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Using Term Life Insurance to Secure Medical or Dental Practice Financing

April 20, 2015

Banks and creditors consider many factors when deciding whether or not to extend credit to a business. In the case of medical and dental practices, creditors have a special interest in the physical well-being of the borrower. The success of a practice rides on the talent, effort and experience of one person, the physician or dentist, and the creditor’s ability to recoup the loan is dependent on the health and well-being of that one person. Creditors must have a guarantee that funds will be repaid should the physician or dentist pass away. This is why many banks require term life insurance, naming the bank as the beneficiary, in order to secure a business loan.

What is Term Life Insurance?
Term life insurance is a death benefit for a predetermined term and dollar amount. After the term expires, coverage is no longer guaranteed and the client will either have to obtain further coverage or waive coverage completely.

How Does it Work?
When securing a business loan, the amount of the term life insurance should match the value of the loan. For example, a physician wants to secure a loan in the amount of $100,000 to purchase new equipment. The loan must be paid back with interest over a ten year period. A bank or creditor may require the physician to purchase a term life insurance policy with the same terms ($100,000, covering a ten year period) naming the creditor as the beneficiary.

Why is it Necessary?
Banks and creditors extend credit with the intention that the loan will be repaid in full.  Without any form of guarantee, banks and creditors open themselves up to significant risk and could suffer a dramatic loss if a borrower passes away before the full repayment of the loan.  By requiring the borrower to purchase term life insurance, the bank is covered in the event the borrower passes away before the loan is repaid.

While much of the focus of term life insurance is directed toward the bank’s interest in the borrower’s well-being, it is also important to note that these policies benefit the borrower as well. If the owner of a dental practice suddenly passes away, their surviving family may be responsible for repaying the balance of the loan. A term life insurance policy relieves the borrower’s family of any responsibility for repaying the loan.

What is the Cost?
Term life insurance is one of the least expensive types of life insurance. When compared to the amount of money that is being loaned out by the creditor, the cost of term life insurance is relatively inexpensive.
In an on-going effort to simplify the lending process, some banks and lenders bundle the cost of the life insurance policy with the loan itself. The cost is effectively treated as accrued interest over the term of the loan.

In all likelihood, a borrower will outlive the term of their bank loan, but it’s not a guarantee. When seeking financing for a medical or dental practice, the borrower may be required to purchase a term life insurance policy in order to secure the loan. This insurance policy guarantees that the bank will recoup its loan in the event the borrower passes away before the full balance is repaid.

This is especially important for medical and dental practitioners. These individuals are the driving force behind the business’ success and if they unexpectedly pass away before their debt is repaid, the creditor must have collateral to fall back on. Term life insurance protects the creditor, but it also benefits the family of the borrower, relieving them of the responsibility to repay the loan.

Contact a commercial lender at Peoples Bank to learn how life insurance can help secure financing for your medical or dental practice.