Life Insurance - A Solution for Collateral Assignment on a Loan

Life Insurance

Did you know that life insurance can be used as collateral for certain types of loans? I received a call from a client who was required to name a lender on a life insurance policy because he took a loan for his business. The lender wants to ensure that the loan would be paid if the client passed away. A solution to this request is to name the lender as a collateral assignee on a life insurance policy. I asked if he had an existing life insurance policy to place the collateral assignment on without jeopardizing the family’s financial security. He told me he did not want to add the collateral assignment on his existing policies.

He had borrowed $500,000 from the lender with a 10 year payback period. Since he was a 50 year old male, non-smoker in exceptional health, we determined that he could apply for a 10 year term life insurance policy at a preferred plus rate class with a coverage amount of $500,000 for a monthly premium of $48.00.

I explained that he could name the lender as a collateral assignee when the insurance carrier approved the new policy. I recommended naming primary and secondary beneficiaries on the policy, as the insurance carrier will pay the collateral assignee the amount of the outstanding loan balance. Should there be any excess death benefit, it would be payable to the primary and secondary beneficiaries.

Term life insurance is an excellent solution when a collateral assignment is required. The term period can coincide with the required period of the collateral assignment. The policy owner can choose to either terminate when the collateral assignment is released or continue the policy for family protection.

It is important to get a release of assignment from the lender when the loan is repaid. You will need to submit the release to the insurance carrier to avoid delays in payments of death proceeds to named beneficiaries.

About the author: Ken Buccico holds a LUTC designation and has been in the life insurance business for 39 years. His wealth of experience empowers clients to make best possible decision regarding a life insurance policy. To explore the best  life insurance option, contact Ken at 1-800-651-1953 or