If you are a business owner, you probably don’t think about using disability insurance to protect your business loans, right?
But, you should.
In this article, I’ll tell you why, and how to go about securing disability insurance for your business loans.
First, let me ask you something.
What do you think has a greater chance of happening?
A disability that can leave you out of work for more than 90 days, or…
An unexpected death?
If you said an unexpected death, you are wrong.
You have a 1 in 4 chance, give or take, of being disabled for more than 90 days.
So, how do you pay your business loans if you can’t work?
This is a serious conversation. In this article, we will discuss:
- Why Do I Need Disability Insurance To Protect My Business Loans?
- Structure Of A Strong Business Loan Protection Insurance Policy
- Types Of Eligible Business Loans
- Potential Costs of Business Loan Protection Disability Insurance
- Other Options To Protect Your Business Loans (Not To Consider)
- Now You Know How To Protect Your Loans With Disability Insurance
Let’s start by discussing how disability insurance protects your business loans.
Why Do I Need Disability Insurance To Protect My Business Loans?
We’ve discussed disability insurance ad nauseam. If you earn an income, you need disability insurance. It’s that simple. We aren’t going to rehash the reasons why. But, one major reason stands out.
You have a 1 in 4 chance of a long-term disability.
I am not one for statistics, but everyone generally agrees with the 1 in 4 probability of disability. (Some other agencies state 1 in 3).
To put that into context, the Social Security Administration estimates you have a 1 in 14 chance of an unexpected death.
These statistics are all from government agencies like the Social Security Administration and the Department of Labor. I think you’ll agree with me that the government is not in the business of getting you disability insurance. In fact, one can argue, they are in the business of not getting you help, as evidenced that 70% of people are denied social security disability on the first application. Moreover, it can take up to 5 years (or longer) for approval.
OK, John, you say. But, I already have disability insurance.
That’s good to hear. However, there’s a big problem if a disability happens. That individual plan you have is to help pay your mortgage, put food on the table, pay your utilities, and so on.
It’s not for your business loan, which might cost…thousands more per month?
Now, what will you do then?
Banks Are Not Your Friend
I don’t mean to sound harsh, but the bank or lending institution isn’t your friend. They are in business to make money. Sure, they loaned you the money. Yes, your loan officer is indeed nice. However, if you are disabled and can’t pay your loan, get ready for really tough conversations with them.
Often, during the loan process, banks require you to have life insurance and disability insurance. Why? It’s to protect themselves. See…they want to get paid!
Here’s a major mistake we see when business owners take a loan. They assign an existing life or disability insurance plan to the bank. This means the money that was intended for your family to live off is now going to the bank to satisfy the loan.
In other words, you will have no, or limited, money to pay your mortgage, bills, food, etc. What will you do now?
Avoid the tough conversations with your family and bank. This is why you need a separate disability insurance policy to protect your business loans, which will ultimately protect you and your family.
Proper Structure Of Disability Insurance For Your Business Loans
The structure of the disability insurance policy is not much different than your individual policy. For instance, you still want:
- Own occupation definition
- Residual disability benefits
On typical disability insurance policies, we would like to see a guaranteed purchase option among other things. However, business loan protection insurance isn’t your typical disability insurance policy.
Your benefit period is the length of the loan. For example, let’s say your loan is 10 years. That is your benefit period.
Similar to an individual policy, a disability insurance policy for business loans have waiting periods from 30 days to 365 days. The right choice depends on your savings. While everyone’s situation is different, I do recommend a 30 day waiting period. Do you really want to wait for this money?
Additionally, the bank or lending institution receives the benefit payments directly. How great is that? You are not involved.
Obviously, if you return back to work full-time, the plan stops paying, and you resume the loan payments.
Nevertheless, you have plan B if something were to happen. How great is that? You will have peace-of-mind knowing the bank receives the loan payments. You can then focus on what really matters: getting better and your family.
Types Of Business Loans Disability Insurance Protects
Disability insurance protects the following (not inclusive) business loans:
- SBA Loans
- Construction Loans
- Commercial Mortgage Loans
- Lease / Equipment Loans
- Working Capital
- Variable Rate, Term, Balloon Loans
- Interest-Only Loans
- Investment Loans
- Credit Cards
Contact us if you have questions or would like to know if your loan qualifies.
Potential Costs Of Business Loan Protection Insurance
Everyone wants to know about cost.
I don’t want to be insurance-poor, John, I routinely hear.
Sure, no one does. But, do you want to lose your home or struggle because you didn’t elevate the importance of this insurance?
I typically aim for my clients to pay $100 or less for their individual disability insurance. However, I can’t say that for disability insurance that will protect your business loans. The cost of business loan protection insurance depends on the typical underwriting factors such as:
- Health conditions, height / weight, tobacco and/or marijuana use
Additionally, your premiums depend on the size of your loan, term, and your monthly payments.
So, if you have a $500,000 loan, 10 year term, making $4,200 monthly payment, the cost of your disability insurance is based on the 10 year term and $4,200 monthly amount.
We at My Family Life Insurance always aim to provide you the most comprehensive coverage at the lowest possible cost.
Other Options Instead Of Business Loan Protection Insurance (Do Not Consider)
There are always options. As I always say, any type of insurance contains advantages and disadvantages.
Some people tell us, “John, I already have disability insurance.” We tell them what we wrote here earlier. And, we never hear from them again. OK…
Then, people tell us they have a business overhead expense policy. Great. Although these policies cover business expenses, including loans, coverage is limited. Most business overhead policies have a 24 month benefit period. What if your disability lasts longer than 24 months? What will you do?
There’s no substitution in protecting your business loans with a properly structured disability insurance policy.
Now You Know How To Protect Your Business Loans With Disability Insurance
I hope you found this article educational. I can’t stress how important business loan protection insurance is. Now you know how to protect your business loans with a properly designed disability insurance policy.
Would you like to discuss more? I am happy to talk to you about how we have helped other business owners protect their loan (and family) through disability insurance. Feel free to contact us or use the form below,
If you are worried about contacting us, don’t be. We aren’t trying to “sell” you. We really want to help you. At the very least, you’ll learn a little more. If you don’t want our help, no worries. We will part as friends. You see, that is the only way we know how to work with our clients. We always have your best interests first rather than our own.