Life Insurance as Loan Collateral

Loans are crucial to the expansion and growth of small businesses. Whether your business is acquiring funds from a local bank or a private lender, many of these institutions will require life insurance on the business owner(s) as security for the loan.

In most cases, inexpensive term life insurance policies that offer guaranteed level rates for the duration of the loan can be purchased to satisfy this requirement. When buying life insurance to secure a loan, the company pays the premiums, owns the policy and is the named beneficiary.

As soon as the key man insurance policy is effective, a collateral assignment agreement can be signed by the business owner and the bank. The collateral assignment is a lien against the policy proceeds. In the event of the business owner’s death, the bank would have first rights to the policy proceeds in the amount of any outstanding loan balance due. The business would then receive any remaining proceeds.

Key Man Insurance for Business Owners

With many small businesses the key man or key employee in the business is the business owner. In these cases, key man life insurance can be purchased on the life of the business owner to protect the company in the event that he/she unexpectedly passes away.

With key man life insurance, the business owns the insurance policy and pays the premiums and is also the beneficiary. If the business owner dies, the business receives the policy proceeds and can use the funds to hire a capable replacement, pay off debts or simply use the funds to buy time until the businesses assets can be liquidated and the business can be closed. In any event, key man life insurance on the business owner can provide much needed stability if there is a sudden and unforeseen death.