Insurance - a Small Business Loan Resource

A Home Business Article Contributed by Sharon Hill

Your Life Insurance May be a Source of Small Business Loan Funds

There are two types of life insurance and one, but not the other, could provide funds for a small business loan.

What's the Difference - and Which Will Provide a Small Business Loan?

The two types are term and whole life. Term insurance, the least expensive, offers coverage up until a certain age - often 70 - and does not accrue value. Rates or coverage change as you age, too. One of two things happen. Your coverage may continue at $10, 000 for the life of the policy but the rate goes up each year as you age. The alternate would be that your monthly premium would stay the same but your coverage decreases.

In other words, each month for the life of the policy you might pay $50 but at age 60 that $50 now provides you with $9000 of coverage, at age $55 the value is only $8500 and so forth.

Whole life, in contrast, accrues cash value. Additionally, the monthly premium and coverage you are quoted when you first take out the policy never change throughout the life of the policy. Nor do you outlive your policy. If you're 110 you still have coverage. At age 100 or thereabouts you typically no longer have to pay into it.

The best way to describe the difference between term and whole life insurance is to think of term as renting insurance and whole life as buying insurance. As a home renter, for example, you pay each month for the privilege of living there and must continue to pay each month you are there. It never ends. Nor does the property become yours at any time. With ownership, however, you are accruing more and more cash value in the property until finally it's paid - it's all yours. You pay no more. This is essentially the difference between term and whole life insurance.

If you have an existing whole life insurance policy you may have cash value to borrow against - for a small business loan, perhaps. If you're not sure peruse your policy. You also should receive an annual statement from your insurance company that will advise you of the current cash value. Typically you can borrow up to 90% of that cash value. Call your insurance company and find out the particulars. If you can't locate their contact information call your local agent.

You'll also want to know their dividend payment schedule so that, if your need to borrow is not urgent, you may choose to time your request for a small business loan to that part of the month after which you will have accrued a higher balance.

Some Cautions about Small Business Loans Against Your Life Insurance

It stands to reason that your money can't be in two places at once. If you borrow against your life insurance and you are injured or lose your life before the money is paid back you or your beneficiaries will only be insured for the coverage of the policy minus the unpaid small business loan balance.

Worse yet, if you should borrow an extensive portion of the cash value of your life insurance and then fall behind on your payments your insurer could treat the policy as lapsed, thus eliminating your life insurance coverage altogether. This is bad not only because you will be without coverage should something unexpected occur, but should you want to reinstate the policy your premiums would now be more costly, as you would now be older at the time of issuance.