Case 1: Here’s a case of how a business shut down because the business owner had no Life Insurance.
Back in 2002, someone referred me to a potential client – I got a call and was told that this big business owner was in the market looking for Life Insurance.
The business opportunity was pretty exciting, so I seized it, and had set up a meeting to discuss the prospect’s requirements as swiftly as I could.
Let me draw you a picture.
I walk into a boutique café where my prospect had requested the meeting, and there he was – a 58-year-old man, less than five and a half feet tall with a solid 110kgs on his frame. (The medicals from the insurance companies later confirmed my guestimates weren’t at all off the mark).
My prospect ran a successful metals trading business that was doing exceptionally well around then, during Dubai’s construction boom.
For over 25 years now, HSBC bank had been backing his business. But the bank was now reassessing their support. The business had no real succession plan, and my prospect’s kids didn’t want to take over the reins anytime soon.
With my prospect pushing 60, the business’s longevity was in question.
The bank requested some form of a collateral if they were to continue financing the business.
They suggested that my prospect purchases a Life Insurance policy with a reputable insurance company so that, should anything happen to him, the bank would be able to recover its investment, which was a sizable US$ 5 million.
With a Life Insurance policy in place, the bank expressed that they would feel comfortable about continuing to finance the business as they had been, at the same competitive rates they had always offered my prospect.
So I set the ball in motion to secure my prospect a Life Insurance policy. After all his medical checks, however, I quickly realized that this was going to be a challenge.
He was declined a Life Insurance policy by three major insurance providers due to his health, lifestyle, and age.
Unfortunately, the bank then decided to pull out its financial support. That left my prospect in a tough position – he had to liquidate his personal assets to keep the business running. This, at a time when instead, the company should have been generating income for him to invest outside.
Without that financial support, the business had lost a leg, and a few short years later, my prospect decided to shut shop.
This particular case isn’t exactly a one-off case – banks often request Life Insurance as collateral against borrowing, and business owners who for whatever reason are not insurable, struggle to find alternative financing and keep the business running.
And now, let me take you through a different situation – a success story.
Case 2: How Life Insurance Helped a Business Owner
Eight years ago, I was introduced to a prospect – a successful 38-year-old business owner who ran a US$ 100 million turnover operation. They were pulling in about 13% of net profits every year.
The banks were willing to finance his business at rates as low as 6% per annum. Once again, the bank wanted some collateral in place against the borrowing, and they recommended a Life Insurance policy.
So my prospect got his accountant and his then Life Insurance agent to put together a contract for a Whole Life Insurance policy, and the cost of insurance was about 3.75% per annum.
The cover was a significant amount, and because of the way that most Whole Life policies are structured, it also meant a handsome commission for my prospect’s then Life Insurance agent.
Along with the cost of Life Insurance and the bank’s rate of borrowing, my prospect paid a whopping 9.57% per annum as the cost of borrowing. This brought that 13% business profit margin down to less than 4%.
So when he was referred to me, the first thing my team and I did was conduct an audit to see what his current finances looked like. We established that he needed US$ 40 million of Life Insurance cover that would go to his family, should anything happened to him, and an addition US$ 30 million of Life Insurance as bank collateral.
We built his product suite, and got his US$30 million in the form of a Term Life policy, at a rate of 0.7% per annum. (I’ll leave the technicalities of the two types of policy for another article, but drop me a message if you want some insight right away)
As for the US$ 40 million of cover that my client (now) required for his family, we structured that as a combination of term life insurance and universal life based on his ability to pay the premium and the level of cover required.
So his cost of borrowing was now down to 6.7% per annum – significantly lower than the big amounts he was paying out before.
So the key takeaways here are:
- Life Insurance can serve as a crucial tool to secure business financing from banks, private equity firms, or other finance providers.
It is, however, not the only form of collateral there is. Some business owners even put down personal assets as collateral. Life Insurance is probably a safer and maybe even more cost effective option.
2. Having a Life Insurance policy does not guarantee business owners financing. That eligibility depends on the individual’s ability to sell his business vision, and garner the support and resources required to make it happen.
But with a policy in place, a business owner does remove any possible resistance that might arise due to the lack of sufficient collateral against a loan.
3. The type of Life Insurance policy and the way it’s structured can make a huge difference in your overall cost of borrowing.
Always choose carefully and explore every option before you go with a policy. Or at least make sure you’ve got a reliable pair of eyes looking over things for you.
I hope this article has helped. If you’re a business owner and you’re looking into financing your business, consider getting a Life Insurance policy in place to help accelerate the decision. As always, feel free to reach out to me if I can weigh in with some advice!