Many businesses need to acquire a bank loan collateralized by the full value of their assets just to survive. A classic Canadian example is the farmer who often mortgages his or her entire farm, including collateralizing the machinery just to operate on borrowed money year by year, to be paid back from slimming profit margins. Because the property values are high, some farmers can carry debt from one to five million dollars or higher. If the farm is near a town and the loan gets called, where the farmer cannot arrange other financing, the bank now has recourse to sell a huge property to home developers (or other farmers) to redeem the debt. And banks following their established rules, may ask a business-owner to collateralize a loan, not just with business assets, and land, but with personally owned assets as well, along with the wife's co-owned assets, even if the business is incorporated. Add to that, a possible collateralization of any assets of a son or daughter (and spouses), who also share in ownership. This is particularly true of small business owners who can't rely on capital infusion from the markets. They can lose their shirts if they default on a loan. If you own a business, avoid being held a financial hostage by the lending institution or forced into liquidation.

While you slave away on the farm, or in the business, the bank might end up owning your entire net worth—moving you into increased financial dependence the older you get.

What if an owner dies?
If a business owner who has a good relationship with the bank were to die, chances are the bank may call the loan. The likelihood of this increases, if the heir of the small business, or partner, is not in favour with the bank manager. Where the loan equals or exceeds the value of the business assets and/or personal assets, the prospect is not favourable.

You can solve this to a degree in a family business such as a farm, by insuring the oldest owners and succeeding generations using joint-first-to-die policies or individual policies. Where there are non-family businesses, each owner/partner should be insured to cover debt. When the life insured dies, the tax-free life insurance proceeds can be used to pay back loans, and essentially win back ownership and discharge any liens of personally owned assets.

What if there is a Critical Illness?
Also, for the same reason, consider purchasing a Critical Illness Insurance policy on each of the principal business owners and key persons. This product can take care of up to $2 million of the bank debt if one were to experience a major illness such as heart attack or stroke. One could end up being incapacitated, and may need to be bought out by a partner or an heir (there should be a buy-sell agreement in place). The risk of a loan being called increases when an owner-manager is sick and the bank manager loses confidence in the stabilizing influence of that owner.