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.
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.
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!
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.