Riscario

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
  • which makes a portion of the life insurance premium tax deductible
• 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