Like the majority of car dealers require drivers to have auto insurance before purchasing and driving a new vehicle off the lot, most lenders require business owners to have life insurance before borrowing a high-value loan to open a practice.
Having a life insurance policy in place shows the lender that, should you pass away unexpectedly, the amount of the loan could be paid back.
Read on to learn more about the requirements you may face as an orthodontist and what you can expect should you decide to open your own practice.
Life Insurance and Other Loan Requirements Orthodontists May Face
When securing life insurance to secure a high-value loan, your bank will request to be listed as the assignee of your life insurance policy as collateral for the loan. Below are some terms you may encounter in this process:
A bank assignment or assignee is utilized to list a bank or other financial entity on the policy. An assignee is paid the remaining balance of the loan from the benefit in the event of your death, satisfying the loan requirements.
A beneficiary form is utilized to list a family member, friend, trust or other entity on the policy to receive the benefit, if you were to pass away. Multiple beneficiaries can be listed to receive different portions of the benefit, such as a spouse and children.
Consider this scenario:
After several years of working in a group practice, Michelle has been saving to open her own practice. She still requires a large amount of money for equipment, construction expenses and more, so she looks into securing a $300,000 loan.
Her lender, Ted, says everything is feasible, but that the bank must be listed as an assignee on Michelle’s $500,000 life insurance policy. She lists the bank as the assignee and then lists her partner and daughter as beneficiaries.
A few years later, Michelle passes away unexpectedly. She had paid $100,000 from the loan, owing $200,000. Her life insurance covers the remainder of the loan, leaving her partner and daughter the remainder of the policy.
Types of Life Insurance Required to Secure a Loan
If you are required to secure a loan to purchase or start your practice, the type of life insurance coverage you want may change, depending on the length of the loan term and your age.
For example, if your loan term is 10 years, you may want a 10-year Group Level Term Life insurance policy.
If the loan term is more than 10 years but less than 20 years, you may want a 20-year Group Level Term Life insurance or Term Life Insurance, depending on your age. Term Life is often ideal for younger members, while 20-year Group Level Term Life is often ideal for older members.
Other Suggestions when Purchasing Life Insurance to Secure a Business Loan
There are two life insurance policies available through the AAO-Endorsed Insurance Program—Group Level Term Life Insurance and Group Term Life Insurance.
Group Level Term Life Insurance can be best for longer term needs, as your premium remains constant for the initial 10- or 20-year term.
Group Term Life Insurance may be best for young individuals who wish to cover short-term debts, such as a business loan or mortgage, as coverage is more beneficial early on. Premiums will increase gradually at first and more rapidly as you get older.
If you are purchasing our coverage, please note:
- It may take a few weeks or more to obtain a life insurance policy, so we recommend applying as early as possible.
- Once approved, we will send the assignment form, which requires your name, policy number and the name and address of the bank we are assigning. This form will be signed by you and your Lockton Affinity account manager. We will then save a copy to your file and share the certified copy with your bank.
Support from Lockton Affinity to Purchase Life Insurance to Secure a Business Loan
As administrator of the AAO-Endorsed Insurance Program, Lockton Affinity can help answer all your insurance questions, whether you are purchasing life insurance to secure a business loan or buying business insurance to help protect your practice.
For more information including features, costs, eligibility, limitations and exclusions, visit AAO-Insurance.com.
This marketing material is not intended for the residents of New Mexico with respect to Group Disability Insurance