by Philippe Deray • 2020-03-18
When applying for a loan, life insurance is not, usually, the first thing on our mind. After all, we are just borrowing money which already collateralized with hard assets. Why would a lender even need life insurance?
Why do some lenders require life coverage for a loan?
In most situations, I have seen lenders requiring life insurance for business loans. It is very rare that a personal require a life policy. A lender will require a life policy to collateralize the loan to further add security that the loan will be paid off. You may have assets that the lender may have access to on case you default on the loan while you live, but they are do not have the same guarantees once you ide. In some situations, those assets may revert to a third party and the lender may become one the last one to get paid. By requiring that the loan be collateralized with insurance, the lender has a better guarantee that the loan will be paid off in case of your premature death.
Which insurance plans are available to secure a loan?
The lenders main interests are the face amount of the policy and its guarantee period. In other words, if you take out a loan for $500,000 with a 10 year payment schedule, then the lender would likely require that you take out a plan that is at least guaranteed for 10 years with a face amount of $500,000. For that purpose, you can use almost any king of life insurance, term life, whole life, universal life.
Why use no exam life insurance?
In most situations, I have found that lenders do not mention the need for insurance until the last minute, and I mean the last minute. It is not unusually that I would get a call form a business owner who was told by the lender that he or she has three days to secure an insurance policy so that the loan closing can happen on time. Three days is very short and the only type of plans that can usually accomplish that are no exam term insurance plans. Depending on the amount needed, more than one company may be needed as no exam plans tend to have lower face amount limits.
Which no exam life insurance plans is best?
As we mentioned previously, the type of plan you will need depends on your lender's requirements. In most situations, I have found that no exam term life works well. It is rare that a loan last for more than 30 years. The 10 year term plan seems to be the most commonly used. Of course, you can choose to do no exam whole life or universal life but rates are likely to be pretty high.
Another reason, you may to do no exam life insurance, even if you have weeks to get your policy, is your unknown health status. If you have had medical issues then this question does not apply and no exam life may not be an option. If you are healthy tough, you certainly should make sure that you first secure the insurance you need with no exam life insurance and then, if you wish, do an exam plan later. The reason you want to do this is to avoid finding out that you have a health issue you were not aware of during an insurance exam. If that happens, it could really complicate things and you may not be able to qualify for any insurance. In light of that, you may want to consider a new hybrid insurance plan which allows you to get a good amount of no exam life now and take an exam later.
Can anyone get no exam life insurance for a loan?
Unfortunately, the answer to that question is no. Two main factors limit the availability of no exam life, one is health and the other is age. As we mentioned above, if your health is not the best, you will not likely be approved for no exam life. At least, not term life insurance. Also as you get older, the amount available goes down dramatically. The biggest drop happens after the age of 65 where whole life may be the only plans available.
Do I have to stay with no exam life insurance?
Since rates on no exam life tend to price higher than plans that require an exam, it is not uncommon for someone to want to switch to a regular plan that requires an exam. I strongly advise that you do not cancel your present plan until after you have secured a new policy. The advantage of the exam plan is, of course, the potential for substantially lower rates. I say potentially because the final rates is really what matters and you may not qualify for lowest quoted.
Can a no exam life insurance be assigned?
I have yet to find a policy that cannot be assigned to the lender. It is important that you check first with your agent though. If the policy cannot be assigned, it will useless to your purpose of securing your loan.
I hope this article has helped you understand the advantages of no exam life. Please always feel free to ask any questions.