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A Cure For Small Business Credit Crunch? Try Permanent Insurance Cash Value

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Small business owners may find their backs up against the wall during these days of tightened credit. Obtaining the financing they need to grow is increasingly difficult, and even when they do obtain credit, it is often at high interest rates that increase the cost of doing business.

It’s a perfect time for agents to remind their small business clients that they may be overlooking a reserve they have: the cash value of a whole life insurance policy. This can be an especially valuable tool for small or young businesses that are deemed a credit-risk because of a lack of collateral or history. Business owners can tap their whole life insurance policies for capitalization and liquidity, particularly in times of tight credit, and some often do.

For example, one Tampa, Florida business has used the cash value of its whole life insurance policies several times over the years, in one instance staving off mortgage foreclosure and in another, redeeming shares. One of the company’s owners declares that the whole life policies’ cash values enabled the company to weather tough times, grow and become a success, even though at various times it was unable to obtain credit through bank loans.

A flexible solution

The company faced circumstances familiar to many small and/or new businesses. Although the prospect of borrowing from a bank and repaying over an extended period of time can be attractive, doing so requires the business to generate sufficient cash flow to make the required payments. Moreover, the company’s ability to generate income may depend upon the efforts of a key owner, and his or her death, disability or retirement might devastate the business. If that is the case, the creditworthiness of the business and the other owners may be impaired. The interest on a loan might be substantial, or it may be that the business will be unable to obtain a loan.

That’s why whole life insurance is an attractive, if sometimes overlooked, solution: It can kill two–or more–birds with one stone, solving continuity and succession challenges while also addressing liquidity issues. In fact, whole life insurance policies can help small businesses address a number of issues (see chart).

How it can work

A typical situation might work like this: A company purchases a whole life insurance policy for each of its 3 owners. Over the years, the policies’ cash value grows on a tax-deferred basis. Additionally, the policies are a bookable asset on the company’s balance sheet.

As the policies’ cash values grow, they create a pool of resources the company can use to fund specific needs. For example, the company could borrow the cash value to purchase the building in which it is located without applying for a bank loan or otherwise jeopardizing its operations. Or it might borrow the cash value to fund the buy-out of one or more of the owners.

But note: Access to cash values through borrowing or partial surrenders can reduce the policy’s cash value and death benefit, increase the chance the policy will lapse, and may result in a tax liability if the policy terminates before the death of the insured.

Using this strategy, the company can avoid the credit crunch that might limit its opportunities. Additionally, the policies continue to receive dividends which, although not guaranteed, can increase the policy’s death benefit (if they are used to purchase paid-up additional insurance or term insurance available through a rider) and cash value or offset some or all of the premiums due.

A high early cash value contract can be particularly beneficial. The premiums are higher than they are for a typical whole life insurance policy, but, as a result, the cash value grows in a relatively short time. This approach can very quickly create a resource that companies can leverage as needs arise.

As the markets continue to sort through increasingly negative economic news, many small businesses will continue to find their hands tied by a lack of access to credit. An informed financial services professional using flexible product solutions, such as whole life insurance, can help them survive and thrive by meeting today’s challenges and anticipating tomorrow’s needs.

Brian E. Code, CLU, ChFC, AEP and Special Care Planner, is a partner with Code Smith Financial, LLP, (an affiliate of Levin Financial Group, a general agency of the Massachusetts Mutual Life Insurance Co.) which is located in Tampa, Fla. Brian can be reached at .