Should Your Bank Be Your Beneficiary?
When looking for life insurance to cover a business loan, many business owners ask if they should name their bank as the beneficiary of their life insurance….It seems like it would make sense, right?
Making the bank your beneficiary may be a huge mistake!
As a business owner, you may have a need to borrow money from your bank. Depending on the amount of your business loan, the bank may require that you obtain a life insurance policy to protect them in the event you die.
If you name your bank as the beneficiary of your life insurance policy, they will receive 100% of the death benefit. While that may be fine if you just took out the loan and your life insurance policy is for the same amount as your loan….but what happens in the future once you have paid off part of your loan?
You may create a nightmare for your beneficiary to recover money that should go to them, not your bank!
Life Insurance Collateral Assignments for Business Loans
A better way to address life insurance for business loans is to complete a collateral assignment with the life insurance company.
What is a Collateral Assignment?
A collateral assignment is a document submitted to the life insurance company that assigns the death benefit to the bank to the extent of the outstanding loan at the time of death. Once a collateral assignment is added to the life insurance policy, it can not be removed unless the bank agrees to the removal of the collateral assignment.
How Do Collateral Assignments on Life Insurance Policies Work?
A collateral assignment secures the bank’s interest by providing the bank with the death benefit up to the extent of your business loan balance.
Life Insurance Collateral Assignment Example:
You borrow $500,000 for your business. One of the bank requirements will probably require that you obtain life insurance in order to protect the bank’s interests. As part of the life insurance, you complete the insurance company’s required collateral assignment forms. The insurance company will complete the collateral assignment paperwork and send a copy of the assignment to the bank. A few years later your business loan balance now stands at $300,000.
If you were to die, the life insurance company would ask the bank to provide information regarding the current loan balance. The insurance company would pay the $300,000 to the bank as the outstanding loan balance. The remaining $200,000 of your life insurance policies would be paid to your beneficiaries as directed when you applied for life insurance.
A final note. Collateral assignments are very common and accepted by banks all the time. At Risk Quoter we’ll help you setup the life insurance you need and work with your banker as needed to complete the process quickly.