Understanding Collateral Life Insurance

Collateral Term Life Insurance is a policy appointing a lender as the primary beneficiary of a death benefit to use as collateral for a loan. If the borrower is unable to pay because of an unexpected situation, the lender can cash in the life insurance policy and recover what is owed.

You might consider covering your business loans with a  life insurance policy. This is referred to as Collateral Life Insurance, or Business Life Insurance.

Getting financing for your business can be difficult. Banks want to make sure you’re worth the risk. Imagine how they will feel if you’re unexpectedly out of the picture.

Collateral Life Insurance can provide coverage of your business debts in the case something happens to you. There are two purposes for this type of life insurance:

Life insurance coverage may be a condition of the loan. Lenders recognize that business owners are usually the driving force behind generating income for the company and that the loss of an owner may cause them difficulty in recouping their loan.

Even when life insurance is not required by the lender they may still require your personal guarantee as the business owner. In the event of the death of the owner, the lender may demand repayment requiring substantial liquidation of business assets. Because the loan is often personally guaranteed, the bank may go after the deceased’s estate. Life insurance coverage for the loan can ensure that your business and estate remain untouched by creditors.

Can you tax deduct your life insurance premiums for business loans?

Deducting your life insurance premiums is generally not allowed by the CRA in Canada. There is however a specific set of four conditions under which your business may deduct a portion of the life insurance premiums:

1. The lender requires the insurance in writing. A verbal request is insufficient.
2. The loan interest would be considered tax deductible.
3. The policy is assigned to the lender.
4. The lender must be a restricted financial institution.

As these are Canada Revenue Agency requirements for tax deductions you should consult with your business accountant to determine whether your business loan life insurance meets these criteria.

Types of Business Loan Life Insurance

Term life insurance would normally be used, with the term corresponding to the duration of the loan. If the loan is to be paid off over 5-10 years, then a 10-year term policy would often be your least expensive solution. If the loan is revolving or ongoing, longer term options may be more appropriate.

With the amount and type determined, it’s simply a matter of running a life insurance survey to short-list several possible companies and then to work with a professional insurance broker to decide on the best option. Make sure to work with an independent broker so that your choices are not limited to one company.

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