As a business person, one should consider ‘cost of delay’ representing the highest risk, an immediate impact and the future well being of not only yourself, but everyone who’s financially dependent on you, writes Sandi Saksena.
The Central Bank of the UAE has issued unified forms for all types of bank loans. However, an SME in this part of the region still experiences an uphill task while applying for a loan to fund/expand the business. Often, many opt for the personal loan route where the working ‘silent partner’ will take a personal loan because they meet the bank’s stipulated requirements.
Now, as per the directives, banks ask borrowers to ensure all borrowings are covered by a life insurance, or, a disability insurance policy, to guarantee the loan would be paid back as the lender could use its value to regain the rest of its funds.
Recently, a prospect came up with an enquiry about a large life insurance policy immediately amounting US$ 2.5 million. Life insurance immediately, how can that happen? Furthermore, this client was 60-years old. On completing the paperwork, I was forced to ask the reason for such an exhorbitant amount and why so late in life, especially, because he had been in business for more
than 20 years.
He reasoned that the company wanted and SME loan for expansion, however, banks do not want equipments as collateral (as they deemed it difficult to sell and recover in case of default or death), and no succession plan in place. None of the kids had the educational qualifications or any experience related to the business. When questioned that why he had not considered life insurance at a younger age, he responded, “My wife does not like life insurance.”
My responsibility as a consultant was to warn him that the premiums would be very high as per the age requirements, and he would have to undergo a comprehensive medical check-up. Moreover, the chances of him being rated for hypertension, diabetes and any other age related illnesses was extremely high, which would drive up premiums. He agreed and despite being rated, he took the policy because weighing the cost of premiums against the amount of profits the expansion would bring about with the cash injection will still have him in the green, i.e. the premiums were a good ROI.
Another case that sticks with me until date was a prospect who was looking to expand his business and was also facing a cash crunch. I approached him with life insurance for
two reasons: (a) help him get a loan and, (b) ensure that if anything happened to him, then, his family would have funds that could not be accessed by creditors. He was healthy and the cost of the insurance was great.
This dragged on for two years with the usual excuses. Though a year older, so higher premium insurance was still a good deal because of his good health. I urged him to apply, get approved and put a policy in force. On my last scheduled follow up call, I had difficulty understanding him and assumed we had a bad connection, he asked if the last quotes I had sent him were still good as he was ready to sign up. I checked his age and assured him the quotes were good as long as his health was still the same. That’s when I found out that he was just out of the hospital after suffering a massive stroke. He was partially paralysed and required 24 hour care. I was forced to tell him that there was no chance of getting him life insurance. He died 6 months later. Needless to say that his family has no business to take over as they’re fighting a legal battle, and more importantly they’re cash strapped.
All of us have been affected by the cost of waiting, buying or selling a stock or real estate and it has cost us thousands of dirhams. Having been in the business for more than a few years, the differences in the costs can be considerable.
The following are just some of the significant categories of the cost of waiting to buy life insurance and critical illness insurance:
Premium change due to age
This is a given, so no arguments.
Change in health underwriting and rating
A significant factor in the cost of waiting is the change in underwriting and ratings. Here are a few statistics: A 39-year old male will have easier underwriting when applying for life cover of $ 450,000 than a 50-year old applying for just $ 100,000. Similarly, a 29-year old can usually get up to $ 1 million worth of life insurance undergoing the same blood tests and answering the same questions as a 49 year old applying for $ 200,000.
Bottom line: The cost of waiting isn’t just about a higher premium because you’re older. Too often it’s about health changes that can turn a good opportunity for family protection into a nightmare.
You’re healthy and are diagnosed with cancer or diabetes or a fatal car accident.
Is this to scare you into buying life Insurance? On the contrary, a savvy businessperson you should know what makes economic sense, the cost of procrastination and the domino effect. In this part of the world, there are those who admit that that they should be carrying life insurance, but they aren’t. It is surprising to know that these people have done their homework enough to know that life insurance especially term insurance is so inexpensive that almost no one notes it as the reason.