Insurance coverage is important for small business owners. One effective cost saving strategy is with loan insurance. It is common risk management practice for lending institutions to request disability and life insurance protection on loans and mortgages. Personal insurance is more favourable over creditor protection.
We will examine the process, savings, risks and benefits:
1.Application and approval process. Typically creditor insurance is offered by the lending institution. It is a tick of a box to accept, there are a few medical questions, the process is easy and the insurance coverage is almost immediate. However, the hidden cost such as interest payable on insurance premium, is overlooked.
2. Interest is charged on the insurance premium. The total cost of insurance for the duration of the business loan is added to the loan. The lending institution receives absolute assignment to the policy; meaning if the business owner becomes sick, injured, or dies the loan would be covered. The insurance terminates at the end of the term for the loan.
3. Personal insurance coverage is not immediate. There are medical questions and possibly medical tests, a risk of being uninsurable. If approved, the cost of insurance can be significantly less, as much as 60% savings. After all, the insurance company has done its due diligence with assessing the risk.
4. Personal insurance benefits the business owner. The business owner has control. Whereas, creditor insurance the lender is the owner of the policy. Once the debt obligation has been met, personal insurance can be transferred to another loan or mortgage, without further medicals evidence.
Sindy Billan, president of SB Wealth Solutions, Vancouver BC, delivers risk management solutions for business owners. She has been appointed the insurance advisor for members of the BC Naturopathic Association and also conducts lectures and workshops for doctors at Boucher Institute. She writes quarterly Financial Planning articles for the BCNA Bulletin.