Collateral Assignment

A life insurance contract can be assigned to a lender as collateral for a commercial loan. Collateral life insurance can require a change to make the lender the beneficiary for the amount of the outstanding loan. The lender then has priority over

  • any other assignee
  • a revocable beneficiary

Most provincial Insurance Acts require that the insurer be notified of the assignment in writing.

Note: the insurer is not a party to the collateral assignment. Only the borrower (the policyowner) and the lender are bound by the terms.

[another source]

  • when policy assigned to a financial institution as security for an investment loan
  • require a reasonable expectation of profit from investing the loan proceeds
    • so can’t use for personal purposes, e.g., buying a boat
  • the lender owns policy to the extent of the debt (in some ways controls the policy)
    • e.g., if the outstanding loan is $87,000 and the death benefit is $100,000, the remaining $13,000 goes to other beneficiaries
  • policyowner must keep coverage in force by paying premiums
    • insurer usually required to inform lender if policyowner misses a premium payment

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