A collateral assignment of life insurance is a contract that assigns a life insurance policy death benefit to the Lender as collateral for a loan.
In examining whether or not to make a loan to a business, the Lender will evaluate if repayment of a loan will be dependent upon a particular business owner’s active participation in the business. In other words, if the business owner dies, will the business operations be adversely affected and the loan default? The pledge of the policy, or death benefit, works as a “security” to ensure that the Lender will be repaid for the loan should the unexpected death of the business owner occur.
The “policy owner” of a life insurance policy can pledge a policy’s death benefits to a Lender, but the insured cannot.
The Lender does not require any particular type of life insurance policy. However, the life insurance policy must be assignable.
What are some acceptable types of life insurance policies?
Term Insurance: Term insurance is death protection for a “term” of one or more years. Benefits are paid only if the insured dies within
that term of coverage. It has no equity or cash value.
Whole Life or Universal Life Insurance: These forms of insurance are considered permanent insurance and there are numerous variations that enable the insured to custom-design the life insurance to fit their needs, and death benefits are paid when the insured dies.
Second to Die Insurance: This type of policy is meant to insure two people – usually a husband and a wife. The death benefit is not paid until the second person dies.
Group Policy: A group policy is an insurance policy that covers a group of people. It typically covers a group of individuals who are employees of a common employer. Often group policies cannot be collateral assigned. However, in some cases the policy owner can appoint the Lender as an “irrevocable” beneficiary of the policy. Speak with the Loan Officer for more details.
Can an existing life insurance policy be used to satisfy the Lender’s requirements?
An existing life insurance policy can be pledged if the amount of the life insurance policy is sufficient to cover the amount of the loan.