Banks and other money lenders typically require a life insurance policy as collateral for a loan. In fact, most lenders won't release the funds until a life insurance policy is firmly in place. This is where a collateral assignment form comes into play. It allows the policyholder to assign a portion of the death benefit to a lender as security for a loan, ensuring the lender gets paid first if the insured passes away before the loan is repaid.
But here's the important part of the process. The insured, who is generally the owner of the policy, retains control of the policy and names their own personal beneficiary, like a spouse or family member. The collateral assignment form, which is not submitted to the life insurance carrier until the policy is placed in force, assures that the lender is indemnified only to the extent that their interest may appear - in other words, what they are owed - and any remaining death benefit reverts to the personally named beneficiary once the loan is settled. As the loan is paid down, more of the “net” life insurance proceeds would be paid to the personally named beneficiary if the insured were to die. Once the loan is fully repaid, the assignment is removed, and the beneficiary of the policy would be entitled to the full policy proceeds.
This is a win-win situation - the client secures funding while maintaining life insurance protection. Understanding this process allows you to better serve your clients who may need to leverage a life insurance policy for financial purposes.
Pro-Tip: In many cases, clients don’t realize that it can take time to obtain a life insurance policy and won’t mention the need until the end of the loan process. Life insurance ends up holding up the loan distribution. If you are aware of a client applying for a loan (for example, an SBA loan), ask if a life insurance policy will be needed and if so, start the process early.
