What is Life Insurance Assignment?
The Short Answer
Life Insurance Assignment explained simply
When you assign your life insurance policy, you give the lender rights to the death benefit. This means if you pass away before the loan is repaid, the lender gets paid directly from the policy. It’s a way for lenders to reduce their risk when giving out loans, especially for small businesses where the owner’s life is key to the business.
Real-World Example
The Bakery Loan Scenario
Imagine Sarah, a bakery owner, needs a $200,000 loan to expand. Her bank asks for collateral. Sarah assigns her $500,000 life insurance policy to the bank. If Sarah dies before repaying the loan, the bank can claim $200,000 from the policy to cover the outstanding debt. The remaining $300,000 would go to her original beneficiaries.
Why this matters
This matters because it can help you get a business loan that you might not otherwise qualify for. It gives lenders extra security, making them more willing to lend money. It also protects your business and family from financial hardship if something unexpected happens to you.
Make sure you understand the terms of the assignment. Know exactly how much of the policy is assigned and what happens if the loan is repaid early. This protects your beneficiaries.
Make sure you understand the terms of the assignment. Know exactly how much of the policy is assigned and what happens if the loan is repaid early. This protects your beneficiaries.
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