How the Collateral Assignment Helps Business Owners Control Their Life Insurance Benefit

Growing your business is the name of the game, and bank loans often fuel that growth. When a bank loans you money, it wants to be sure it will get paid back – even if you predecease the loan. So it typically requires life insurance to close the deal.

Using life insurance is good for everybody

This makes sense. Your loan officer doesn’t want to have to chase down your spouse, and force him/her to squeeze money out of your estate to pay the balance due. You certainly don’t want to have to put your grieving partner through that. Life insurance is the way to go to secure that debt, because each dollar of benefit literally cost pennies. It is a much more economically sound strategy than paying off the debt dollar for dollar out of cash, or liquidating LifeInsurance2assets at a potential loss.

Ownership of the policy is key

But who should own the policy? This is where many business owners are tempted to make a serious planning mistake. It may sound simple to make the bank the owner and beneficiary of the policy. This way, the insurance company could just send them a check and settle things once and for all. But here’s the thing: what if you take out a $2 million loan, and owe only $1 million at the time of death? If the bank is the beneficiary, they will get the full $2 million benefit – even though they are due only half that much! Why overpay them? You can still keep things pretty simple, and retain control over the amount paid, by using a collateral assignment.

A collateral assignment keeps you in control

A collateral assignment is simply an amendment to the policy. You get to designate the owner. It could be yourself, your estate, a trust, your business – whatever makes sense, according to your financial plan. You will also get to designate the beneficiary. The assignment is filed to inform the insurance carrier that you have agreed to pay your lender first out of the benefit. When a claim is filed, the carrier will check with the lender and ask them to prove any amount due. They do so and are paid accordingly. Your beneficiary will then get the balance of the benefit. This way all interested parties get what they deserve, and not any more or less. And, if you happen to pay off the loan before any claim is filed, you simply get a letter from your bank to this effect, and instruct the carrier to remove the assignment.

A post-policy issue requirement

A collateral assignment is really the last requirement to be met when you get your coverage. You go through full underwriting, get approved, and pay for the policy. In the meantime, you work with your bank to get the assignment form completed. It could be a form the carrier mandates, or, if they have no preference, the bank should have a template. The completed form should be submitted to the carrier along with all your policy delivery requirements – payment, health forms, amendments, etc. Then, when the policy is put into force, the assignment can be executed. This usually happens on the same day.

Your broker should provide reassurance to your banker

Sometimes, the purchase of life insurance can take a while. This is especially true if the insured has a higher-risk factor, such as a medical condition or adventurous hobby. Your broker has to first prequalify you in order to quote both a competitive and a reliable rate. He then has to advocate on your behalf throughout the underwriting process, to obtain an approval at the rate quoted. In the meantime, both you and your lender can get a little antsy because you want to close the loan, get the money, and supercharge your business. Encourage your broker to reach out to your banker peridocially provide reassurance that progress is being made. This is usually all that is needed for the banker to remain optimistic and interested in doing business with you. Before you know it, the deal will be sealed and you can march on.

Please feel free to comment, or to contact me directly with a specific question. If you need a quote now, or a second opinion on a quote you have received, the best thing to do is to call me toll-free at (866) 633-1818. Or email me at skobrin@stevenkobrin.com. I also encourage you to download my free Life Insurance Guide – see the above tab. Many people have found it to be extremely educational.

 

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