Many small business owners have greeted the mortgage-induced credit crunch with understandable worry. 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.
Then there are the small business owners who had the foresight to purchase a whole life insurance policy, the cash value of which they can tap when the credit spigot runs dry. They’re not wringing their hands. Instead, they’re riding out the storm or, better yet, seizing new opportunity — without having to involve bankers and credit scores.
Whole life insurance is an attractive, if sometimes overlooked, solution, particularly for small or young 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 a great deal 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 excessive, or the business may be unable to obtain a loan at all.
Whole life insurance, on the other hand, enables business owners to kill two — or more — birds with one stone, solving capitalization and liquidity issues while addressing continuity and succession challenges. In fact, whole life insurance policies can help small businesses address a number of issues, such as:
- Funding buy-sell agreements;
- Providing cash for down payments or loan interest on other debts;
- Paying pre-retirement survivor benefits to families of key employees and/or officers;
- Supplementing cash flow during lean times;
- Funding a replacement when a key employee leaves, becomes disabled, or retires;
- Supporting supplemental retirement benefits for key employees.
A high early cash value contract can be particularly beneficial because significant cash values are available in the early policy years. This approach can quickly create a resource companies can leverage as needs arise.
As always, choosing the right carrier — such as a mutual company with strong to excellent ratings, whose structure makes it ideally suited for permanent, dependable solutions — enables the agent to sell with and the business owner to buy with assurance.
As the credit crisis continues and potentially worsens, many small business owners will look to their financial professionals for guidance on how to weather both these and future tough times. A smart financial professional will add whole life insurance to his or her collection of potential recommendations, knowing that, in the right situation, it can be a solution that enables companies to address urgent needs and take advantage of new opportunities.
Victor Iannelli, CLU, ChFC, MBA, is the owner and founder of The Financial Services Firm of Victor Iannelli of Freehold, NJ (a detached office of Lee-Nolan Associates, LLC, a General Agency of the Massachusetts Mutual Life Insurance Co.) He can be reached at email@example.com, or by calling 732-683-1000.