If the insured person passes away with outstanding debts, and the beneficiary of the policy is his/her estate, creditors can attempt to get life insurance money to repay those debts. If the beneficiary is a person, the person is safe from the insured person's creditors, unless the beneficiary is a co-signer to the deceased's debts.
Business Development Officer, T.D. McNeil Insurance Services, Fresno, California
I life insurance policy is a contract that operates outside of probate. Debtors present obligations to probate. The only way that life insurance proceeds would be used to satisfy debtors is when the beneficiary has died or the beneficiary was the estate. There are ways that a debtor can secure their debt with life insurance and many do that. Mortgage companies cannot secure debt with a life insurance policy, their recourse is the residence.
President, The Firm of Steven H. Kobrin, LUTCF, 6-05 Saddle River Rd #103, Fair Lawn, NJ 07410
I’ll tell you one way they can: by making them the beneficiary on your policy.
It’s a common mistake, and it can be costly.
When men and women go into business for themselves, they often take out a bank loan to jumpstart the enterprise. Many lending institutions require life insurance to be in force on the borrower. They simply do not want to have to chase the heirs or estate custodians in case their client unfortunately dies before the loan is paid up.
The question is, how can you arrange for them to get only the amount that is due on the loan at the time of death? You may take out $1 million loan initially, but seven years down the road you may owe only $750,000. How do you prevent them from getting the entire million dollars of benefit?
One very effective way of accomplishing this is through the use of a collateral assignment. As soon as the policy is put into force, the owner signs an agreement signing over the benefit to the lender. But, the agreement is careful to stipulate that only the outstanding amount of the loan would be payable.
This is how it would work: the estate of the insured files a claim. The insurance carrier sees from their file that a collateral assignment has been executed. They then contact the lender for proof of the outstanding amount. Once that proof is provided, they are sent a check. The beneficiary gets the rest.
The lender gets only what they are due, as they should. But I think you can see the trouble that could be caused if you made the lender the beneficiary. They would get the entire amount of the benefit even if they are not owed that much!
The collateral assignment is a neat little tool that is not complicated and can be executed in a day. But it goes along way towards securing your life insurance benefit for both your creditors and your beneficiaries.
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It’s a common mistake, and it can be costly.
When men and women go into business for themselves, they often take out a bank loan to jumpstart the enterprise. Many lending institutions require life insurance to be in force on the borrower. They simply do not want to have to chase the heirs or estate custodians in case their client unfortunately dies before the loan is paid up.
The question is, how can you arrange for them to get only the amount that is due on the loan at the time of death? You may take out $1 million loan initially, but seven years down the road you may owe only $750,000. How do you prevent them from getting the entire million dollars of benefit?
One very effective way of accomplishing this is through the use of a collateral assignment. As soon as the policy is put into force, the owner signs an agreement signing over the benefit to the lender. But, the agreement is careful to stipulate that only the outstanding amount of the loan would be payable.
This is how it would work: the estate of the insured files a claim. The insurance carrier sees from their file that a collateral assignment has been executed. They then contact the lender for proof of the outstanding amount. Once that proof is provided, they are sent a check. The beneficiary gets the rest.
The lender gets only what they are due, as they should. But I think you can see the trouble that could be caused if you made the lender the beneficiary. They would get the entire amount of the benefit even if they are not owed that much!
The collateral assignment is a neat little tool that is not complicated and can be executed in a day. But it goes along way towards securing your life insurance benefit for both your creditors and your beneficiaries.