When your clients are looking for a way to secure a loan, a life insurance policy may be the best bet. In some cases, your client may be required to purchase life insurance to secure their loan. There is a right way and a wrong way to use life insurance with a loan.
Why give money to a bank that is not owed to them?
Your clients are essentially doing that if they name a bank as a beneficiary on a life insurance policy because of a loan. If your client were to pass away and had named a bank as beneficiary on their policy, even if they had paid off any portion of their loan, the bank would still receive the full benefit amount from the insurance company. Don’t let this happen. Banks only require a collateral assignment of a life insurance policy.
What is a Collateral Assignment?
A collateral assignment of life insurance is an agreement appointing a lender with the right to receive the amount of the outstanding loan first. The balance of the benefit would then go to the named beneficiary on the life insurance policy. Here is an example:
Joe and Sue are buying a new home and the bank requires they have a life insurance policy assigned to the bank as collateral. They decide to purchase the life insurance on Joe who is a healthy, non-tobacco using 40-year-old. The loan is for $250,000 so they purchase a term life insurance policy for that amount on Joe for 30 years.
20 years have now gone by. Joe and Sue have been making their mortgage payments diligently. Their outstanding loan is now $119,700. Unexpectedly, Joe is in an auto accident and passes away. Because they had an assignment to the bank, the outstanding amount, $119,700, goes directly to the bank to pay off the mortgage leaving Sue with a home that is paid off. The balance of the $250,000 life insurance benefit, $130,300, is disbursed to Sue and will help her pay any additional expenses.
When can I assign a life insurance policy?
Some lenders will consider using an existing life insurance policy for an assignment. Others may say you must have a new policy. Either way, using life insurance for a collateral assignment is a fairly common practice that every insurance company can handle. Here are the steps:
- Secure a loan
- If required, apply for a life insurance policy.
- Once the life insurance policy is placed in force, a collateral assignment form from the life insurance carrier is completed and submitted to the carrier to assign a portion of the benefit to the bank or financial institution.
Helping your clients protect their mortgage is as easy as 1, 2, 3. Now with Accelerated Underwriting, your clients can purchase up to $500,000 of coverage without a medical exam as well, making it even easier to provide the benefits your clients need. You don’t have to be the expert; we are here to help. Simply give us a call at 800.747.4445.