Collateral Assignment of a Life Insurance Policy
Situation: Typically, this monthly publication focuses on technical life insurance concept information. 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.
Solution: Often, when trying to get a loan a lender will require life insurance. Many lenders require life insurance to secure a loan simply because it ensures they can collect if the person taking out the loan passes away. While this subject comes up with some frequency, I’m surprised at how many lenders and financial advisors are not familiar with the arrangement. So, we will start with an example of how adding a collateral assignment on a life insurance policy to secure a loan works.
Example: Mr. Business Owner went to his local bank to get a 10-year loan for $400,000 to fund the expansion of his successful business. As part of the loan arrangement the bank required that he make it the “beneficiary” of a $400,000 life insurance policy. The business was a second generation closely held operation that employed 10 people in addition to the owner. One employee was a longtime friend of the owner, who was “in charge” of the operation, and another was the owner’s college age child who worked in the business during the summer. The owner netted $105,000 after expenses.
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