Life Insurance Lawyers can inform their clients that a creditor can have an insurable interest in a life insurance policy. There is a caveat. A creditor may designate itself the beneficiary of a policy purchased by it on the life of its debtor, but its insurable interest is limited to the loan balance at the insured’s death; the rest of the policy proceeds belong to the insured’s estate. This is confirmed in the 1968, Texas Supreme Court opinion styled, McAllen State Bank v. Texas Bank & Trust Co.
The bank asserted rights to the life insurance policy as a beneficiary of the proceeds of the policy in this case. The insured had pledged policy proceeds as security for the debt.
The assignment or pledge of a policy as security creates a lien on the proceeds on behalf of the assignee. While some authorities limit the rule, it is generally held that the rights of an assignee under a valid assignment of the policy for security are superior to those of the beneficiary to the extent of the indebtedness secured where the policy provides that insured has the right to change the beneficiary, especially where the beneficiary joins in the assignment; but the beneficiary is entitled to the excess of the proceeds over the amount of the indebtedness secured.
From an every day, practical standpoint it is desirable to hold that an assignee of a policy containing a clause permitting a change of beneficiary and an assignment of the policy secures a right in the proceeds of the policy superior to the rights of the named beneficiary. If an assignee, in the absence of the consent of the beneficiary, does not obtain such right it will be practically impossible for an insured to borrow on a policy in time of need of financial aid in those cases where compliance with the form prescribed in the policy cannot be followed. No bank or individual would be likely to lend on the security of a policy where the right to enforce the reduction of the security to cash would only mature in case the insured outlived the beneficiary.
This Court held that an assignee or pledgee of a policy in which the insured has reserved the right to change the beneficiary has a right to the proceeds of the policy superior to that of a beneficiary.
It is undisputed that the insured owed a valid debt to the bank. a contract of pledge demonstrated by the language of the notes the insured executed. Possession of the insurance policy was held by the bank. It is clear from the language of the notes and from correspondence in evidence that the policy was given to the bank to secure the note and that the bank was to have a lien on the policy for the payment of the debt.