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Who's Paying the Loan?

Who's Paying the Loan?

| January 14, 2020

What would happen to a loan if a business-owner professional couldn’t produce?

This question reminds me of a young medical professional who found himself in a situation to use his disability income insurance. It wasn’t because of a car wreck (which is what most folks think would be the most likely thing to happen), it wasn’t because of cancer, and it wasn’t because of a stroke. His problem started with an upper respiratory infection – or as some of us call it a cold!

Because of the upper respiratory infection, he stopped by his general practice doctor and was administered as standard protocol an antibiotic along with a steroid shot. Weeks later, he started having difficulty performing the normal work of a medical professional. It wasn’t a big deal, but then it didn’t get better and actually got worse. Over the next few months, after several medical specialists, they linked tendon ruptures as a side effect to one of the medications administered for his respiratory infection.

The financial reality for professional service firms like a dentist, doctor, financial planner, CPA, or attorney is that they are dependent on licensed professionals to produce and generate revenue. Often the producing professionals are the main, if not only, revenue-generating resource to the organization. Therefore, the professional’s physical and mental ability is directly tied to the company’s profitability and, of course, ability to cover expenses, wages, distributions, and… loan payments. Meaning, one of the greatest risks tied to a professional business loan is that the professional owner is not able to produce enough to cover.

So, what happens if the attorney can’t show up to court?

How does a dentist’s office look if a dentist is unable to examine patients?

Who will cover a loan payment if a physician can’t care for their patients?

Did the story about the dentists resonate with you? Probably not for many, because most professionals don’t think about medications or illnesses as taking them away from their practice, but in reality, about 90% of disability income claims are caused by illnesses, and only about 10%(1) are caused by accidents like car wrecks or falling out of ladders.

So, what if beating cancer became your primary focus and work duties became secondary?

What if a stress-induced heart attack meant you scaled back your work?

Would the loan obligation go away?

That’s why whenever you take on obligations like a spouse, child, business, or our subject here, a business loan, it’s wise to re-evaluate your insurance strategy.

What can be done when new loan obligations are taken on by a business?

  • Do nothing.
    • No action is certainly an option. The owner burdens the full impact of risk. Did you know that the leading cause of bankruptcy is health-related?(2)
  • Collateralize a policy.
    • If an existing disability policy is owned by the loan obligor, they can collaterally assign all or part of that benefit to the lender as security for loan payments.
  • Business reducing term.
    • This is a special disability insurance policy built for loan obligations where a business owner can dial in the term and payment amount of the loan so that if injury or illness occurs, it helps cover or covers the business loan payment completely.

The main benefit of the third option is that potential income from other policies aren’t reduced by collateral assignment and remain available for personal lifestyle. The other benefit is that the special policy for loans can be dialed into the exact attributes of the loan and therefore, an efficient means to address the loan obligation.

 

 

 

Sources:

(1) 2014 CDA LongTerm Disability Claims Review, www.disabilitycanhappen.org

(2) https://www.cnbc.com/2019/02/11/this-is-the-real-reason-most-americans-file-for-bankruptcy.html