{"id":4871,"date":"2026-10-25T05:07:00","date_gmt":"2026-10-25T05:07:00","guid":{"rendered":"https:\/\/nrcpas.com\/life-insurance-guides\/key-person-insurance\/key-person-insurance-key-person-insurance-as-loan-collateral\/"},"modified":"2026-10-29T23:23:25","modified_gmt":"2026-10-29T23:23:25","slug":"key-person-insurance-key-person-insurance-as-loan-collateral","status":"publish","type":"page","link":"https:\/\/nrcpas.com\/life-insurance-guides\/key-person-insurance\/key-person-insurance-key-person-insurance-as-loan-collateral\/","title":{"rendered":"Key Person Insurance Collateral Assignment Explained"},"content":{"rendered":"\n
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Key Person Insurance | Miami, Florida<\/p>

How a Key Person Policy Can Serve as Loan Collateral<\/h1>

A collateral assignment ties part of a key person life insurance policy to a business loan. Here is how it works and what to review before you sign.<\/p>

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By Nischay Rawal \u00b7 Published October 25, 2026<\/p>\n\n

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A key person insurance collateral assignment gives a lender a defined claim on a life insurance policy. It secures a loan, so the lender can be repaid if the loan isn’t paid. The rest of the death benefit usually stays with the company. Lender rules vary, so confirm them with your lender before you rely on a policy as collateral.<\/p>\n

What a Collateral Assignment Means in Plain Words<\/h2>\n

A collateral assignment is a security arrangement. The policy owner transfers a defined interest in the life insurance policy to a lender as security for a loan. If the loan isn’t repaid, the lender has a right tied to that loan.<\/p>\n

The policy itself doesn’t change. The insured, the insurer and the policy’s contract still set the framework. The assignment adds the lender’s interest on top of that framework.<\/p>\n

Florida law also sets rules for policy loans. Under Fla. Stat. \u00a7 627.458<\/a>, a life policy with a cash surrender value must include a provision that the insurer will advance money on a proper assignment or pledge. Fla. Stat. \u00a7 627.458<\/a> reads: “The loan value of the policy shall be at least equal to the cash surrender value at the end of the then-current policy year, except that the insurer may deduct, either from such loan value or from the proceeds of the loan, any existing indebtedness not already deducted in determining such cash surrender value, including any interest then accrued but not due, any unpaid balance of the premium for the current policy year, and interest on the loan to the end of the current policy year.” That applies while no premium is in default. The rule doesn’t cover term policies.<\/p>\n

Key person insurance is different from a personal policy. It’s a policy the business owns on a person whose work or death would affect the company. The Insurance Information Institute<\/a> describes it as coverage that compensates a business for financial losses caused by a key employee’s death or disability.<\/p>\n\n

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Not sure what your next step is?<\/h3>

Talk it through with our team — we can walk you through how a situation like yours is usually handled and what your options are.<\/p>

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Who Is the Owner, Insured, Beneficiary and Assignee<\/h2>\n

Four roles decide who signs, who gets paid and who keeps the rest of the benefit. In most key person cases, they look like this.<\/p>\n\n

\n\n\n\n\n\n\n\n
Role<\/th>\nUsually<\/th>\nWhat it means<\/th>\n<\/tr>\n<\/thead>\n
Owner<\/td>\nThe business<\/td>\nPays premiums and controls the policy<\/td>\n<\/tr>\n
Insured<\/td>\nThe key person<\/td>\nThe life the policy covers<\/td>\n<\/tr>\n
Beneficiary<\/td>\nThe business<\/td>\nReceives the death benefit under the policy’s terms<\/td>\n<\/tr>\n
Assignee<\/td>\nThe lender<\/td>\nHolds rights tied to the loan<\/td>\n<\/tr>\n<\/tbody>\n<\/table><\/figure>\n\n

The policy owner signs the assignment. The insurer’s assignment form and its acknowledgment are part of the process. Check both with the insurer before the loan closes.<\/p>\n

Florida adds one more step. Under Fla. Stat. \u00a7 627.404<\/a>, a business can insure its owners, directors, officers, partners and managers, or a key person, if that person gives written consent before the insurance is purchased. For this rule, a ‘key person’ is someone whose position or pay is described in s. 101(j)(2)(A)(ii) of the Internal Revenue Code. Many owners overlook this step. It should happen before the policy is issued.<\/p>\n

How the Loan Amount and the Remaining Death Benefit Are Split<\/h2>\n

A collateral assignment usually covers an amount tied to the loan, not the whole death benefit. The lender’s share is limited to that amount. The remaining death benefit stays with the company as the named beneficiary, under the policy’s terms.<\/p>\n

Here’s a simple way to picture it. Suppose a policy pays a benefit larger than the loan balance. The insurer pays under the policy and the assignment. The lender receives its assigned amount, and the company keeps the rest.<\/p>\n

No general rule sets the exact amount. The assignment documents and the loan agreement set it. Read both before you sign, and ask the lender how it calculates the split.<\/p>\n

Why Lender Requirements Vary and What Lenders Often Review<\/h2>\n

Lender requirements vary by institution, loan type and borrower. Each lender sets its own conditions, so a policy that works for one bank may not satisfy another.<\/p>\n

Lenders often ask about these items:<\/p>\n