Using Life Insurance Coverage to Handle Business Debt

When a business owner is faced with a good deal of debt, it can make them feel overwhelmed. Just as a personal debt load can make a person uncomfortable or stressed, a business debt load can do the same. Business debt can be especially difficult to deal with, however, if it is seriously impacting the income generated from that business. If more revenue goes to debt than to the business's operations or to the business owner as income, it can pose very serious problems.

If the business is the main source of an individual's income, if not the sole source, it can be serious enough to make a person contemplate filing bankruptcy. It could make them face the very real need to close the business, too. But, for a person who is reliant on the business to survive, this is not the most practical solution. If there is a family this person needs to support, they may think that the only safe option for them is to borrow the money available on their life insurance policy.

Using Life Insurance as Intended

Life insurance should be viewed as something that is in place to provide for the beneficiaries of that policy, rather than the policy holder. If you were to borrow the money from your policy to wipe out business debt, it might provide temporary relief. But, if there were other problems such as poor risk management which caused the problematic business debt in the first place, this move would not necessarily keep this sort of debt from growing again.

What is worse, the benefits in the policy intended for your beneficiary would be diminished until you pay back the loan on the policy. If you do not pay the loan back before your policy benefits are needed, you would have essentially taken money from the person who was to originally benefit from the policy. If it really would help to pay the bills which cannot be handled in another manner and it would help keep you from having to close the business, it might be a step that must be done in order to protect your beneficiary's immediate welfare.

Otherwise, you would want to consider doing this. You want to consider whether or not your spouse or child should be made to pay for the debt you and your business incurred. Also, since the policy would require you to take a loan against the cash portion available you would still have the same sum to pay back as you owed the business creditors.

If you are in the position of making use of term life insurance benefits in the wake of a partner's death to pay business debts that is a much different scenario. As the beneficiary, you would be able to do whatever is necessary with the life insurance benefits received after filing a claim after that person's death. You would be able to pay for a funeral and, depending upon how much debt exists and how much money is left over from the policy, you could pay off business debts as you see fit.

For a husband and wife who worked as partners in business together, there probably would have been enough anticipation about expenses or debts on the business that when they purchased their life insurance policy they bought plenty of coverage to ensure the surviving spouse would not be burdened with business debt. Using life insurance coverage to handle business debt is possible. But, it should be done after careful thought and consideration for the impact doing this may have on the beneficiaries.

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