Introduction to Finance

Life Insurance Loans 
Whole life insurance—sometimes called permanent life 
insurance—provides a death benefi t to a benefi ciary when the policyholder passes away. 
But during the person’s life, they pay life insurance premiums on a regular basis to keep 
the policy in force (similar to the case of a car insurance policy). But with permanent life 
insurance, part of the premium goes into a “savings” account and is invested over time; 
should the person live into retirement this cash value of the policy can be used to help pay 
their living expenses. During one’s life, this cash value can be tapped for making loans or 
for security on a loan.
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Small businesses frequently obtain needed short-term bank loans by pledging the cash 
surrender value, or the amount they will receive on cancellation, of the owner’s life insurance 
policies. The policies must be assignable, and many insurance companies insist their own 
assignment forms be used for such purposes. Because of the safety aff orded the bank by the 
cash surrender values, these loans usually carry a lower interest rate than loans on other types 
of business collateral. Another reason for the favorable rates is the borrower could borrow 
directly from the insurance company. Even so, bank interest rates are many times higher than 
those of insurance companies to their policyholders. As a result, the number of these loans 
made by insurance companies has increased.
Co-maker Loans 
Many small businesses must provide the bank with a guarantor, in the 
form of a cosigner, to their notes. The cosigner is expected to have a credit rating at least as 
satisfactory as, and usually far better than, the fi rm requesting the loan.
LEARNING ACTIVITY
Have you visited http://www.ebay.com to look for items of interest? Do a search for 
items that may comprise excess inventory. Another business oriented site is http://www.