Collateral Assignments for Loan Indemnification

by Terri Getman, JD, CLU, ChFC, RICP, AEP (Distinguished)

Situation: Typically, this monthly publication focuses on technical life insurance concepts. However, this month we are taking a slightly different direction to describe how a collateral assignment of a life insurance policy can be used to help secure a loan from a bank or other lender. Often, when trying to get a loan, many lenders require life insurance simply because it ensures they can collect if the person taking out the loan passes away before the full loan amount is paid.

While this subject comes up with some frequency, I’m surprised at how many lenders are not familiar with the appropriate arrangement. Compounding the likelihood of missteps during the process is the recent use of electronic accelerated underwriting, which places more reliance on the client communicating the appropriate information during the tele-underwriting process. Unfortunately, it’s common for miscommunications to occur during the application process, resulting in delays which can potentially lead to a reduced face amount being issued. To avoid this outcome, it’s critical for the financial advisor to prepare their client. This Counselor’s Corner is going to discuss some of the most common mistakes and how a financial advisor can proactively help their clients.

Solution: Let’s start with a typical example of a situation which can result in a client requesting coverage to cover a loan.