top of page
Writer's pictureLarry Carlin

How Entrepreneurs Can Use Life Insurance For Their Business



Capital is usually the single greatest barrier to any entrepreneur whether starting a business or running an existing business. A solution that’s available to help overcome this barrier is using your insurance as the funding.


You’re allowed to take loans against your life insurance policy. Taking a loan directly through your insurance policy holder against the value of your life policy is an easy process.


The benefit of a life insurance loan for an entrepreneur are (1) no credit or background checks that will affect your credit history, (2) flexible payment schedules because you’re not required to make monthly repayments and (3) lower interest rates.


Fast Money


Life insurance loans don’t require credit checks because the loan is financed by your life insurance policy. It’s similar to taking a loan from your own 401(k) or your own money that was put aside, thus the lender already has collateral that they can hold against the loan. This makes the time between you obtaining the “loan or cash” and application much faster than a traditional bank loan.


No Monthly Payments


The loan is secured by your life insurance policy, so you’re not required to make monthly payments like a bank loan. This is the most important benefit of a life insurance loan. There nay be months where you’ll be doing great financially and months where you’ll wonder how to keep the doors open. Having the option to decide, whether to make a payment against the loan will literally determine whether you’re able to stay in business.


The main factor that determines whether you’re able to continue to avoid making payments is the interest rate and the cash value of your insurance policy. If your loan exceeds the cash value of your insurance policy, then you will “surrender” or “lapse” your life insurance policy. Basically, you’ll lose your insurance policy.


Surrendering or lapse your insurance policy will like cause a taxable event. This income will be treated as ordinary income that is taxed at your marginal tax rate. Thus, it’s important to never surrender or lapse your life insurance policy because it will cause you to recognize phantom taxable income.


Cons to Loan Insurance Loans


Nothing in life or business is perfect and this is no exception. The drawback of a life insurance loan is that you’ll need a life insurance policy. It can take years to build enough cash value to effectively take a loan against the policy.


Avoiding Taxes


Taking a loan against an insurance policy is not taxable. It is a common practice for wealthy or high networth individuals to obtain life insurance policies and to draw against them through loans. Taking a loan against the value of the life insurance policy allows the policy holder to enjoy the fruits of the policy before their death.


Even companies are able to obtain life insurance policies for their executives through “keyman or key person” life insurance policies. The money a company receives through these life insurance policies are not-taxable to the company under the exceptions enacted by the Pension Protection Act of 2006.

10 views0 comments

Comments


bottom of page