Coverage for Loans Coverage for Loans Insurance Concepts

Whenever a person or company borrows money, for whatever reason, they have put themselves into a situation where certain events, beyond their control, can cause the bank to insist that the funds be repaid immediately.

There are 2 specific situations where you can insure against this risk. The borrower either becomes too sick or hurt to be able to continue paying the loan principal and interest, or they die and the loan is either immediately called by the bank, or the debt is passed on to the heirs, or those who are left running the company.

Either situation places a significant burden on those left behind. In many cases, be it a family situation or a corporate one, the burden is the same. They have lost someone who was vital to their lifestyle and wellbeing, and provided cash flow and support. Those same people are now put under additional pressure to meet the debt payments which can be onerous given the new cash flow restraints.

In some cases, the lending institution is unwilling to work with the heirs or remaining owners and demands payment immediately, forcing the sale of the valuable family or corporate assets which may not only impact the remaining values but also cause additional tax burdens.

Disability coverage can be purchased by individuals or companies to cover the ongoing payments to the financial institution. Life insurance can be put into place to make sure loans are repaid at the premature death of the borrower or key person in a company. Insurance can’t prevent sickness, accidents or loss of life. But insurance helps you prepare for all those possibilities..

A portion of the life insurance premium may even be deductible depending on the situation and nature of the loan. As well, for Private Corporations, there is a special benefit to having Corporate owned insurance to cover loans.

Collateral Assignment When the coverage is issued, the lending institution will have demanded a “collateral assignment” of the policy. This gives them the rights to take an amount of the insurance proceeds payable up to the amount of outstanding loan. Upon the death of the insured, the proceeds will go directly to the lender and the loan will be discharged. No money may ever be received by the company, however, the company receives an important benefit, in addition to having the loan being repaid.

Capital Dividend Account The company is allowed to apply a credit to a special account on it’s books called a Capital Dividend Account. Even though the insurance proceeds were not received by the company, the credit is still applied. Capital Dividends can be paid out of a company tax free. Therefore, the company can, using the credit created by the insurance, pay out tax-free dividends to the owners, using company earnings, until the Capital Dividend Account is totally paid out.

This is a benefit that is only available with individual insurance… NOT creditor group coverage sold by financial institutions.

Absolute Assignment The lender may ask for an “Absolute Assignment” of the policy, which means that the lender is a named beneficiary in the insurance contract. Unlike “Collateral Assignment”, there would be NO credit to the Capital Dividend Account allowed in that case. It is important that you understand the difference between the two types of “Assignments.”

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