Collateral assignment of life insurance

Definition

A policy on the buyer, assigned to the lender until the loan is repaid.

Why It Matters

SBA rules require it on a standard 7(a) that is not fully secured where the business depends on one person, which in a company this size is usually you. The policy is yours and so is the premium; what the assignment does is put the lender first in line for the death benefit, up to the balance outstanding. Two things are worth settling early. The amount the rules require is the collateral shortfall, the part of the loan its collateral does not cover, though a lender's own policy may ask for more. The timing matters too, because underwriting a policy takes weeks and is a common reason a closing slips.

In numbers: A $3.6M loan backed by $2M of collateral has a $1.6M shortfall, so the policy assigned is written for $1.6M and not for the loan, and the buyer pays its premium.