Term vs. Perm for Business Owners

For business owners, liquidity is everything. The ability to access capital quickly, without disrupting operations or exposing personal assets, is often what separates a good opportunity from a missed one. While most business owners’ default to lines of credit or bank financing to fund their ventures, a properly structured life insurance policy offers a compelling and often overlooked alternative that accomplishes many of the same goals.

Whole Life – A Unique Asset

While most individuals tend to focus on term insurance, when structured properly, whole life insurance creates a truly unique asset. It provides tax-free policy loans, requires no lender approval, and does not impact the owner’s credit score. This individually owned policy also sits outside of the business, and in most states is shielded from creditors of the business.

When a policy loan is taken, some mutual carriers available through SPG Life & Annuity use non-direct recognition of loans, meaning dividends continue to be credited on the full cash value as if no loan exists. This provides a consistent accumulation method even while capital is deployed elsewhere. Not all carriers handle loan recognition the same way, so the policy design and carrier selection matter.

The safety of the underlying carrier is important. Some of the highly rated mutual companies available through SPG Life & Annuity carry Comdex scores at or near 100 and have paid dividends to participating policyholders every year for well over a century. While past dividend performance does not guarantee future results, this track record reflects the financial discipline inherent in the mutual company structure.

Why Not Term, IUL, or VUL

Term insurance is the most affordable mortality coverage, but it builds no cash value. For a business owner seeking an alternative capital reserve, term does not accomplish that goal.

Indexed universal life (IUL) does build cash value, but its accumulation pattern introduces variability that can work against the business owner who needs predictable access to capital. In years where the index credit is zero, ongoing policy charges still erode cash value — there is no offsetting dividend credit as there would be in a participating whole life contract. Over time, a string of zero-credit years can meaningfully reduce the policy’s effectiveness as a borrowing vehicle. The floor protects against market losses, but it does not protect against the cost drag of a flat-credit environment.

Variable universal life (VUL) offers the greatest upside accumulation potential through direct equity exposure, and for a younger business owner with a multi-decade time horizon, that growth potential is real. However, VUL also introduces downside market risk to the existing cash value — the same capital the owner would be borrowing against. For the specific use case this article addresses — a reliable, predictable capital reserve — that volatility works against the planning objective. Where the goal is maximum long-term accumulation and the owner can tolerate interim fluctuation, VUL may have a role, but it is a different conversation.

The Federal Reserve’s 2026 Report on Employer Firms, based on a 2025 survey of 6,525 businesses nationwide, reinforces the point: only 42% of firms applying for financing received the full amount requested. Another 36% received a partial amount, and 22% were denied entirely — meaning 58% of business owners who applied for credit came up short. (3) 

Whole life insurance does not replace an existing banking relationship — it reduces dependence on one.

For a business owner who relies on credit facilities, personally owning a participating whole life policy diversifies that liquidity risk – it provides access to capital through a channel that is independent of the banking relationship, the business’s credit profile, and the broader lending environment.

Case Study – Real Estate Entrepreneur

Take Joe Smith. Joe is a real estate entrepreneur who routinely borrows $250,000 to $500,000 from a private lender to acquire properties, renovate, and resell. In 2023, Joe had difficulty securing financing during the post-SVB credit tightening, and today he occasionally finds that the full amount he needs is not available. When that happens, he bridges the gap by liquidating securities or drawing down savings — both of which carry tax consequences and disrupt his broader financial plan.

Had Joe begun funding a participating whole life policy five to seven years earlier, he would have accumulated meaningful cash value against which to borrow. That policy loan would be tax-free, would require no lender approval, would not appear on his credit report, and would not trigger a taxable event the way liquidating securities would. And with a non-direct recognition carrier, the cash value continues to receive dividend credits as if no loan were outstanding.

A fair analysis also requires acknowledging the cost. Policy loans carry interest – typically in the range of 5-6% annually on whole life contracts. That rate should be compared against the business owner’s alternative borrowing cost. In today’s environment, where commercial credit lines may carry comparable or higher rates with more restrictive terms, the policy loan can be competitive, particularly when factoring in the speed of access, absence of approval friction, and continued dividend crediting. But the loan is not free, and the advisor should model the cost comparison for the client.

What if Joe sells a property and wants to make a larger contribution? Whole life base premiums are fixed, but this is addressed at policy design by including a paid-up additions (PUA) rider from inception. The PUA rider increases the policy’s total death benefit corridor, which in turn establishes a higher premium threshold under the IRC §7702A seven-pay test — the statutory limit that determines whether the contract qualifies as life insurance or becomes a modified endowment contract (MEC). With the PUA rider in place, Joe has a window each year to contribute above the base premium without jeopardizing the policy’s tax-advantaged status. This design flexibility is built into the policy from day one; it is not something that can be added after the fact to accommodate an unexpected windfall.

This planning approach, designed around Joe’s specific circumstances, reduced the liquidity and concentration risk in his financial plan by creating a capital source independent of the banking system. For business owners broadly, the question is not whether to carry life insurance – most already do in the form of term. The question is whether that coverage is also working as a planning tool. When properly structured, whole life insurance does both.

References

(1) Publicly available carrier financial reports and dividend announcements; Comdex composite ratings via Vital Financial.

(2) As Banks Tighten Credit, Alternative Financing Provides New Funding Options | eCapital

(3) 2026 Report on Employer Firms: Findings from the 2025 Small Business Credit Survey