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Preparing security/collateral for bank loan (7): Life Assurance Policy

By Emeka Anaeto

OUR last discussion on this topic was centered on use of stocks and shares as security for a business loan. We noted that stocks/ shares are basically financial assets that could be valued and determined to match with the value of the loan you are seeking in a bank.

Similarly, in today’s discuss we present life assurance policy as another type of financial asset that qualifies as security for a business loan from a bank.

A life assurance policy (which also represents an investment contract), is a contract whereby the insurer (insurance company), in consideration of a certain premium payable monthly or annually undertakes to pay to the beneficiary of the policy or the holder a lump sum at the terminal date predetermined or annually upon the death of the life assured.

This policy (contract) can be pledged for loan under conditions and terms that do not undermine the existing assurance policy contract.

Specifically, the borrower who should be the policy holder can assign the benefits thereof subject to fulfilled premium obligations. In other words the outstanding premium obligations do not count for the purpose of determining the loan amount and repayment obligations.

This means that the value of the insurance contract pledged for loan is determined by the total premium already paid.

In most cases banks discount the terminal benefits from the total value of the insurance policy for the purposes of determining the worth of the policy as a security for the loan amount.

In the life time of the loan the borrower may continue to pay the outstanding premium to the insurance company but they would not be credited to the bank loan account.

On the other hand the insurance company would request for a tripartite indemnity clause to be signed amongst the three parties (the bank, the borrower and the insurance company) to secure the insurance company against any liability that may arise as a result of, probably, a loss suffered by the borrower/ insured in the loan contract.

This means that in the event the borrower/ insured fails to repay the bank loan he would have lost his premium and all accruable benefits to the bank without any recourse to the contract he had with the insurance company which had earlier assured those benefits.

But if the borrower repaid the loan the original life assurance policy/ contract is almost automatically restored with the full benefits.



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