Can Creditors Get Life Insurance Money? 
Ill tell you one way they can : by making them the beneficiary on your policy . Its a common mistake , and it can be costly . When men and women go into business for themselves , they often take out a bank loan to jumpstart the enterprise . Many lending institutions require life insurance to be in force on the borrower . They simply do not want to have to chase the heirs or estate custodians in case their client unfortunately dies before the loan is paid up . The question is , how can you arrange for them to get only the amount that is due on the loan at the time of death ? You may take out $ 1 million loan initially , but seven years down the road you may owe only $ 750,000 . How do you prevent them from getting the entire million dollars of benefit ? One very effective way of accomplishing this is through the use of a collateral assignment . As soon as the policy is put into force , the owner signs an agreement signing over the benefit to the lender . But , the agreement is careful to stipulate that only the outstanding amount of the loan would be payable . This is how it would work : the estate of the insured files a claim . The insurance carrier sees from their file that a collateral assignment has been executed . They then contact the lender for proof of the outstanding amount . Once that proof is provided , they are sent a check . The beneficiary gets the rest . The lender gets only what they are due , as they should . But I think you can see the trouble that could be caused if you made the lender the beneficiary . They would get the entire amount of the benefit even if they are not owed that much ! The collateral assignment is a neat little tool that is not complicated and can be executed in a day . But it goes along way towards securing your life insurance benefit for both your creditors and your beneficiaries . 