The Use of 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 fol-
lowing 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.
Xow, 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 cur-
rent rate of interest and without tangible collateral if only
assurances can be given that the loan will be repaid. Know-
ing 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 antici-
pated interest charges, and then assign the policy to the cred-
itor; 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 assign-
ment.
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 hie
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 in-
surance proceeds the amount still owing and refund the bal-
ance 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 borrow-
ing 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 advantage-
ously 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 illus-
tration, the contingency of early death must be provided
against, since in that event the last loans are apt to be unse-
cured. 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.


Related posts:
The Use of Life Insurance as a Means of Enhancing the Credit of Business Enterprises During Times of Financial Stringency.