Situation: Financial representative submitted a life insurance application for a $4,000,000 face amount on a business owner seeking coverage for a $4,000,000 business loan. The insured told the advisor that to qualify for the loan, the bank required this policy with the bank named as the beneficiary. The application listed the insured as the policy owner and the bank as the beneficiary. The insured had existing personal coverage of $300,000 and no existing business-owned coverage.
Problem: The carrier’s underwriting department expressed two concerns with the case: First, they carrier wanted to limit the face amount to 80% of the loan or $3,200,000. Second, the carrier did not want the bank as the beneficiary.
Solution: A member of the DBS underwriting team and an advanced case design associate reached out to the advisor. They explained that life insurance is often required to obtain a business loan because it ensures that the lender can collect if the insured passes away. However, they explained that a lender’s insurable interest is limited to the loan advanced, which the carrier assumes will decrease over time. Carriers also typically want a beneficiary structure tied to the decreasing loan amount. DBS suggested that a collateral assignment would provide the most appropriate structure, with the lender named as the assignee and the policy beneficiary the insured’s spouse.
Because of the decreasing loan assumption, carrier guidelines typically limit face amount to between 60-80% of the outstanding loan. However, DBS suggested that it would be possible to get coverage equal to the full loan amount by layering an additional need for insurance, such as survivor income or key person – that determination is dependent on who the insured ultimately wants to benefit. In this case it was the spouse, so DBS constructed a cover letter explaining that the need for coverage included both survivor income and loan liquidation.
Result: As a result of DBS’ recommendation and insight, the carrier issued the policy for the full, requested amount of $4,000,000.