When borrowing from a traditional lender such as a bank, or even a private equity firm, the lender may require collateral be pledged as part of the terms of the loan.
In addition to real assets, the lenders may require the assignment of a Life insurance policy. The lender is named as beneficiary of a policy. If the borrower passes during the term of the loan, then the lender can collect on the death benefit. This can be accomplished through one of two types of policies. With a credit Life policy, the face amount decreases proportionally as the outstanding balance on the loan is paid down. A traditional level Term Life policy, subject to medical underwriting, can also be utilized. Under this scenario, the premium and death benefit remain constant over the term of the policy and in the event of death, the borrower is only paid an amount equal the outstanding loan balance while another beneficiary would be paid the balance of the death benefit.
Permanent Life Insurance that builds cash value can also be used with a collateral assignment of either the equity or the death benefit depending upon the terms of the loan.
Your team of trusted business professionals no doubt includes a lender, a tax professional, and an attorney. Make sure that team also includes a trusted risk manager that specializes in business asset preservation as well as Life and Disability coverage protecting your most valuable asset; You!