So your lender wants you to use a collateral assignment of life insurance in order to get a loan? This is not uncommon at all for small business owners who are looking to gain access to additional (or start-up) capital for their growing business.
A collateral assignment of life insurance sounds like a mean pile of paperwork, but it is actually very simple.
Don’t let the big words scare you; usually there is just one or two additional pieces of paperwork needed in order to assign your life insurance death benefit. But, of course, you have to have some life insurance in place to assign.
Read more below to find out the simplest way to get life insurance to satisfy loan requirements, ways you can expedite the process and have it completed in no time, and even how to do it to be beneficial for your family in the long run such as an option of decreasing term life insurance. There are also many other options such as having a million dollar insurance policy.
Collateral Assignment of Life Insurance
When you go to get a loan for your business, the lender may have asked you to collaterally assign your life insurance policy to them to satisfy the loan requirements. Why is this important and how does it affect your policy?
Collateral Assignment–the assignor (or owner) transfers an asset until the assignee (or lender) receives full repayment
In order to protect itself from undue risk, the lender is adding security to the loan by making sure an untimely death won’t be the reason a loan can’t be repaid. If a businesses profitability and solvency is completely dependent on you, your death creates this risk. If your business could run without you and the bank could still reasonably expect to be repaid, it may not be required.
If you would like impaired risk life insurance coverage, we can help.
In order to perform the collateral assignment of life insurance correctly, you’ll have to first have an in force policy. This means you not only have been approved for life insurance, but you’ve made (or are making) payments. The policy must be active and up-to-date on the key person for the loan, usually called the assignor.
When your policy is active, you can contact the insurance company or your agent to request the assignment paperwork. You will need to fill it out with your information, as well as have your lender complete its portion before returning it to the insurance company. Most of the time, a collateral assignment of life insurance must then be approved by the home office of the insurance carrier.
After approval, the lender may now proceed with its loan acceptance knowing it will not retain the risk of your passing. Because of the collateral assignment of life insurance, the lender now has confirmation from the insurance company that it will be first in line to the access of the death benefit of your policy. If there is a remainder, it will go to your named beneficiaries.
Need It In a Hurry?
Often times, we receive calls from business owners who have a quickly arriving closing date. If this is the case, you may be on a time crunch to get a policy active before you can request the assignment.
The typical life insurance policy takes anywhere from 4-6 weeks from start to finish. Obviously, you may not have the luxury of waiting around for the insurance carrier to make its decision or you’ll miss the opportunity to close on time.
In this scenario, a no exam life insurance policy would be a recommendation. Not only is no exam required, but the underwriting requirements and health questions can be simplified. This results in a much faster policy, sometimes in as little as a couple days. Do understand that these policies may cost slightly more per thousand, but the speed is unmatched.
There is a significant disadvantage to no exam plans that you should be aware of when you’re shopping for life insurance coverage. With a no exam life insurance policy, you’re going to be limited on how much insurance that you can buy without taking those health tests. Most insurance companies are only going to sell you around $250,000 worth of coverage. For most collateral requirements, this isn’t going to be enough insurance.
TIP: If you buy a policy with much more death benefit than the loan requires, your designated beneficiaries get the difference. In other words, you can plan for your family and your business simultaneously!
How Much Life Insurance You Should Buy?
When you’re shopping for life insurance to satisfy a loan, it’s important that you’re considering more than just the loan itself. If something tragic were to happen to you, then your family would be left with some additional expenses as well, aside from your business loan. Not having enough life insurance coverage is one of the worst mistakes that you can make for your loved ones. There are several different categories that you should account for when you’re calculating your life insurance needs.
The first number that you should look at is your debts and other expenses. The purpose of this life insurance exam is to satisfy the requirements from the loan, but that isn’t the only debts that you have. You should also look at your mortgage loan, car payments, student loans, and any other bills that your family would be responsible for if something tragic were to happen to you. Everything that’s left over after the loan is paid off will go to your family.
The next number that you should add to the equation is your annual income. The secondary goal of your life insurance is to give your family the money that they need to replace your paycheck if something tragic were to happen to you. If you’re one of the main sources of income in your home, your loved ones may struggle without that stream of funds. That’s where your life insurance comes in. It gives them the money that they need to get through the difficult time without sacrificing their standard of living.
Another factor that you’ll need to consider is any funeral expenses or final bills that your family would be responsible for. The average funeral can cost around $10,000 which is a large bill for your grieving family to cover. That’s not to mention some of the other bills that they may run into, like mover’s fees or other random expenses.
Getting Affordable Life Insurance
If you’re looking to get life insurance to secure a loan, you may be worried about the cost of your life insurance plan, but don’t worry, they are more affordable than you may think. There are several ways that you can get lower premiums and keep more money in your pockets.
The first thing that you should do is slow down on your way to work in the morning. When you apply for life insurance, the company is going to pull your driving records. If you have several speeding tickets or accidents on your records, then you’re going to be considered much of a risk to the insurance company. They are going to offset that risk by charging you higher premiums. If you want to save money, lay off the gas pedal.
One of the best ways to get lower rates is to cut out any cigarettes. If you’re a smoker, you can expect to pay a lot more for your life insurance, regardless of why you’re purchasing the insurance plan. Smokers are at a high risk of being diagnosed with health problems like cancer or a heart attack, which makes them a much greater risk for life insurance. The insurance company is going to offset all of that risk by charging them drastically higher premiums. In fact, smokers pay at least twice as much for coverage versus what a non-smoker is going to pay for the same sized plan.
The best way to ensure that you’ve got the most affordable life insurance policy is by comparing dozens of companies quotes before you decide which one is going to work best for you and your family. Every company is different, and all of them have different medical underwriting, which means that you’ll get drastically varying rates based on your application. Instead of wasting hours and hours on the phone calling all of those companies yourself, let one of our independent insurance brokers do all of the hard work for you. Unlike a traditional agent, we work with some of the best companies on the market, and we can bring all of the best insurance policies directly to you.
If you need to complete a collateral assignment of life insurance for a loan, like a small business (SBA) loan, contact us. We’ll help you find the best coverage as quickly as possible.