Collateral Assignment of Life Insurance: When Your Bank Wants Your Life Insurance

Loan application… check. New business plan… check. Updated financial reports verified by your CPA … check. You’ve collected and submitted all the documents and requirements your bank has asked for and now it’s time to collect the cash and get to work. Or, so you think.

Today’s tight lending environment has seen a new trend emerge in business lending. Many banks now require life insurance coverage on borrowers, and possibly on guarantors as well. It’s a sensible form of collateral and protection for the bank and is not a new practice at all. In fact, it used to be common for lenders to require life insurance coverage on borrowers. However, it was also a huge hassle for the borrower. After all, years ago you couldn’t just run out and buy life insurance in a day.

But you can now.

Simplified Issue Term Life Insurance

Enter Simplified Issue Term Life Insurance, also known as No-Medical Exam term life insurance. It’s exactly what the name says it is and it comes in various forms, as life insurance companies scramble to get new products to the market. And the reason is obvious. Life insurance shoppers are buying it. Lots of it.

Simplified Issue Term offers the following benefits:

• No Medical Exam. Standard term life insurance requires a brief paramedical exam. While this is usually not a big deal to most people, it can be for people that are in a hurry or have a needle phobia.

• No Paper Application. The application is typically completed online or by telephone, with either an electronic or voice signature at the end.

• Reduced Wait Time. The entire process, from application to approval to payment, can be completed in as little as 15 minutes! Some applications can take a bit longer, up to 7-10 days. Compare that to regular term life insurance which has an average process time of 3-4 weeks.

Too Good to be True?

So what’s the catch? There isn’t one, but there can be some disadvantages, depending on your circumstances:

• Limited Coverage Amount. The highest amount currently available with any one life insurance company is $500,000. However, it is possible to ‘stack’ policies by purchasing from two or more companies. You just need to make sure you disclose all of your pending applications to each insurer.

• Cost. While not always more expensive, it is in many cases. This is the tradeoff for getting a limited medical review by the life insurance company.

• You May Not Qualify. The medical and background questions you must answer may disqualify you for simplified issue term. This does not necessarily mean you will be declined entirely. Based on your answers, you may be required to apply for regular term life insurance.

So, now you have a brand new term life insurance policy, and you’re ready to hand it over to your loan officer. All finished, right? Not yet. You will also need to complete the assignment paperwork to make the lender a beneficiary on your policy. This assignment establishes the lender as policy beneficiary for an amount equal to the payoff of the loan. Any additional proceeds from the policy after the lender has been paid will be paid to the beneficiary(s) of your choice.

If you are in the market for a business or personal loan, be sure to ask the lender if a life insurance policy as collateral will be necessary. The best thing you can do is shop for a policy early, just in case you can’t qualify for a simplified issue term life policy and you need to go the traditional route.

Case Studies: Collateral Assignment of Life Insurance

Case Study 1: Small Business Loan

John, a small business owner, applied for a loan to expand his business. The bank required collateral to secure the loan, and John decided to assign his life insurance policy with a coverage amount of $250,000 as collateral.

By doing so, he provided the bank with the assurance that the loan would be repaid even in the event of his untimely death.

Case Study 2: Personal Loan

Lisa needed funds for a personal matter and applied for a loan at her bank. The bank requested collateral, and Lisa assigned her life insurance policy with a coverage amount of $100,000 as security. This collateral assignment gave the bank confidence that the loan would be repaid, ensuring financial protection for both parties involved.

Case Study 3: Real Estate Investment

David planned to invest in real estate and sought a loan from his bank. To secure the loan, he assigned his life insurance policy with a coverage amount of $500,000 as collateral. This collateral assignment provided the bank with assurance that the loan would be protected and allowed David to pursue his investment goals.

Your life insurance quotes are always free.

 Secured with SHA-256 Encryption