If we are taking an assignment of life insurance, does the life insurance policy have to be in effect before they sign our agreement? As long as they are acknowledging that they will provide it the same day of the loan closing, we should be fine, right?

Absolutely, as long as they provide at closing you are fine.

So their policy doesn't have to be in effect yet at the time of loan closing? Our customer is still working on getting their life insurance in place. They have signed the agreement that they will provide it.

Good luck, what if they are not insurable? Was life insurance a condition of the loan? The premiums would have had to be treated as a finance charge if this loan was subject to Regulation Z.

If you are requiring that the borrower purchase a life insurance policy as condition of the loan I would want a policy in place the day of closing or earlier.

If you dont have it in place at closing, and the borrower turns out to be un-insurable (as rcarey states) it leaves you with "calling the loan" or being less secure. You are at the borrowers mercy.

rcarey is correct about the finance charge too. If the bank requires the particular services for which the consumer is charged it generally falls under the definition of a finance charge. I know that Reg Z addresses "credit life" specifically, but I was not sure about an ordinary life insurance policy. However, it makes sense that if it's a condition of the loan that it would be a finance charge.