CFS Dental Division
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Dedicated Expertise: Industry leader in dental specific financial and insurance options.
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Dental Dummies Digest
Everything is done for you to buy that practice, you have been approved by the bank, the lease has been signed, and the bank is ready to disburse the loan so you can be a practice owner! There is just one issue, they need you to collaterally assign them a life insurance policy. Now usually no one ever explains what this actually means and what you should do. Should you assign your personal policy to them? Do you need to get a new one? There are many different options and while no one will stop you from doing either of them, there are different considerations to be made when making that decision. What is a Collateral Assignment? When getting a loan for a dental practice, the bank will almost always require the borrower to assign to them a life insurance policy that will cover the amount of the loan for the term of the loan. It basically means that if the borrower were to pass away during the loan term, the bank still gets the money they were owed, and the loan is paid off by that life insurance. If that is a requirement from your bank, then there is no getting around having to assign the policy to them with the help of your agent. Should I Assign My Current Policy or Get Another One? The first point we always help our clients to make is that personal life insurance is just that, personal! It is almost always in someone’s best interests to separate church and state in a sense when thinking about their own finance’s vs the finances of their business. If you already have a personal life insurance policy, that’s great! That policy is meant for your family and next of kin if you pass away. However, while the prospect of having to get life insurance again may not be what you were hoping for, the flip side is that if you were to assign that policy to the bank and then pass away, your family will most likely not get the payout they were planning to live on. Reason is, because the bank will need to satisfy their loan, and that is exactly what is avoided with the concept of separating business vs personal finances and getting a second policy! What Does Getting a Second Policy Entail? It’s fairly simple since it is the exact same process as the first! Starting with figuring out the term and amount of the loan, getting a quote, filling out the application and then getting the policy! Term life insurance tends to be very cost effective for most people when it comes to the amount and terms one needs for the collateral assignment. So, it is almost never an issue with budgeting or cost as well! There is also the added benefit, because it is exclusively tied to the loan, if you pay it off early you can always cancel the policy since it wouldn’t be needed anymore. Along with that, since the bank is not the beneficiary of the policy, but the assignee is, there is still a beneficiary as well (still usually your family or next of kin). So, if the worst still does come to pass and the practice is paid 50% off, then the bank still gets what is owed to them. But then the beneficiary may get something that they weren’t expecting during a hard time too. I hope that helps all the new practice owners out there! We at CFS Dental Division are always here to help and work in your best interest to figure out what is going to not just be best for you now, but in the future as well! Written by: TJ Stanton
There will come a time in your life where you will be introduced to life insurance. It may be from a salesman, a letter in the mail, or your workplace may offer it to you. You might ask, what is the point of life insurance and why do I need it? Life insurance is a financial safety net for your loved ones in the tragic event of your passing. Likewise, a loan may require life insurance as well. There are two main life insurance policies, term life insurance and whole life insurance. They both serve the same core purpose; however, they differ in structure, cost, and benefits. Term Life Insurance Term life insurance provides you with coverage for a set amount of time. Most term life insurance policies are set between 10-to-30-year terms. This means that you are covered by life insurance during that timeframe. For example, a 30-year-old obtaining a 20-year term life insurance policy is covered until they reach age 50. Once they reach age 50, the policy no longer covers them and their family unless renewed or converted. The main highlight of term life insurance is the affordability. Term life insurance uses a fixed payment throughout the duration of the term length. The younger a person is when purchasing a policy, the more cost effective the rate will be. When purchasing life insurance, be sure that your policy has the word ‘renewable’ or ‘convertible’ included. Those types of term life insurance policies guarantee that you will be able to continue your life insurance coverage either as another term policy, or as a whole life policy. Renewable or convertible policies also do not usually require a new medical exam as well. The downsides of a term policy are fairly straight forward. Term policies only offer death benefits and nothing further. This can dissuade some as they may see term policies as paying the premium just in case something bad happens. Also, once a term policy matures, your premiums will adjust. This means that after a term ends, it may become more expensive than before to renew your term. There will be a reason to purchase term insurance, and that reason should outweigh the limiting factors of a term life insurance policy. Whole Life Insurance The other aforementioned life insurance is a whole life insurance policy. Whole life insurance offers coverage for the entirety of a person's life or once a person reaches 100 years old. The main feature of whole life insurance, outside of the death benefit, is the cash value that the policy can hold which grows tax deferred. As stated, whole life policies have a cash value element to them that a term policy does not. On top of the death benefits, whole life policies have a minimum interest rate that grows the cash value along with your premium payments. On top of this, you do not pay taxes on the cash value growth while the policy remains in place. A whole life policy can be seen as an investment vehicle for those that have maxed all their retirement options and wish to have another way to invest their money. Whole life insurance policies offer everything a term policy does, but with a cash value and lifelong protection. While whole life insurance policies offer a lot, they may not be great for everyone. Whole life policies are more expensive than term policies since you are paying extra because of the cash value. A person that is more attracted to a lower price tag could opt for a term policy instead. Whole life policies can also be hard to understand. The complexity of the cash value growth and when taxes finally come into effect make it harder to judge how much of that cash value is actually liquid. If you have a lower income, or your retirement options are not maxed out, then a whole life may not be the best choice for you. Which Type Is Right For You By this point, you may be favoring one type over the other but pause and think of your current situation. Do you have a family? Do you make enough to cover a premium for multiple years? Are my retirement accounts at capacity? Buying life insurance is not a rash decision as it is a policy you hold for at least a decade. If you are young, budget-conscious, or are concerned with protecting your family, then term life insurance is better for you. It offers a lower premium given your current age and gives coverage for the set amount of time that you specify. If you are nearing retirement but are still working and you are looking for another way to invest, then whole life insurance can be the better choice. Insurance as a whole depends on your current situation in order to meet you where you are. It is best to make an educated decision, rather than pay for an expensive one for years to come. Written by: Nate Young