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Securing a Business Loan with Term Life

As a business owner, you have probably worked long and hard to build a successful company. Yet, even when profit projections look promising and a project is backed by a sound business plan, your banker may be reluctant to lend the funds necessary for expansion, particularly if the success of your venture depends too heavily on you.

Life insurance, an important element in many business arrangements, may help you secure that business loan. Specifically, term life insurance is designed to help minimize financial risk for a predetermined period of time in the event of the insured’s death. With a term policy on your life for the duration of the loan, the bank’s security requirements may be satisfied.

By assigning your policy, you transfer your rights to all, or a portion, of the proceeds to the bank. The extent to which these rights are transferable depends on the assignment provisions in the policy, the intention of the parties as expressed in the assignment form, and the actual circumstances of the assignment. Here are two common types of insurance policy assignments:

  • Absolute assignments. These typically assign every policy right the policyholder possessed prior to the assignment. Once the transaction is complete, the policyholder will have no further financial interest in the policy.
  • Collateral assignments. These are more limited types of transfers. They can protect the lender by using the policy as security for repayment. When the loan is fully repaid, the bank releases its interest in the policy.

Life insurance policies generally can be freely assigned, unless some limitation is specified in the contract. To fully protect the assignee, the insurance company must be notified that the assignment has been made. It is also important to notify the insurer if future assignments are made and/or terminated.

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