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In this post, I will discuss how lenders require the collateral assignment of life insurance to issue many business loans and how you can get this done if one is asking you to take out a policy for this purpose.
What is collateral assignment life insurance and what does it cover?
Before many lenders provide business loans to borrowers, they want to know they will be paid back should the borrower dies while the loan is outstanding.
The collateral assignment of a life insurance policy names the lender as the collateral assignee should the borrower pass away with an outstanding loan balance.
The collateral assignment is put in place with a simple “collateral assignment form” filled out, providing the lender with a lien on the death benefit of the life insurance policy (a “collateral assignment”) so that the death benefit can be used as collateral to pay off any outstanding loan balance.
Any death benefit amount that exceeds the loan balance amount is paid to the policy owner’s named beneficiary.
This means the lender won’t profit from the death of the borrower. Instead, they just are guaranteed to get their money back, and the beneficiaries receive the remaining death benefit.
How much does life insurance cost if it is used as collateral assignment?
It doesn’t cost any additional money to use a life insurance policy for collateral assignment. Instead, to know how much life insurance costs, it is important to know the answer to a few questions:
What kind of life insurance policy will be used?
Generally, any life insurance policy can be used as collateral assignment life insurance. This includes whole life insurance policies, term life insurance policies, and even universal life insurance policies.
Generally speaking, term life insurance, which is considered “pure insurance,” requires the least amount of premium for the greatest amount of death benefit. The shorter the “term” of the policy, the lower the cost as well.
For example, a policy that lasts 10 years will cost less than a policy that will last 20 years. Therefore, it is important to know how long you want the policy to stay in force.
On the other hand, whole life and universal life insurance policies require more premiums but could be leveraged for other business needs in the future when the collateral assignment is not required.
How much death benefit protection is needed to fulfill the collateral assignment?
The amount of death benefit coverage will often need to be, at the very least, equal to both the outstanding loan balance plus any interest that has accrued. The lender will want to be sure they are paid in full should the borrower die while the loan is still outstanding.
If you want to ensure you have additional life insurance health benefit protection for other needs, this will need to be added to the policy.
We have a free term life insurance quote tool you can use which also has a life insurance calculator to help you determine how much coverage you need.
You can find the quote tool and the calculator here: life insurance needs calculator
What is the best insurance company to buy a collateral assignment policy from?
Many good insurance companies sell collateral assignment life insurance policies because, as mentioned earlier, a policy like this is either a term or permanent life insurance policy with the death benefit assigned with a collateral assignment form.
The most important factors to know about any life insurance company you are thinking of using are:
1) Is the life insurance company you use admitted to offering coverage in your state?
2) Is the life insurance company financially strong so that they can pay a claim?
There are hundreds of life insurance companies available to buy life insurance from that can do collateral assignments. There is no need to try and save money buying from a poorly rated company or one that is not licensed to do business in your state. In the long run, this would just hurt you and could force the lender to “call the loan,” which would mean it would become due IMMEDIATELY!
How does collateral assignment life insurance protect borrowers in the event of death or disability?
Collateral Assignment life insurance protects both a borrower and a lender in the event of the borrower’s death. In the event of the borrower’s death, the lender uses the life insurance death benefit as collateral to satisfy the loan balance.
However, if the borrower becomes disabled and loses their ability to work, a potential policy owner will want to know if the policy they are applying for has either a disability income benefit or “critical illness” benefit that will allow for an accelerated payout of the death benefit should the insured become disabled or suffers a hearth attack, stroke or cancer.
Other life insurance policies have benefits for “accidental dismemberment” should the insured have an accident and lose a hand, foot, leg, arm, or eye.
Speak to an agent at Decision Tree Financial if this is a concern. Many times, these additional disability benefits don’t require much additional premium for the coverage.
What is an example of collateral assignment life insurance?
An example of collateral assignment life insurance would be if an individual took out a $100,000 loan from their local bank. The bank may require the borrower to take out a life insurance policy with them as the beneficiary and name the bank as the collateral assignee. This way, should the borrower die while there is still an outstanding balance on the loan, the bank would be paid back the $100,000 from the death benefit of the life insurance policy. The remaining funds from the death benefit would then be paid to the named beneficiaries on the policy.
If you have any questions about collateral assignment life insurance or would like more information, please contact us at Decision Tree Financial. We are always happy to help.
Why is collateral assignment life insurance important for borrowers to have in place?
If a lender requires life insurance to be in place before a loan is issued, collateral assignment life insurance is important for the borrower to have in place because the loan will likely be rejected if it isn’t. Once a borrower has a collateral assignment policy in force, it will also be important for them to keep paying the premium, or else the policy will lapse.
If a life insurance policy with collateral assignment lapses, it could result in the loan being called due and payable immediately, which could put the borrower in a difficult financial situation. Remember, with collateral assignment life insurance in place, the loan will be paid off in full if the borrower dies before the loan is repaid, ensuring that the lender does not lose out on any money.
For this reason, borrowers must take out this type of life insurance when taking out a loan.
How does collateral assignment life insurance pay off a loan?
If the borrower dies while there is still an outstanding balance on the loan, the death benefit from the collateral assignment life insurance policy will be used to pay off the loan in full. The death benefit is paid directly to the lender, so there is no need for the borrower’s family to worry about repaying the loan.
This type of life insurance policy gives peace of mind to both the borrower and the lender, as it ensures that the loan will be repaid even if the borrower dies before it is fully repaid.
What are some things to remember when taking out collateral assignment life insurance?
When taking out collateral assignment life insurance, it is important to remember that the policy will only pay out to the lender if the borrower dies while there is still an outstanding balance on the loan. If the loan is paid off before the borrower dies, the death benefit from the life insurance policy will be paid to the policy owner’s named beneficiary.
If there aren’t any named beneficiaries when the insured dies and there isn’t any balance on the loan, then the death benefit proceeds will be paid to the policy owner’s estate.
Can anybody get a life insurance policy to use as a collateral assignment?
Medical conditions or lifestyle choices that are considered high-risk may not be eligible for traditional life insurance coverage. In these cases, a collateral assignment life insurance policy may still be available, but it will likely come with a higher premium due to the increased risk.
It’s important to shop around and compare different life insurance quotes before selecting one to apply for.
At Decision Tree Financial, we are here to help you understand your options and find the best life insurance policy for your needs. Contact us today to learn more about collateral assignment life insurance and how it can benefit you
How can borrowers get a quote for collateral assignment life insurance coverage?
When you need to borrow money, but a lender requires you to have insurance to assign as collateral, you will likely want to find the lowest cost insurance to fill this need.
Decision Tree Financial makes it easy to get quotes for collateral assignment life insurance on this site. All you have to do is click here.
You will be taken to our free simple use life insurance quote tool, where you will be able to put in the amount of life insurance your lender requires you to hold for the loan you are applying for and receive quotes from up to 35 carriers who provide coverage in your state.
When you are ready to buy or have questions about what type of life insurance policy is right for your collateral assignment needs, we are here to help and look forward to serving you.
