Life Insurance as a Means of Borrowing Without Collateral

Thus far it has been shown that life insurance may be the means of strengthening and safeguarding the credit of a business whose tangible collateral might be adversely affected by the death of those who are the brains and the life-blood of the concern. But life insurance policies may also be used for effecting loans by persons who possess no tangible security whatever but who are trusted by the lenders because of their well-known integrity. The usefulness of life insurance in this important respect has been too little appreciated. Thousands upon thousands of young men fritter away the best years of their lives and fail to take advantage of the finest opportunities simply because they are laboring under the assumption that they are handicapped in doing what they would like to do because they do not actually possess the necessary capital.

The serviceability of life insurance in helping such young men to realize their ambition may be illustrated by the following example: A young man desires to obtain a college education, yet he himself does not possess the necessary means nor can his parents, owing to their moderate circumstances, assist him, much as they would like. His best interests require that he should take the course of study as soon as possible and pursue it consecutively and without interruption, but this he feels he cannot do. Assuming that this young man is determined to get the education, he will see that one of two courses is open to him. He may first earn the necessary money, but this course is likely to consume some of his best years, and will defer the time of graduation and his entrance into his chosen vocation. Or, he may, as the saying is, "earn his way through college", but in doing this he is serving two-masters, to the detriment of himself. He is in college for the express purpose of preparing himself for his lifework, yet he must give much time and energy that should be devoted to study, to the performance of work in which he has no other interest than the earning of necessary funds. Clearly, it is to the interest of this young man to borrow money, if that is possible, so as to enable him to give all his time to the mastery of his studies, and upon their completion, promptly to begin his vocation with a view to repaying the loan as soon as possible.

Now, as is frequently the case, this young man has some relative or friend who is interested in his welfare, and who can be induced to advance the necessary amount at the current rate of interest and without tangible collateral if only assurances can be given that the loan will be repaid. Knowing the young man's reliability, the lender feels certain that the loan with interest will be repaid in due course of time, but he cannot afford to gamble with the contingency of death, because he knows that should the borrower be removed by an untimely death the loan would never be repaid. This uncertain element in the transaction may be obviated in one of two ways. Either the young man may insure his life for an amount sufficient to cover the principal of the loan, any premiums that the creditor might have to pay, and all anticipated interest charges, and then assign the policy to the creditor; or, the creditor may if he so desires, take out a policy on the life of the debtor. Usually it is best for the debtor to take out the insurance and protect the creditor with an assignment.

Moreover, if the debtor finds it necessary he may arrange to have the creditor pay the premiums and consider these as a part of the loan, Now if the borrower completes his course and continues to live he will repay the loan with interest and at that time the assigned policy will revert to him and may then be used for family or business protection. Should the borrower die, however, before he has had time to repay all of the loan, the creditor will retain out of the insurance proceeds the amount still owing and refund the balance to the person or persons designated as beneficiaries by the insured.

Numerous other illustrations may be mentioned to show the value of life insurance as a means of making possible borrowing without collateral. It may serve as a means of enabling a young man to obtain the initial supply of capital to start in business. It may enhance the value of an indorsement or any other obligation when the indorser or debtor is not the possessor of marketable collateral. It may also advantageously be used in that large number of instances where a man already established in business may need more credit for its proper development but where the banker feels that the business, standing by itself, does not warrant the making of a new loan. To the banker the man at the head of the business is a very important asset, and he may feel that while the business itself does not warrant another loan, the business plus the man who manages it would justify the extension of further credit. Here, however, just as in the previous illustration, the contingency of early death must be provided against, since in that event the last loans are apt to be unsecured. In other words a life insurance policy in favor of the creditor is a hedge against the contingency of the loss of the value of the human life upon which the repayment of the loan is primarily dependent.