Advanced Underwriting Consultants

Question of the Day – November 23

Ask the Experts!

Here’s the question of the day.

Question: I have a client who is buying a business using installment payments.  The seller wants to be sure of being paid in the event of the client’s premature death.  The client is willing to buy life insurance to cover the seller’s concern, but wants to keep the rest of the death benefit for his family’s needs.  How should I make that happen?

Answer: The simplest way probably is to use a collateral assignment.

A collateral assignment is typically used by a policy owner when a bank or other lender wants to claim part of the death benefit to pay off an existing loan.  It is possible to customize a collateral assignment, although many life insurance companies have standard forms they ask agents to use.

Upon the insured’s death, the collateral assignment usually directs whatever part of the death benefit to the lender is needed to pay the unpaid loan balance.  The rest of the death benefit is paid to the policy owner’s named beneficiary.

In the fact situation described above, the buyer would be the owner and insured under the policy.  The buyer would name a personal beneficiary for the policy, but the death benefit would also be collaterally assigned to the seller.  A copy of the collateral assignment would be filed with the insurance company.

In the event of the buyer’s death, the insurance company would send an amount equal to the loan balance to the seller, in satisfaction of the assignment.  If the loan amount is bigger than the death benefit, the insurance company would simply send the whole death benefit to the seller.  The balance of the death benefit, if any, would be paid to the buyer’s attorney.

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