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Loan Protection Insurance

If you’ve borrowed money, whether for personal or business reasons, you should consider loan protection insurance.  Owing money to another person, bank, investor, or company creates debt.  Typically, someone beyond yourself is responsible for that debt.

For instance, if you pass away, your spouse gets the privilege of paying off your mortgage by himself/herself.

If you have a business loan and become disabled, the business may have to sell equipment or equity to make the bank whole.

If you have debt, loan protection insurance can help make sure it is paid off if you become disabled or die.

If you’re beginning to learn about loan protection insurance, feel free to peruse this entire article.  The beginning of this article mainly discusses business loans.  If you’re not here for that, then feel free to skip ahead to personal loans.

The Two Types of Loan Protection Insurance

The first kind is for businesses.  This includes loan indemnification coverage, business succession paybacks, and a variety of other debt or loan repayment strategies that business owners use to protect themselves.

The second category covers your personal finances.  Debt from mortgages, student loans, and a host of other personal loans are not forgiven just because you’re dead or disabled.

Let’s explore each in detail.

Business Loan Protection Insurance

As mentioned, there are a number of different types of business loans. The main difference between business loan protection insurance and personal loan protection insurance is that, on the business side, the coverage is likely required by the lender.

From something as simple as a bank loan to a complex transaction involving venture capital, most lenders are going to require some type of protection, should the business owner be unable to fulfill their obligation.

Different lenders have different requirements.  Like buy-sell arrangements, death is the most common provision.  Some lenders (the smart ones) will also require a policy if the business owner becomes disabled and is unable to repay the loan.

Loan Protection Using Life Insurance

As mentioned, a smart lender is going to have a strong loan protection plan, purchasing an insurance policy on the business owner’s life or having the business owner collaterally assign an existing life insurance policy.

Simply put, the death of the business owner, who is responsible for the loan, puts the lender in a difficult position.  Banks don’t want to have estate sales of your equipment to recoup their costs; they just want their money.  Similarly, if you’re acquiring a business from a previous owner, the last thing that person wants to do is sue your grieving family to fulfill your obligations.

Protecting business loans using life insurance is relatively easy.  Depending on the urgency of securing the protection, there are normally four routes you can consider.

① The Match Game

Since many business loans have a relatively short obligation, term insurance will normally suffice.  Term insurance can be used to match the debt repayment obligation timeframe.

For instance, if your bank or investor loans you money that is repayable over 10 years, you can simply purchase a 10-year term policy to repay the loan should you pass away during the loan repayment period.

The underwriting for this type of loan protection insurance can vary based on the obligation.

If your loan is relatively small (250k-500k), then you may qualify for a policy that doesn’t require a medical exam.  Larger loans will normally require full underwriting.

Either way, if this strategy fits the bill, it is often the least expensive (although often the more time-intensive) of all of the life insurance loan protection plans.

The ART Strategy

If your loan is less than 5 years, it will be difficult to find a term policy to match your loan obligation.

This is for two reasons.

One, term insurance doesn’t normally go below 5 years, and two is a little-known life insurance term called “need and purpose.”

Need and purpose is something the underwriter of your case needs to consider.

Put simply, it means the insured’s death needs to create a financial loss for the beneficiary of the policy.

When purchased for a cause, such as income protection, there are guidelines that the insurance companies follow.

For example, having 20 times your income in term insurance when you’re 35 years old or 10 times your income when you’re 55 is relatively easy to qualify for.

That being said, if your loan term is only 2 years, what is your lender’s “need and purpose” beyond the second year?

If your only option is to purchase 5 year term, and your lender is going to own the policy, then the policy may not be approved.

One option to overcome this is to use ART.

Not the kind you hang on a wall or look at in a museum, in insurance parlance, ART stands for “annual renewable term.”

An ART policy is typically applied for the same way a 5, 10, or 20-year term would be.  The only difference is that the policy premiums are not level. The price of an ART policy will go up each year.

From a cost perspective, ART becomes unreasonable to hold past the time it is actually needed.  Therefore, it is perfectly suited to pass a “need and purpose” test with an underwriter.

IMPORTANT NOTE
If your loan term is longer than 1 year, make sure your ART plan is renewable without any financial or medical underwriting. Because things aren’t confusing enough in the insurance world, some annual renewable term policies aren’t actually renewable without going through the underwriting process again. The last thing you or your lender wants is for you to lose your policy due to a health condition in year 2 of a 3-year loan.

ART is a great way to purchase loan indemnification and make sure that, if something happens to you, the debt will be satisfied.

Collateral Assignment

This is one of the easiest loan protection insurance strategies to implement.

You have an existing life insurance policy.

The carrier has a form called “collateral assignment.”

You complete this form and name the lender as a beneficiary of the death benefit subject to the remainder of the outstanding loan.

The remaining death benefit is paid to your beneficiary.

This works well for a few reasons:

First, you don’t have to get a new policy.  You can simply use an existing policy (the one that you should have to protect your family from a loss of your income). You’re not actually hurting your family by doing this.  Since your business loan lender likely has recourse to seize assets (or equity) of the business in the event of your death, your family is still protected because your business interests remain whole.

Second, you just fill out a form. That’s easy and allows you to receive your funding almost immediately.

Last, since your loan obligation decreases every year, your lender is only entitled to the remaining balance.  Once the loan is satisfied, the collateral assignment goes away.

There is little management to this strategy.

If you don’t have an existing life insurance policy (again, you probably should), you can always purchase one and then collaterally assign it to your lender.

Of course, this requires going through the same process as options 1 and 2 (above).  The main difference is you own the policy once the loan is paid off, as opposed to the lender letting the policy lapse.

In other words, you get to keep the policy, and your family can use the funds as seen fit in the event of your death.

Failure to Survive

Sometimes, a loan needs to be closed very quickly.  Other times, a challenge comes up in the 11th hour that requires some type of loan protection insurance.

A failure to survive policy can step in and facilitate the completion of the loan.

Unlike traditional term or ART options, failure to survive can be jet issued in less than 48 hours.

Typically, all that is needed is a one-page application with the copy of the loan agreement.  No medical exams or medical records are required to apply.

These plans are normally temporary, replaced with more traditional strategies.  But, for those with a limited timeline and a necessity for insurance, a failure to survive policy can help you get your deal done.

The bottom line is this:

While there is no best way to get loan protection using life insurance, there are quite a few options.  If you need a loan protected or indemnified, please contact us today or complete the quote form on the left.  We specialize in this market and will help you identify the best loan protection plan for your personal situation.

Loan Protection Using Disability Insurance

Disability insurance is often used as income protection.

If you’re unable to do your job due to sickness or injury, it pays you a monthly income that you can spend on your mortgage, utilities, groceries etc.

What if you had a large business loan that was predicated on your ability to execute a strategy or marketing plan?

With no income, it would be difficult to repay your loan obligation.  That’s where disability insurance for loan and credit protection comes into play.

①  Collateral Assignment-Part 2

Just as you can assign a portion of your existing life insurance to help secure a loan, this may be an option with your personal disability insurance as well.

Unlike doing this with life insurance, assigning your individual disability insurance is normally not a good idea.

FOR EXAMPLE
Let’s say you make 100k per year and need to take out a 250k SBA loan (payable over 5 years at 5% interest) to grow your business. You have 10 times income as life insurance (1m) and 60% income protection (5k/mo.). If you collaterally assign your life policy and die, your family still gets 750k.  If you collaterally assign your disability policy and have to go on claim, over 94% of your benefits will be kept by the bank (the monthly payments on this loan would be $4,717.81).

So, while this may be an option, unless you have a large disability policy or a relatively small loan, it often isn’t a good strategy.

Business Overhead Expense Riders

First, if you’re a business owner that has overhead (such as a lease/rent, payroll, equipment, etc.), you should own a business overhead expense policy.

O.K., now that we’ve made that point, know that traditional business overhead expense insurance does not cover loans.

Some policies, however, do have what’s called a rider that is designed specifically as a loan protection plan.

A BLP (business loan protection) rider covers loans taken out for expenses, such as the purchase of a business or expensive equipment, renovations, or even an increase in working capital.

If your overhead policy has a BLP rider, you have additional peace of mind, knowing that, if you can’t work due to a health condition, your business can continue to run and won’t be forced into liquidation.

Loan Indemnification Disability Insurance

It is good practice to protect any loans against the death or disability of the business owner.

That being said, sometimes, a lender may require the borrower to have proof of disability insurance to pay off the loan if necessary.

What is required often depends on the lender.

An SBA loan may have different requirements than a venture funded loan.  Likewise, each bank has specific criteria required to secure a loan, whereas an individual lender will require loan protection insurance that makes him or her comfortable.

While most loans, regardless of source, are going to require some type of death protection, not all will require disability coverage.

Having some protection from disability is ideal; however, it is not always feasible.  Finances, as well as health, can come into play (these policies are often fully underwritten in finding this type of coverage.

For those that can attain loan indemnification disability insurance, it can help you obtain the financing you need and protect your interests from an unpredictable situation; there is a chance that you are unable to fulfill the obligations of your loan due to sickness or injury.

Purchasing disability insurance specifically to cover your loan has advantages.

For one, it can help your loan close more smoothly.  If this is required by your lender, then obviously, you need it.  If not, it can still make sense for three reasons:

  • You still want to protect your credit from default.
  • You want to maintain your assets and business operations should you become incapacitated.
  • It prevents last minute delays in receiving your money (11th hour requirements).

The bottom line is this:

If you’re going to take out a loan to grow your business, protect yourself by purchasing life and disability insurance to pay off the loan in case you die or you’re unable to work due to sickness or an accident.

JUMPSPOT

 

Personal Loan Protection Insurance

There are ultimately three main (large) loans that individuals take out for personal reasons: Home loans or mortgages, student loans, and personal loans.

Home loan protection insurance (sometimes called mortgage loan protection insurance), student loan protection insurance, and personal loan protection insurance exist to help you pay off these loans should you unexpectedly die or become disabled.

Home Loan Protection Insurance

Your home loan or mortgage is likely one of your largest debts.

Making sure that you have home loan protection insurance is a critical part of your personal loan protection plan.

There are two important types of home loan or mortgage protection insurance, coverage if you die and coverage if you become disabled.

① Home Loan Protection – Death

Mortgage protection insurance is a popular option for those that want to have their home loan paid off in the event of their death or disability.

There are two types of mortgage loan protection insurance that protect against your death, and both are life insurance.

The first way to protect your home loan from death of a breadwinner is simply to purchase traditional life insurance.

Normally, using term life (which is the least expensive type of life insurance that you can purchase), the loan can be protected and paid for should you pass away during the loan period.

In addition to covering your home, a proper loan protection plan will cover other debts, such as credit cards and student loans and even the lost future income of the deceased.

The second type of mortgage loan protection insurance goes by the name “mortgage protection insurance.”

This is nothing more than a marketing term for a life insurance policy that matches the term of your home loan.

Keep in mind, “mortgage protection insurance” is not the same thing as the “mortgage insurance,” which is tied to your mortgage and is an agreement between you and your bank or lender.  Mortgage protection is simply an insurance policy that can help your loved ones pay off your house should you die prematurely.

For instance, if you have 200k remaining on your mortgage that is payable over the next 15 years, a mortgage loan protection insurance policy will be structured to match those exact terms.

If you pass away prior to your mortgage debt being paid off, then the policy will pay your beneficiary (normally a spouse) 200k to settle your loan (and they can keep anything left over).

What makes a mortgage protection policy different than traditional life insurance is that these policies are often simplified issue underwriting.  That means that you don’t have to take a medical exam and the health questions on the application are more relaxed, allowing for easier and quicker qualification.

Having a policy issued without a medical exam or lengthy approval process may sound very attractive; however, it can come at a steep cost.

FOR EXAMPLE
A 30 year old healthy female needs 250k of 30 year term life insurance to protect her mortgage in case she dies. If she’s working with an independent agent (who can shop her policy), she’ll find 13 companies that cost less than $21 per month.  That cost is if her health is rated preferred, which isn’t even the best health class.  An identical “mortgage protection” policy will cost at least $31 per month. A difference of $10 per month over 360 months (the length of the term) translates to $3,600.  Is $3,600 worth the convenience of a mortgage protection policy?

Unless you are in a real hurry to purchase home loan protection or you have health issues that would make a traditional policy more expensive, purchasing traditional term life to cover your mortgage (and other debts) is normally the most cost-effective strategy.

② Home Loan Protection – Disability

Most people don’t think they’ll ever become disabled, but that just isn’t the case.

More than one in four of today’s 20-year-olds will miss work due to a disabling condition before they reach normal retirement age. (source:  http://disabilitycanhappen.org/disability-statistic/)

In addition, the average claim is 31-34 months.

Most people envision disability very different than what is the reality.

First, while it is common for people to want to protect themselves from a disabling injury or accident (like a drunk driver), these events only account for 10% of claims.

The other 90% of claims are health conditions, such as disease or illness.  While many view disability as a lifetime circumstance, that is often not the case.

Keep in mind that disabilities include musculoskeletal issues, such as back pain, or even mental/nervous disorders, such as anxiety, both of which are treatable but may require time off work.

So, if you’re thinking “should I buy disability insurance” or wondering if you’re one of the few people who shouldn’t buy disability insurance, then you need to analyze your finances as they relate to your mortgage.

If you can go several years without an income and still pay your loan, then you may not need disability insurance for your mortgage.

Specific to this article, disability loan protection insurance should at least cover your mortgage, utilities, and groceries.  One of our carriers, Illinois Mutual,  calls it the M.U.G.

These are the basic essentials, and any loan protection plan should pay for those at a minimum.

While you can certainly buy a policy to cover much more of your income, disability insurance can be expensive, depending on your occupation, age, gender, and health.

Start your loan protection plan by covering the M.U.G., so can have a very necessary safety net while keeping costs in check.

The bottom line is this:

If you have a home loan, you should buy mortgage protection insurance.  Covering your largest asset with a loan protection plan is essential.  Make sure your plan includes insurance for both death and disability.  Once that’s in place, you can have peace of mind and focus on wealth building as opposed to protection.

Student Loan Protection Insurance

If your mortgage is likely your largest debt, for many individuals, their student loans are a close second.

Depending on the type of student loan, your debt may not be forgiven due to death.

Federal student loans are discharged when the borrower dies.  That means, if you pass away owing money on a federal student loan, the debt won’t be passed on to anyone else.

The same holds true for parent PLUS loans.  The death of either the parent or student will discharge these loans, and the debt will not become an estate obligation.

Private student loans can become a liability to your estate.  That means, if you die, the loan may still need to be paid from any assets you may have.  This can cause your family to have to make drastic decisions at a time when they are already grieving.

Cosigners are still on the hook for the balance of a student loan.  If a parent or someone close to you (or not close to you…they just won’t normally cosign loans for people) cosigned your student loan and you pass away, they are still obligated to repay the debt.

Using some type of student loan protection can help protect your family or your cosigner (or both).

① Student Loan Protection – Death

Covering your student loans from your untimely passing is relatively simple.

Like mortgage protection insurance, student loan protection insurance is really term life insurance designed around the loan itself.

If you owe 100k in student loans payable over the next 10 years, then having a 10 year, 100k term policy is the simplest way to protect yourself.

Of course, you could add up what you need to pay off your mortgage and pay off your student loans (and replace your income, but that’s for another article) and just purchase one policy.

Another strategy is to ladder your term policies.

FOR EXAMPLE
Let’s say you have a 30-year home loan of 300k and 10 years of student debt repayment totaling 100k.  You could purchase a 300k 30 year term policy with a 100k 10 year term rider.  This means, if you died in the first 10 years, your death benefit would be 400k (paying off both the home and the student loan).  If you died anytime between years 11-30, your death benefit would be 300k (since you would have already paid off the student loan, you just need mortgage protection). This strategy normally results in lower overall premium costs.

If you have a student loan that is still payable on your death, having student loan protection insurance can help your family protect their assets.  These plans are relatively easy to put in place, so try to have it done as soon as you graduate when your loan is the largest.

② Student Loan Protection – Disability

As mentioned, covering your student loans for death is relatively simple and affordable.

Making sure they’re protected from your inability to work due to sickness or injury, that’s a little more challenging.

First, unlike life insurance, the amount of disability insurance is directly related to your earned income (life insurance does factor in income but also looks at need and purpose, assets etc.).

That means you can only buy disability coverage up to approximately 60-65% of your earnings.

If that doesn’t sound like enough, don’t worry.  If you pay for your disability insurance with after-tax dollars, your benefits are normally tax-free.  That being said, if you have an employer-paid policy (the company that you work for covers the costs of the premiums), then your benefit may be taxable.

Some people have disability coverage through work.  These plans are normally pretty “bare bones” but cover most conditions that will keep you from doing your job and earning an income.

No matter what type of disability insurance you own, it is critical that you make sure that some of that money is allocated to pay for your student loan obligations.

If you are in the market for an individual disability insurance policy (normally because your employer doesn’t offer one or if they do, it doesn’t cover enough of your income), then you may have additional options.

Some individual disability insurance policies offer what is called a “student loan protection rider.”

These riders are sometimes based on occupation; however, if eligible, adding one to your disability insurance policy can be very helpful.

Student loan protection riders will reimburse you for the amount of your student loan expense (as stipulated in your repayment agreement), up to a maximum monthly benefit.

Anyone with larger student loans should enquire about these riders when they purchase their disability insurance policy.

Whether you have disability insurance through work or you’re able to buy a policy with a student loan protection rider, making sure that student loans will still be paid, even if you can’t work, is a necessary part of your loan protection strategy.

The bottom line is this:

If you have student loans, make sure you have some type of student loan protection insurance.  The ability for your family to pay off your obligations should you become unable to work or die is necessary.

Should this be important to you, please complete the quote form on this page and mention student loans in the comment section.

We’ll reach out to you to help you find the best policies for your needs.

Personal Loan Protection Insurance

All the loans that we have discussed in this section are technically personal loans.

Your mortgage and your student loans are directly tied to you, your social security number, and your credit.

In addition to these loans, there are others that require insurance.  Personal loan protection insurance can help you cover all of your other debt obligations outside of those previously mentioned.

Credit cards can be construed as a loan, but unless you have very high credit card debt, you might be able to pay these off by adding a little more benefit to your mortgage protection insurance or your student loan protection insurance.

But what if you took out a personal loan from a good friend or family member?

Maybe you needed the down payment for your mortgage and borrowed it from your parents.  Or maybe you wanted to start a business and needed capital to get the ball rolling.

These are typically called personal loans because, although they’re tied to other topics (home loan protection and business loan protection), the obligation is to someone you know personally.

Should you be unable to repay a personal loan, you might not take a credit hit, but you could certainly ruin a relationship.

After all, loaning money is a business act, not a personal one.  Sure, if your parents gave you that money for your down payment on your home or your friend invested that money in your business startup, that’s one thing.

But, if either of these acts was considered a personal loan, then you have a personal obligation to repay them, even if you’re unable to work through death or disability.

You can purchase personal loan protection insurance the same way you do other types: buying policies to cover the specific needs.

The other option is to assign some of your existing coverage to protect against default.  Since most personal loans don’t necessarily have this as a requirement, you can often do this as part of your personal loan protection plan.

In other words, you can just earmark the payment obligations (subtract them) from your existing coverage to make sure that, if all else fails, you can still make good on your repayments.

The bottom line is this:

If you have a personal loan obligation, it is still important to make sure you can pay it back if you are unable to work.  While it may not be as financially damaging as not repaying a business loan or a mortgage, it can be personally damaging to all involved parties.

In Summary

Debt isn’t necessarily bad.

If it helps you expand your business or acquire assets (or knowledge), it can be part of a healthy personal balance sheet.

What’s important is that you know your obligations beyond when you initially sign up. If your loan needs to be paid, even if you become disabled or die, then coming up with a sound loan protection plan makes sense.

We specialize in loan protection insurance.  Whether you need a 10 million dollar failure to survive policy to get venture financing, or you need a disability policy to cover your monthly expenses, we can help.

Complete the quote form on the left or contact us.  We offer expert, unbiased advice about these products and will help you find the best policy for your needs.

We can help.