what is collateral assignment

News | Montebello City Council approves 14.5% raises…

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News | Montebello City Council approves 14.5% raises for police over next three years

Includes collateral assignment pay and increase in health insurance contribution.

The new memorandum of understanding runs until June 2027. This year, police officers will receive a 7% salary increase. In July 2025 there will be a 5% increase and a 2.5% increase in 2026.

Police officers’ new salary range is $95,760-$119,592 per year. By 2026, that will increase to $103,128-$128,787, according to a staff report.

“This new agreement reflects how much we value and support our dedicated police officers,” Montebello Mayor Scarlet Peralta said in a statement. “By investing in our police officers’ compensation and benefits, we are honoring their service and ensuring that Montebello continues to attract and retain the best talent in law enforcement.”

In addition to raises, the agreement includes special assignment and collateral pay, education incentive pay, shift differential pay and an increase in the city’s health contribution for two-party and family coverage.

City spokesperson Darrol Hunt said the introduction of collateral assignment pay sets Montebello apart from agreements between similar cities and their police departments. It compensates officers for additional responsibilities, such as serving as range master or honor guard.

“This feature sets the MOU apart by formally acknowledging and compensating these additional duties, which can enhance officer morale and incentivize the development of specialized expertise within the force,” Hunt said in an email.

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What Is a Collateral Assignment of Life Insurance?

Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University.

A collateral assignment of life insurance is a conditional assignment appointing a lender as an assignee of a policy. Essentially, the lender has a claim to some or all of the death benefit until the loan is repaid. The death benefit is used as collateral for a loan.

The advantage to using a collateral assignee over naming the lender as a beneficiary is that you can specify that the lender is only entitled to a certain amount, namely the amount of the outstanding loan. That would allow your beneficiaries still be entitled to any remaining death benefit.

Lenders commonly require that life insurance serve as collateral for a business loan to guarantee repayment if the borrower dies or defaults. They may even require you to get a life insurance policy to be approved for a business loan.

Key Takeaways

• The borrower of a business loan using life insurance as collateral must be the policy owner, who may or may not be the insured.
• The collateral assignment helps you avoid naming a lender as a beneficiary.
• The collateral assignment may be against all or part of the policy's value.
• If any amount of the death benefit remains after the lender is paid, it is distributed to beneficiaries.
• Once the loan is fully repaid, the life insurance policy is no longer used as collateral.

How a Collateral Assignment of Life Insurance Works

Collateral assignments make sure the lender gets paid only what they are due. The borrower must be the owner of the policy, but they do not have to be the insured person. And the policy must remain current for the life of the loan, with the policy owner continuing to pay all premiums . You can use either term or whole life insurance policy as collateral, but the death benefit must meet the lender's terms.

A permanent life insurance policy with a cash value allows the lender access to the cash value to use as loan payment if the borrower defaults. Many lenders don't accept term life insurance policies as collateral because they do not accumulate cash value.

Alternately, the policy owner's access to the cash value is restricted to protect the collateral. If the loan is repaid before the borrower's death, the assignment is removed, and the lender is no longer the beneficiary of the death benefit.

Insurance companies must be notified of the collateral assignment of a policy. However, other than their obligation to meet the terms of the contract, they are not involved in the agreement.

Example of Collateral Assignment of Life Insurance

For example, say you have a business plan for a floral shop and need a $50,000 loan to get started. When you apply for the loan, the bank says you must have collateral in the form of a life insurance policy to back it up. You have a whole life insurance policy with a cash value of $65,000 and a death benefit of $300,000, which the bank accepts as collateral.

So, you then designate the bank as the policy's assignee until you repay the $50,000 loan. That way, the bank can ensure it will be repaid the funds it lent you, even if you died. In this case, because the cash value and death benefit is more than what you owe the lender, your beneficiaries would still inherit money.

Alternatives to Collateral Assignment of Life Insurance

Using a collateral assignment to secure a business loan can help you access the funds you need to start or grow your business. However, you would be at risk of losing your life insurance policy if you defaulted on the loan, meaning your beneficiaries may not receive the money you'd planned for them to inherit.

Consult with a financial advisor to discuss whether a collateral assignment or one of these alternatives may be most appropriate for your financial situation.

Life insurance loan (policy loan) : If you already have a life insurance policy with a cash value, you can likely borrow against it. Policy loans are not taxed and have less stringent requirements such as no credit or income checks. However, this option would not work if you do not already have a permanent life insurance policy because the cash value component takes time to build.

Surrendering your policy : You can also surrender your policy to access any cash value you've built up. However, your beneficiaries would no longer receive a death benefit.

Other loan types : Finally, you can apply for other loans, such as a personal loan, that do not require life insurance as collateral. You could use loans that rely on other types of collateral, such as a home equity loan that uses your home equity.

What Are the Benefits of Collateral Assignment of Life Insurance?

A collateral assignment of a life insurance policy may be required if you need a business loan. Lenders typically require life insurance as collateral for business loans because they guarantee repayment if the borrower dies. A policy with cash value can guarantee repayment if the borrower defaults.

What Kind of Life Insurance Can Be Used for Collateral?

You can typically use any type of life insurance policy as collateral for a business loan, depending on the lender's requirements. A permanent life insurance policy with a cash value allows the lender a source of funds to use if the borrower defaults. Some lenders may not accept term life insurance policies, which have no cash value. The lender will typically require the death benefit be a certain amount, depending on your loan size.

Is Collateral Assignment of Life Insurance Irrevocable?

A collateral assignment of life insurance is irrevocable. So, the policyholder may not use the cash value of a life insurance policy dedicated toward collateral for a loan until that loan has been repaid.

What is the Difference Between an Assignment and a Collateral Assignment?

With an absolute assignment , the entire ownership of the policy would be transferred to the assignee, or the lender. Then, the lender would be entitled to the full death benefit. With a collateral assignment, the lender is only entitled to the balance of the outstanding loan.

The Bottom Line

If you are applying for life insurance to secure your own business loan, remember you do not need to make the lender the beneficiary. Instead you can use a collateral assignment. Consult a financial advisor or insurance broker who can walk you through the process and explain its pros and cons as they apply to your situation.

Progressive. " Collateral Assignment of Life Insurance ."

Fidelity Life. " What Is a Collateral Assignment of a Life Insurance Policy? "

Kansas Legislative Research Department. " Collateral Assignment of Life Insurance Proceeds ."

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What Is Collateral Assignment (of a Life Insurance Policy)?

Meredith Mangan is a senior editor for The Balance, focusing on insurance product reviews. She brings to the job 15 years of experience in finance, media, and financial markets. Prior to her editing career, Meredith was a licensed financial advisor and a licensed insurance agent in accident and health, variable, and life contracts. Meredith also spent five years as the managing editor for Money Crashers.

Definition and Examples of Collateral Assignment

How collateral assignment works, alternatives to collateral assignment.

Kilito Chan / Getty Images

If you assign your life insurance contract as collateral for a loan, you give the lender the right to collect from the policy’s cash value or death benefit in two circumstances. One is if you stop making payments; the other is if you die before the loan is repaid. Securing a loan with life insurance reduces the lender’s risk, which improves your chances of qualifying for the loan.

Before moving forward with a collateral assignment, learn how the process works, how it impacts your policy, and possible alternatives.

Collateral assignment is the practice of using a life insurance policy as collateral for a loan . Collateral is any asset that your lender can take if you default on the loan.

For example, you might apply for a $25,000 loan to start a business. But your lender is unwilling to approve the loan without sufficient collateral. If you have a permanent life insurance policy with a cash value of $40,000 and a death benefit of $300,000, you could use that life insurance policy to collateralize the loan. Via collateral assignment of your policy, you authorize the insurance company to give the lender the amount you owe if you’re unable to keep up with payments (or if you die before repaying the loan).

Lenders have two ways to collect under a collateral assignment arrangement:

• If you die, the lender gets a portion of the death benefit—up to your remaining loan balance.
• With permanent insurance policies, the lender can surrender your life insurance policy in order to access the cash value if you stop making payments.

Lenders are only entitled to the amount you owe, and are not generally named as beneficiaries on the policy. If your cash value or the death benefit exceeds your outstanding loan balance, the remaining money belongs to you or your beneficiaries.

Whenever lenders approve a loan, they can’t be certain that you’ll repay. Your credit history is an indicator, but sometimes lenders want additional security. Plus, surprises happen, and even those with the strongest credit profiles can die unexpectedly.

Assigning a life insurance policy as collateral gives lenders yet another way to secure their interests and can make approval easier for borrowers.

Types of Life Insurance Collateral

Life insurance falls into two broad categories: permanent insurance and term insurance . You can use both types of insurance for a collateral assignment, but lenders may prefer that you use permanent insurance.

• Permanent insurance : Permanent insurance, such as universal and whole life insurance, is lifelong insurance coverage that contains a cash value. If you default on the loan, lenders can surrender your policy and use that cash value to pay down the balance. If you die, the lender has a right to the death benefit, up to the amount you still owe.
• Term insurance : Term insurance provides a death benefit, but coverage is limited to a certain number of years (20 or 30, for example). Since there’s no cash value in these policies, they only protect your lender if you die before the debt is repaid. The duration of a term policy used as collateral needs to be at least as long as your loan term.

A Note on Annuities

You may also be able to use an annuity as collateral for a bank loan. The process is similar to using a life insurance policy, but there is one key difference to be aware of. Any amount assigned as collateral in an annuity is treated as a distribution for tax purposes. In other words, the amount assigned will be taxed as income up to the amount of any gain in the contract, and may be subject to an additional 10% tax if you’re under 59 ½.

A collateral assignment is similar to a lien on your home . Somebody else has a financial interest in your property, but you keep ownership of it.

The Process

To use life insurance as collateral, the lender must be willing to accept a collateral assignment. When that’s the case, the policy owner, or “assignor,” submits a form to the insurance company to establish the arrangement. That form includes information about the lender, or “assignee,” and details about the lender’s and borrower’s rights.

Policy owners generally have control over policies. They may cancel or surrender coverage, change beneficiaries, or assign the contract as collateral. But if the policy has an irrevocable beneficiary, that beneficiary will need to approve any collateral assignment.

State laws typically require you to notify the insurer that you intend to pledge your insurance policy as collateral, and you must do so in writing. In practice, most insurers have specific forms that detail the terms of your assignment.

Some lenders might require you to get a new policy to secure a loan, but others allow you to add a collateral assignment to an existing policy. After submitting your form, it can take 24 to 48 hours for the assignment to go into effect.

Lenders Get Paid First

If you die and the policy pays a death benefit , the lender receives the amount you owe first. Your beneficiaries get any remaining funds once the lender is paid. In other words, your lender takes priority over your beneficiaries when you use this strategy. Be sure to consider the impact on your beneficiaries before you complete a collateral assignment.

After you repay your loan, your lender does not have any right to your life insurance policy, and you can request that the lender release the assignment. Your life insurance company should have a form for that. However, if a lender pays premiums to keep your policy in force, the lender may add those premium payments (plus interest) to your total debt—and collect that extra money.

There may be several other ways for you to get approved for a loan—with or without life insurance:

• Surrender a policy : If you have a cash value life insurance policy that you no longer need, you could potentially surrender the policy and use the cash value. Doing so might prevent the need to borrow, or you might borrow substantially less. However, surrendering a policy ends your coverage, meaning your beneficiaries will not get a death benefit. Also, you’ll likely owe taxes on any gains.
• Borrow from your policy : You may be able to borrow against the cash value in your permanent life insurance policy to get the funds you need. This approach could eliminate the need to work with a traditional lender, and creditworthiness would not be an issue. But borrowing can be risky, as any unpaid loan balance reduces the amount your beneficiaries receive. Plus, over time, deductions for the cost of insurance and compounding loan interest may negate your cash value and the policy could lapse, so it’s critical to monitor.
• Consider other solutions : You may have other options unrelated to a life insurance policy. For example, you could use the equity in your home as collateral for a loan, but you could lose your home in foreclosure if you can’t make the payments. A co-signer could also help you qualify, although the co-signer takes a significant risk by guaranteeing your loan.

Key Takeaways

• Life insurance can help you get approved for a loan when you use a collateral assignment.
• If you die, your lender receives the amount you owe, and your beneficiaries get any remaining death benefit.
• With permanent insurance, your lender can cash out your policy to pay down your loan balance.
• An annuity can be used as collateral for a loan but may not be a good idea because of tax consequences.
• Other strategies can help you get approved without putting your life insurance coverage at risk.

NYSBA. " Life Insurance and Annuity Contracts Within and Without Tax Qualified Retirement Plans and Life Insurance Trusts ." Accessed April 12, 2021.

IRS. " Publication 575 (2020), Pension and Annuity Income ." Accessed April 12, 2021.

Practical Law. " Security Interests: Life Insurance Policies ." Accessed April 12, 2021.

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What Is Collateral Assignment of Life Insurance?

Collateral assignment of life insurance designates a lender as the assignee of a policy, granting them the right to part or all of the death benefit until the loan is repaid.

Nathan Paulus

Director of Content Marketing, MoneyGeek

Nathan Paulus is the Head of Content Marketing at MoneyGeek, with nearly 10 years of experience researching and creating content related to personal finance and financial literacy. Paulus has a bachelor's degree in English from the University of St. Thomas, Houston. He enjoys helping people from all walks of life build stronger financial foundations.

Casie McCoskey

Content Editor

Casie McCoskey is a professional editor passionate about providing people with accessible information on personal finance. Before MoneyGeek, she worked in the legal field, drafting and editing briefs and motions.

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MoneyGeek is dedicated to providing trustworthy information to help you make informed financial decisions. Each article is edited, fact-checked and reviewed by industry professionals to ensure quality and accuracy.

Updated: June 5, 2024

• How It Works
• Overview of Application Process

Pros and Cons

• Impact on Beneficiaries
• Alternatives

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Advertising & Editorial Disclosure

Collateral assignment of life insurance is an arrangement where a policyholder uses the face value of their life insurance policy, which can be a term or permanent life insurance policy, as collateral to secure a loan. If the policyholder dies before they pay off the loan, the lender is prioritized to receive a portion of the death benefit equivalent to the outstanding loan balance. The remaining benefit then goes to the policy's beneficiaries. This agreement ensures that life insurance collateral assignment acts as a safety net for both the lender and the beneficiaries.

• Collateral assignment involves using a life insurance policy as security for a loan, where the lender has a claim on the death benefit if the borrower defaults or passes away before repaying the loan.
• The lender receives priority over the death benefit, which means they are paid first from the policy's payout before any beneficiaries if the loan remains unpaid.
• Various life insurance policies, including term, whole and universal, can be used for collateral assignment, depending on the insurance company's policies and the policy's value.
• If a life insurance policy lapses or is canceled during a collateral assignment, it can breach the loan agreement, potentially resulting in immediate repayment demands.

How Collateral Assignment of Life Insurance Works

The collateral assignment allows you to use your life insurance policy as security for a loan. The process involves legally designating your policy as collateral, which means if you pass away before fully repaying the loan, the lender can claim the death benefit to cover the remaining balance. You start by choosing either a term policy or whole life insurance and then complete a collateral assignment agreement. This agreement is legally binding and sets the terms for the lender to access the death benefit .

For your beneficiaries, the assignment of your life insurance policy as collateral could reduce the death benefit they receive. If you die with an outstanding loan balance, the lender is paid first from the policy's proceeds. Any remaining amount goes to your beneficiaries only after the loan is settled.

For example, a policyholder with a $500,000 policy uses their life insurance as collateral for a $200,000 loan. If the policyholder dies before settling the loan, the lender will receive $200,000 from the policy's death benefit. Meanwhile, the remaining $300,000 gets disbursed to the policy's beneficiaries.

Roles of the Policyholder, Lender and Insurance Provider

Role of the Policyholder

• Ensure consistent premium payments to keep the policy active and in force.
• Inform the lender of any policy changes, such as lapses or surrenders.
• Understand that active management upholds the collateral agreement's integrity.

Role of the Lender

• Accept the life insurance policy as collateral.
• Right to recover owed amounts from the policy's death benefit if the policyholder dies before loan repayment.
• Priority claim on the death benefit, with remaining funds disbursed to beneficiaries.
• Responsible for releasing the assignment after full loan repayment.

Role of the Insurance Provider

• Approve or reject the collateral assignment of the policy.
• Evaluate and ensure compliance with policy terms.
• Officially record the assignment as part of the policy.

Applying for Collateral Assignment

Applying for collateral assignment is a process moderated by your life insurance company designed to secure loans using your life insurance policy as collateral. It involves a series of steps:

Obtain a Collateral Assignment Form

Request a collateral assignment form from your life insurance provider. This form is vital for designating the lender as a collateral beneficiary for the loan amount. Ensure you obtain the correct form, as forms vary based on policy type and insurer.

Fill Out the Form Correctly

Complete the form with accurate details, including policy number, loan amount and lender information. Pay close attention to all sections to avoid errors that could delay or invalidate the assignment. Incomplete or incorrect information can lead to processing delays or rejection.

Sign the Paperwork

Ensure both the policyholder and lender sign the form, confirming the agreement. This dual signature legally binds both parties to the terms of the collateral assignment. Any discrepancy in signatures may question the form's validity.

Submit the Completed Form

Submit the signed form back to the insurance company for processing. Consider using a traceable delivery method for submission to confirm receipt. Delays in submission can impact the timeline of the loan approval process.

Await Approval or Rejection From the Insurance Company

Wait for the insurer to review and approve or reject the collateral assignment. The insurer may request additional information or clarification, which can extend the approval timeline.

Receive a Letter of Acknowledgment

You and your lender will receive a letter of acknowledgment from the insurer if your collateral assignment application is approved.

Obtaining Required Documentation

The required documentation for collateral assignment of life insurance is straightforward. Typically, you'll need to provide two main types of documents for the assignment of a life insurance policy as collateral:

• Collateral Assignment Form: This form is critical because it officially transfers a portion of your life insurance policy benefits to the lender as collateral. It demonstrates to the lender that you have taken the steps to secure your loan against your life insurance policy.
• Original Life Insurance Policy and Proof of Loan: Lenders may require your original life insurance policy to ensure it is valid and enforceable. Proof of the loan agreement or obligation, such as a mortgage note or other loan document, is also commonly required. This establishes the legitimacy of your loan and substantiates the life insurance collateral assignment.

If you need more clarification about documentation requirements, contact your lender to confirm the necessary details to avoid process delays.

Pros and Cons of Collateral Assignment

Using life insurance as collateral can offer a range of benefits and potential drawbacks. Collateral assignment of a policy allows you to secure loans and is often safer than using physical assets as collateral. However, you should also note the inherent risks, primarily that the lender retains the first right to your policy’s death benefit upon your death.

• Lower interest rates on loans.
• Allows you to use the policy and not physical assets as collateral.
• The cash value of your insurance policy continues to grow.
• The lender has the first right to the death benefit.
• Failure to repay the loan can reduce or even eliminate the death benefit.
• Any lapse or cancellation of the policy may lead to violating the loan terms.

Impact of Collateral Assignment on Beneficiaries

While the collateral assignment of life insurance has its benefits, it’s important to remember that it can impact the amount your beneficiaries receive. If you pass away with an outstanding balance on your loan:

Your Lender Will Be Paid First

In the collateral assignment arrangement, the lender is designated as the collateral beneficiary holding the primary claim to the death benefit for the outstanding loan amount. This means if you pass away before fully repaying the loan, the lender is entitled to receive payment from the death benefit first. The amount collected by the lender is limited to the remaining loan balance.

Any Remaining Death Benefit Will Be Disbursed to Your Beneficiaries

After the lender's claim is satisfied, the remaining death benefit is disbursed to your policy’s designated beneficiaries. The amount they receive depends on the loan balance at the time of your death. If the loan balance is substantial, your beneficiaries will receive significantly less than the policy's total death benefit.

This structure underscores the importance of carefully considering life insurance collateral loans and their impact on future financial planning. Policyholders using life insurance as collateral need to understand the terms set forth by loan companies that accept it.

Alternatives to Collateral Assignment

Alternatives to collateral assignment include personal loans , home equity loans or surrendering the life insurance policy for its cash value. None of these options require using life insurance as collateral, and each offers different benefits and risks compared to using life insurance as collateral.

FAQ About Collateral Assignment

These questions cover various topics related to collateral assignments, including their requirements, implications for beneficiaries and what happens in different scenarios.

A collateral assignment is a contractual arrangement in which a borrower uses their life insurance policy as collateral for a loan. This agreement grants the lender rights to the policy’s death benefit. The lender is prioritized over other beneficiaries until the loan is repaid in full.

In the context of a life insurance collateral assignment, the collateral is the policy's death benefit. This setup allows lenders to be listed as collateral beneficiaries, guaranteeing that they can recover the outstanding loan balance from the death benefit in the event of the borrower’s death before the debt is fully paid.

In a life insurance contract, a collateral assignment allocates the policy's death benefit as security for a loan. This means that if the borrower dies before repaying the loan, the lender, as the collateral assignee of the life insurance, can claim the owed amount from the death benefit. The remaining balance, if any, goes to the designated beneficiaries, ensuring the loan is covered without affecting other assets.

Collateral assignment allows a lender to claim the life insurance death benefit for an outstanding loan amount while naming a life insurance beneficiary designated who receives the death benefit. The lender's claim is prioritized over the beneficiaries' in collateral assignment.

Most types of life insurance policies , including term, whole and universal life, can be used for collateral assignment, provided the insurance company allows it and the policy has sufficient value.

Yes, the policyholder can change beneficiaries after a collateral assignment, but the lender's right to the death benefit amount remains until the loan is repaid. This ensures the lender's position as a collateral beneficiary.

Canceling your life insurance policy before repaying the debt can lead to a breach of the collateral assignment loan agreement. This action may prompt the lender to increase your interest rate or demand immediate repayment of the outstanding loan balance.

These related sections offer additional insights into concepts and alternatives connected to collateral assignments and life insurance:

Using Collateral for a Personal Loan — This link explains how to use various types of collateral for securing a personal loan, providing a broader context to the specific use of life insurance as collateral.

Term vs. Permanent Life Insurance — This resource compares term and permanent life insurance, helping to understand which policies can be used for collateral assignments.

Permanent Life Insurance — This page details permanent life insurance, a type commonly used in collateral assignments due to its cash value component.

Life Insurance Calculator — This page helps you calculate the appropriate amount of life insurance coverage needed, which is crucial when considering using a policy for collateral.

About Nathan Paulus

Nathan Paulus is the Head of Content Marketing at MoneyGeek, with nearly 10 years of experience researching and creating content related to personal finance and financial literacy.

Paulus has a bachelor's degree in English from the University of St. Thomas, Houston. He enjoys helping people from all walks of life build stronger financial foundations.

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What is collateral assignment of life insurance?

Life insurance can act as collateral for you to secure a loan. With a collateral assignment, the payout from your insurance goes to pay your loan balance first, and your loved ones will get to keep any remaining money.

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Updated January 3, 2024 | 4 min read

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Collateral assignment of life insurance is an arrangement where you agree to give a lender the first claim to the payout from your life insurance policy. This allows your life insurance to serve as the collateral that many loans — especially small business loans or Small Business Administration (SBA) loans — require before they can lend you money you need. 

In other words, the money from your life insurance payout helps the lender feel confident that they can collect the balance on your loan, even if you die while you’re still making payments. After the loan is paid off, anything left over will go to your loved ones.

How does a collateral assignment work?

Collateral assignment is an additional agreement to your life insurance policy that gives a lender first claim to your life insurance payout, but lets you name beneficiaries who can claim any money left over after the loan is paid. This is different from credit life insurance , which forces you to name your lender as the sole beneficiary of your policy. You can use either a term life or a permanent life insurance policy for collateral assignment.

If you already have a life insurance policy, and the death benefit is worth more than the loan you want to get, you may be able to use it as collateral. In other cases, loan companies that take life insurance as collateral may require you to buy a new policy that covers at least the full amount due. 

Either way, the process of getting a policy is the same. You’ll go through the application and underwriting process, and wait to receive your offer. Then, you’ll complete paperwork to set up a collateral assignment. 

Once you’ve paid off the loan, you’ll get a written release from the lender. The collateral assignment condition on your policy ends, but you can keep the policy active if you choose.

Learn more about how life insurance underwriting works

How do you apply for collateral assignment of life insurance?

There are a few simple steps to follow if you want to use life insurance as collateral for a loan. 

Find a lender willing to use life insurance as collateral for the money you want to borrow. 

Confirm the lender’s requirement and see if you can use any existing life insurance to meet it. 

If that’s not an option, purchase a new life insurance policy. 

Once your policy is active, ask the insurer for a collateral assignment form. 

Complete the form and list your lender as the assignee. 

Who should you name as your beneficiary?

When buying life insurance for collateral assignment, the process for setting up the policy is just like any other policy. 

You’ll name your beneficiaries as you would for a personal policy (e.g., spouse, relative, or trust for children). 

The lender is not your beneficiary; they are the assignee on the collateral assignment paperwork. You are the assignor .

Once your policy is set up, a collateral assignment will supersede your beneficiaries’ right to the death benefit. 

If you die, the life insurance company pays the lender, or assignee, the loan balance. Any remaining benefit will go to your beneficiaries.

Who owns your life insurance policy?

Usually, the insured person is the policyowner and the payor on a life insurance policy. Some lenders may require an escrow account for the life insurance premiums; others may require proof of payment or prepayment.

If you’re using a permanent life insurance policy for the collateral assignment, a lender may have access to the cash value if you default on the loan.

Learn more about cash value life insurance

When should you fill out collateral assignment paperwork?

You only complete a collateral assignment agreement once a life insurance policy is active. After you pay your first premium , and sign your policy papers, you can request a collateral assignment form from the life insurance company or your insurance broker.

You’ll need your loan officer’s name and number for the form, as well as your policy number, Social Security number, and other personal information. 

Once completed and signed by both the assignee and the assignor, you’ll file the collateral assignment form with the life insurance company and the lender according to whichever procedures they use for this process.

When does your collateral assignment end?

Collateral assignment ends only if:

You pay off your loan, or

You pass away. 

Your lender must agree that the terms of your loan have been met and send a release to your insurer to terminate the agreement.

If your policy lapses — or you choose to cancel it — that could violate your loan contract. The lender may even make payments on your behalf to prevent a policy lapse. In that scenario, the lender adds the amount they pay to your loan total.

Ready to shop for life insurance?

Collateral assignment pros & cons

Collateral assignment of life insurance has clear pros and cons. Review the following list carefully to decide if it’s a good option for you.

A collateral assignment enables you to secure business loans or other needed funds.

It’s less risky for a family than using a home or other essential property as collateral.

You can choose beneficiaries to receive any remaining death benefit funds.

The lender has first right to the death benefit, so your family may not get the benefit you intended.

Lapsing or canceling the policy could violate your business loan terms, causing problems with the lender.

You’re responsible for making payments until you die or the loan is paid off.

Alternatives to collateral assignment

Other ways to use a life insurance policy for debt repayment include the following options.

Life insurance loan: If you own a permanent life insurance policy, a life insurance loan allows you to borrow directly from your policy’s cash value. Any unpaid balance, plus interest, is deducted from your death benefit.

Cash surrender: The cash surrender value is the cash value built up in the policy minus administrative fees. Surrendering your policy cancels your coverage, so you’d need another policy for continued financial protection. You could also face penalties if you cancel during your policy’s surrender period.

Term life insurance: You should always buy enough insurance to cover your debts . On average, term life is much cheaper than whole life. Even if your lender doesn’t require collateral, your beneficiaries can use the death benefit to pay off your debts and keep the remainder.

For most people, term life is the most affordable and straightforward option to provide coverage for any outstanding loans when they die, with or without a collateral assignment attached.

If you need to use your life insurance policy for collateral assignment, the process is as simple as buying a policy and filling out the appropriate paperwork. Work with a licensed agent who can help you determine how much coverage you need and help you set up a collateral assignment. 

Tory Crowley

Associate Editor & Licensed Life Insurance Agent

Tory Crowley is an associate life insurance and annuities editor and a licensed insurance agent at Policygenius. Previously, she worked directly with clients at Policygenius, advising nearly 3,000 of them on life insurance options. She has also worked at the Daily News and various nonprofit organizations.

Nupur Gambhir

Senior Editor & Licensed Life Insurance Expert

Nupur Gambhir is a licensed life, health, and disability insurance expert and a former senior editor at Policygenius. Her insurance expertise has been featured in Bloomberg News, Forbes Advisor, CNET, Fortune, Slate, Real Simple, Lifehacker, The Financial Gym, and the end-of-life planning service Cake.

Antonio Ruiz-Camacho

Associate Content Director

Antonio is a former associate content director who helped lead our life insurance and annuities editorial team at Policygenius. Previously, he was a senior director of content at Bankrate and CreditCards.com, as well as a principal writer covering personal finance at CNET.

Expert reviewer

Maria Filindras

Financial Advisor

Maria Filindras is a financial advisor, a licensed Life & Health insurance agent in California, and a member of the Financial Review Council at Policygenius.

Questions about this page? Email us at  [email protected] .

Collateral assignment of life insurance

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Secured loans are often used by individuals needing financial resources for any reason, whether it’s to fund a business, remodel a home or pay medical bills. One asset that may be used for a secured loan is life insurance. Although there are pros and cons to this type of financial transaction, it can be an excellent way to access needed funding. Bankrate’s insurance editorial team discusses what a collateral assignment of life insurance is and when it might—or might not—be the best loan option for you.

What is collateral assignment of life insurance?

A collateral assignment of life insurance is a method of securing a loan by using a life insurance policy as collateral . If you pass away before the loan is repaid, the lender can collect the outstanding loan balance from the death benefit of your life insurance policy . Any remaining funds from the death benefit would then be disbursed to the policy’s designated beneficiary(ies).

Why use life insurance as collateral?

Collateral assignment of life insurance may be a useful option if you want to access funds without placing any of your assets, such as a car or house, at risk. If you already have a life insurance policy, it can be a simple process to assign it as collateral. You may even be able to use your policy as collateral for more than one loan, which is called cross-collateralization, if there is enough value in the policy.

Collateral assignment may also be a credible choice if your credit rating is not high, which can make it difficult to find attractive loan terms. Since your lender can rely on your policy’s death benefit to pay off the loan if necessary, they are more likely to give you favorable terms despite a low credit score.

Pros and cons of using life insurance as collateral

If you are considering collateral assignment, here are some pros and cons of this type of financial arrangement.

• It may be an affordable option, especially if your life insurance premiums are less than your payments would be for an unsecured loan with a higher interest rate.
• You will not need to place personal property, such as your home, as collateral, which you would need to do if you take out a secured loan. Instead, if you pass away before the loan is repaid, lenders will be paid from the policy’s death benefit. Any remaining payout goes to your named beneficiaries.
• You may find lenders who are eager to work with you since life insurance is generally considered a good choice for collateral.
• The amount that your beneficiaries would have received will be reduced if you pass away before the loan is paid off since the lender has first rights to death benefits.
• You may not be able to successfully purchase life insurance if you are older or in poor health.
• If you are using a permanent form of life insurance as collateral, there may be an impact on your ability to use the policy's cash value during the life of the loan. If the loan balance and interest payments exceed the cash value, it can erode the policy's value over time.

What types of life insurance can I use as collateral for a loan?

You may use either of the main types of life insurance— term and permanent —for collateral assignment. If you are using term life insurance, you will need a policy with a term length that is at least as long as the term of the loan. In other words, if you have 20 years to pay off the loan, the term insurance you need must have a term of at least 20 years.

Subcategories of permanent life insurance, such as whole life , universal life and variable life, may also be used. Depending on lender requirements, you may be able to use an existing policy or could purchase a new one for the loan. A permanent policy with cash value may be especially appealing to a lender, considering the added benefit of the cash reserves they could access if necessary.

How do I take out a loan using a collateral assignment of life insurance?

If you already have enough life insurance to use for collateral assignment, your next step is to find a lender who is willing to work with you. If you don’t yet have life insurance, or you don’t have enough, consider the amount of coverage you need and apply for a policy . You may need to undergo a medical exam and fill out an application .

Once your policy has been approved, ask your insurance company or agent for a collateral assignment form, which you will complete and submit with your loan application papers. The form names your lender as an assignee of the policy—meaning that they have a stake in its benefits for as long as the loan exists. You will also name beneficiaries or a single beneficiary, who will receive whatever is left over from the death benefits after the loan is repaid.

Note that you will need to stay current on your life insurance premium payments while the collateral assignment is active. This will be stated in the loan agreement, and failure to do so could have serious repercussions.

Alternatives to life insurance as collateral

If you are considering a collateral assignment of life insurance, there are a few alternative funding options that might be worth exploring. Since many factors determine each option, working with a financial advisor may be the best way to find the ideal solution for your situation.

Unsecured loan

Depending on your situation, an unsecured loan may be more affordable than a secured loan with life insurance as collateral. This is more likely to be the case if you have good enough credit to qualify for a low-interest rate without having to offer any type of collateral. There are many different types of unsecured loans, including credit cards and personal loans.

Secured loan

In addition to life insurance, there are other items you can use as collateral for a secured loan . Your home, a car or a boat, for example, could be used if you have enough equity in them. Typically, secured loans are easier to qualify for than unsecured, since they are not as risky for the lender, and you are likely to find a lower interest rate than you would with an unsecured loan. The flip side, of course, is that if you default on the loan, the lender can take the asset that you used to secure it and sell it to recoup their losses.

Life insurance loan

Some permanent life insurance policies accumulate cash value over time that you can use in different ways. If you have such a policy, you may be able to partially withdraw the cash value or take a loan against your cash value. However, there are implications to using the cash value in your life insurance policy, so be sure to discuss this solution with a life insurance agent or your financial advisor before making a decision.

Home equity line of credit (HELOC)

A home equity line of credit (HELOC) is a more flexible way to access funds than a standard secured loan. While HELOCs carry the downside of risking your home as collateral, you retain more control over the amount you borrow. Instead of receiving one lump sum, you will have access to a line of credit that you can withdraw from as needed. You will only have to pay interest on the actual amount borrowed.

Frequently asked questions

What is the best life insurance company, what type of loans are collateral assignments usually associated with, what are other common forms of collateral, what are the two types of life insurance assignments, related articles.

Guaranteed issue life insurance

Life insurance death benefits

What does life insurance cover?

What is collateral insurance and how does it work?

What Is a Collateral Assignment of Life Insurance?

Collateral assignment enables you to use your life insurance as collateral for a loan. This allows you to be approved for a loan if you don’t want to put your other assets at risk. Here is how collateral assignment loans work, as well as the pros and cons and alternatives to collateral assignment. For more help with loans or life insurance, consider working with a financial advisor .

When you apply for a loan, such as a business loan, the lender might require collateral before approving the loan. One way to provide collateral for the loan is to use your life insurance policy. If you die before fully repaying the loan, the policy’s death benefit will reimburse your lender first. Then, any remaining funds will go to your beneficiaries.

Not all lenders will allow you to use your life insurance as collateral, and if they do, they may require you to buy a new policy that can be used for collateral. The lender will be listed as an assignee on the collateral assignment form, which is different from indicating the lender as a beneficiary on the policy .

Lenders are often willing to accept this kind of arrangement because money is guaranteed if the borrower defaults or dies before the loan is repaid. To use your life insurance as collateral, you will have to apply for collateral on your new or existing policy.

How to Apply for Collateral Assignment

If your loan requires collateral, there are a few basic steps you must complete to use your life insurance as collateral. We’ll outline those steps here. Firstly, check to see if your existing policy allows collateral assignment and if the policy’s death benefit is sufficient to cover the collateral requirements of the loan. If your existing policy comes up short, you may need a new life insurance policy ; if so, make sure the new policy passes both checks.

Once you have your policy you can use for collateral, you must fill out a collateral assignment form. There, you will indicate your lender as the assignee for the death benefit. Both you and your lender will have to assign the form to provide your approval. At this point, your bank should be able to confirm the collateral assignment and you can apply for your new loan.

Collateral Assignment Benefits

If your credit isn’t the best, your lender might ask for collateral. Using your life insurance policy as collateral might be worth considering. Here are some possible reasons:

• No risking your personal assets : A lot of people’s most valuable assets are their houses and vehicles, which can make them work well as collateral. The problem is that the lender could seize them if you default or pass away before the loan is repaid.
• Cheap alternative to personal loans : Life insurance rates vary on many factors such as your age and health. However, if your policy has low premiums, it might be cheaper than taking on a personal loan.
• Gain access to the funding you need : If a lender asks for collateral, they just want something that can recoup the lost income from the loan. If your life insurance meets that requirement, your lender should be willing to accept it.

Collateral Benefit Downsides

There are, as with any financial choice, potential downsides as well:

• May reduce death benefit for beneficiaries : If you indicate your lender as assignee on the collateral assignment form, they will be paid before your beneficiaries, if necessary. If you have a whole life policy with a cash value , it may be sufficient to cover the cost of the loan. If not, your beneficiaries’ death benefit may be reduced.
• May require a new policy : Your insurer may not allow you to use your existing policy as collateral. If so, you may have to buy a new policy if you still want to go this route.

Possible Alternatives

There are alternatives to a collateral assignment of life insurance that you may want to consider. In addition to the downsides of this arrangement, you may want to reserve your life insurance for other purposes, such as debt repayment.

• Home equity line of credit : If you are a homeowner and have equity in it, you could consider borrowing against that equity. However, that exposes you to the risk of losing your home.
• Unsecured loan : Another alternative is an unsecured loan . However, if one lender required collateral, it likely means an unsecured loan would come with unfavorable terms, such as high rates . Thus, this option is best if you have good to excellent credit.
• Life insurance loan : As discussed earlier, some life insurance policies have a cash value. If you have built enough of a cash value in your policy, you can borrow against it. But any unpaid amount will be deducted from your death benefit – plus interest.
• Policy cash out : It is possible in some cases to cash out a life insurance policy, less certain fees. But this means your existing life insurance policy will be terminated, and you’ll have to find a new one.

The Bottom Line

Collateral assignment of life insurance allows you to use your life insurance policy as collateral when applying for loans. This is especially common when applying for business loans. However, your insurer must allow this arrangement, and the policy must be sufficient to cover the collateral requirements. Using your life insurance policy comes with certain benefits, such as not risking your personal assets. But it also has downsides, such as requiring a new policy in some cases. Consult a financial advisor before making any major financial decisions.

Tips for Buying Life Insurance

• Deciding how much life insurance to buy isn’t easy, especially with so much to take into consideration. SmartAsset’s life insurance calculator can help you estimate how much life insurance you need in your unique situation.
• A financial advisor can guide you through major financial decisions, like buying life insurance.  SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals,  get started now .

Photo credit: ©iStock.com/milan2099, ©iStock.com/AmnajKhetsamtip, ©iStock.com/PeopleImages

What Is A Collateral Assignment Of Life Insurance?

Our content follows strict guidelines for editorial accuracy and integrity. Learn about our editorial standards and how we make money.

A collateral assignment is sometimes a necessity if you’re applying for larger financing amounts such as a mortgage or business loan.

But what is a collateral assignment and how do you go about getting it on your life insurance policy? 

In this article, we’ll cover what collateral assignment is, how you can add it to your life insurance, and what alternatives there are out there. 

What Is Collateral Assignment? 

A collateral assignment is a process by which a person uses their life insurance policy as collateral for a secured loan.

In simple terms, collateral assignment is reassigning priorities for who gets paid the death benefit of your life insurance policy.

What Is a death benefit?

A death benefit or face value of a life insurance contract is the amount of money that your beneficiaries will receive from your policy when you die.

Once you apply for collateral assignment and it’s approved, your specified debtor (the loan provider) will be paid first and then your beneficiaries will receive what is left over in your life insurance policy.

This is different from using your cash value to loan money as you are taking out a loan from another financial institution and using your policy as a guarantee that you’ll cover any debt when you die. 

For example, let’s say you want to take out a secured loan from your local bank and want to use your life insurance policy as a collateral assignment.

In this situation, you’d still have to pay back any debt you have with interest during the loan period. 

However, the life insurance policy would be used if the borrower dies and there was an outstanding loan balance remaining. 

Secured Loans vs. Unsecured Loans

Secured loans are debts that are backed by assets that a lender can claim if the debt isn’t repaid. These types of loans often offer better interest rates and more generous payment terms.

Unsecured loans are debts that don’t have collateral. These types of loans are more expensive to repay and considered riskier than secured loans.

Source: Pexels

How Does Applying for Collateral Assignment Work?

The process for getting collateral assignments for life insurance is the same as when you apply for new life insurance coverage. 

All you’ll be doing is indicating to your life insurance provider that your lender will be given priority for the amount of money you have borrowed through them.

There is an:

Application process.

Underwriting process.

Offer that you’ll receive.

You’ll be required to name beneficiaries as well as indicate ownership of the life insurance policy in the collateral assignment form which will be provided by your life insurance company.

This is because you’re changing the terms of your payout and your life insurance provider will need to follow these instructions once you die.

NB Some insurance companies don’t offer collateral assignment on new loans and generally only provide this feature to an existing life insurance policy.

You should check beforehand to see what will be required to apply for a collateral assignment. If you need help finding plans that offer this, send an email to a licensed insurance agent today.

Once you’ve assigned a new collateral assignee to your life insurance policy, they will be entitled to lay a claim on your death benefit for any debt you have with them.

For example, let’s say you take out a collateral assignment life insurance policy worth $200,000 for a loan of $75,000 over 7 years at an interest rate of 18%.

If you die after five years, based on these figures, you’ll still have $41,231.02 owed on your loan.

Your $200,000 life insurance plan will be used to cover this and your beneficiaries will receive the remaining $158 768.98 from your life insurance policy.

Your lender is only allowed to take the amount outstanding on the debt owed and cannot take more. 

What about Missed Payments and Cash Value Life Insurance?

If you have a permanent life policy with a cash value account, sometimes called cash value life insurance, your lender will have access to it to cover missed payments on your loan.

For example, let’s say you miss a payment on your loan and have a collateral assignment. Your lender will be able to access your cash value account and withdraw that month’s payment to cover your debt.

Who Can You Add as a Collateral Assignee?

You can add any person or institution as a collateral assignee to your life insurance policy if you owe them money.

This can include banks, lenders, private individuals, businesses, or credit card companies. 

The most common collateral assignments are for business loans and mortgages. This is because they are loans for high amounts that are paid off over several years. 

In fact, some banks and financial lenders may require that you add them as collateral assignees when you apply for any of the financing options mentioned below.

Common Collateral Assignees Include:

💵 Bank loans

💳 Credit cards

🏡 Mortgages

💼 Business loans

What Do I Do If I’ve Paid Off My Debt?

If you’ve managed to pay off your debt - firstly, congratulations! Secondly, you’ll want to notify your life insurance company that you’ll be changing your collateral assignments on your life policy.

While there is no legal claim that a company can make to debts that aren’t owed anymore, there may be a hold up in paying out the death benefit to your beneficiaries and other collateral assignees.

Life insurance companies will have to figure out who must be paid first, according to the order stated in your collateral assignment terms.

In general, life insurance policies will settle claims within 24 hours of being notified of a policyholder’s death.

The process can be delayed if you do not release your collateral assignees from your life insurance contract. 

Tips to Make Sure Your Life Policy Is Paid Out Quickly

Here are some tips if you want your beneficiary claims to be handled as fast as possible:

1) Keep a copy of your life insurance policy and policy number in a safe place or with your lawyer, financial advisor, or estate planner.

2) Speak to your beneficiaries about your policies and give them the contact details of the relevant life insurance company.

3) Make sure your life insurance contract is updated to reflect your latest list of beneficiaries.

4) Make sure you have your beneficiaries' details listed in the contract or with your lawyer.

The Benefits of Using Collateral Assignment of Life Insurance

While adding a collateral assignment to your current life insurance policy may require an application, paperwork, and time, there are benefits:

Many lenders like it: Banks and financial institutions sometimes prefer it when applicants use their life insurance policy as collateral for a loan. This is because they know that their debt will be serviced long-term by your insurance company which makes their loan to you a lower risk.

Your private property won’t be jeopardized: The last thing you want when you go into debt is to put your personal items, such as your car, investments, or home on the line as collateral. Using collateral assignment is an alternative to this and can protect you in the event that you can’t service your debt.

It can be affordable for some people: If you’re in good health and young, you may be paying affordable rates for permanent life cover. In situations like this, it can make sense to use your life cover as collateral for debts you’ve incurred.

What Are Some Alternatives to Collateral Assignment?

Term Life Insurance: Getting a term life insurance contract to cover specific debts is one way of ensuring your estate and family are protected when you die.

There are multiple types of term life insurance plans and they are more affordable than permanent life insurance. This makes options like level term life insurance and decreasing term life insurance ideal for different types of debts you may have over your lifetime.

What Is Term Life?

Term life is a temporary life coverage option that lasts for a specific period of time. It is different from permanent life insurance which lasts until you die or you stop paying premiums.

Term life contracts are typically between 5 to 20 years, however, you can get renewable term life plans and even a forty-year term life plan .

Borrow from your life insurance: If you have a permanent life insurance policy, such as universal, whole, or indexed life cover, you can borrow money from your cash value account. 

However, keep in mind that you’ll be required to pay interest on any amount that you borrow and any amount of debt incurred will be deducted from your policy’s death benefit when you die.

What Is Cash Value?

Cash value is a feature of permanent life insurance plans that policyholders can contribute additional money toward while they have a policy in force.

This money is set aside in a cash value account which is tax-deferred and can be used in a number of ways.

In some cases, if your policy allows it, you can end your contract and get the cash surrender value of it. This amount is usually much less than the value of your total life insurance contract. 

Our Verdict on Collateral Assignment

Many banks, lenders, and financial institutions want long-term guarantees that you’ll be able to service your debt if anything happens to you.

In some situations, getting collateral assignments on your life insurance to cover these debts is a good option for people who are trying to access finance from these institutions. 

However, there is a risk that your death benefit payout may be delayed for your beneficiaries if you don’t keep your different collateral assignees up to date.

If you already have a life insurance policy, you should contact your provider to find out what the process is and what you’ll need to do to change the collateral assignees on your policy.

If you don’t have a policy yet, our advice is to look at all of your options before you decide to take a permanent life insurance contract with a collateral assignment.

There are alternatives out there that are more affordable if you’re looking to protect your family and estate from debt.

Term life is one such option that is adaptable to your life and easy to get. 

For example, a decreasing term life insurance policy might be the right choice for someone who has recently bought a home and wants to cover their mortgage while they pay it back.

Another option is final expense insurance, which is a permanent life policy for smaller amounts, usually under $50,000.

With final expense insurance, your beneficiaries can pay for anything they want, including any debts you may have had in your life.

The process for applying is simple and you won't have to go through a medical exam or intensive underwriting as you would with traditional permanent life insurance. 

If you need any assistance with finding, comparing, or learning about the different life insurance options to cover your debts, speak to one of our expert advisors today at 1-888-912-2132 or [email protected] .

Where Can I Learn More about Life Insurance?

If you’re looking to learn more about life insurance, different kinds of coverage, or costs, visit our life insurance hub to find our latest articles.

We do the research so that you don’t have to and our articles cover complicated topics like what is a cash value account, what is key person insurance, or how long life insurance takes to pay out a death benefit.  

If you need help with quotes, try out a life insurance quote finder or reach out to us via email at [email protected] to get in touch with a licensed life insurance agent for your state.

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Collateral Assignment of Life Insurance

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Life Insurance without a Medical Exam

Secured loans allow you to borrow money using one of your assets as collateral to get easier approval and better rates and terms. Life insurance may not be the first asset to come to mind when getting a secured loan, but you can use your policy as collateral through a process called collateral assignment of life insurance. This article will explain how collateral assignment of life insurance works and how to apply for it, then review some alternatives to using life insurance as collateral.

What is the collateral assignment of life insurance?

Collateral assignment of life insurance involves using your life insurance policy’s death benefit as loan collateral. 1 This means that if you can’t repay what you owe, the lender has the right to collect the collateral amount from your policy.

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How to apply for collateral assignment of life insurance

Here’s how to apply for collateral assignment of life insurance:

1. Know the requirements

Knowing life insurance collateral requirements is vital before applying for collateral assignment. Lenders generally require an active life insurance policy with cash value. This means that a term life insurance policy may not qualify. However, exact requirements vary by lender. If you need to get a new life insurance policy in order to get a collateral assignment, research and gather quotes from several insurance companies to choose the right option for you.

2. Fill out a life insurance application

Once you’ve found a policy that will meet a lender’s loan requirements, you can apply for life insurance . As mentioned, you will likely need life insurance with cash value. Check with the lender to see if the policy you’re approved for qualifies for a life insurance collateral assignment before signing the contract.

3. Fill out a collateral assignment form

Once you sign your life insurance contract and pay your first premiums, complete a collateral assignment form with your insurer. You’ll fill out your lender’s contact details so your insurer can designate them as a collateral assignee while your loan is outstanding.

4. Sign and submit the form

After completing the collateral assignment form, you and your lender must sign it. Your insurer may be able to provide electronic versions of the documents and e-signature capabilities to streamline the process.

5. Apply for a loan

Wait for your bank to confirm that your insurer has made them the collateral assignee. Then, apply for your chosen loan and fill out any relevant life insurance policy information on the application.

How collateral assignment of life insurance may affect your beneficiaries

Using your life insurance policy as collateral may impact your beneficiaries if you default on the loan or pass away with an outstanding balance. 2 Either event could reduce the death benefit payout your beneficiaries receive.

For example, if you take out a $50,000 loan using your $500,000 policy as collateral but pass away with a $40,000 loan balance, your lender can collect a portion of your death benefit. That can leave your beneficiaries with less money to cover expenses in your absence.

Alternatives to the collateral assignment of life insurance

Here are some alternatives to the collateral assignment of life insurance 2 :

Borrow from your life insurance policy

Permanent life insurance policies, such as whole life insurance , let you build cash value with each premium payment. Once your policy grows large enough, you can borrow against it. Policy loans offer favorable rates and no fixed repayment deadline. Accrued interest is added to your loan balance.

You can keep the loan outstanding as long as you want. However, your policy can lapse if the balance grows larger than your cash value.

Withdraw from your policy

You can withdraw money from your life insurance policy once you have accumulated enough cash value. However, this may reduce your death benefit. Withdrawing may also trigger tax consequences. 3

Surrender your policy

You can surrender life insurance if you no longer need your coverage. The insurer pays you the cash value minus surrender charges, letting you access your wealth. If you decide to go this route, your policy will be cancelled, and you’ll stop paying premiums.

Consider a different type of loan

You can get other loans, depending on your financial circumstances. For example, if you have significant equity in your home, you could get a home equity loan or line of credit. You could also apply for an unsecured personal loan to avoid risking your assets as collateral.

Is collateral assignment of life insurance right for me?

Collateral assignment of life insurance may make sense in a few situations:

• Business loans: If you’re a business owner and have a substantial death benefit, you could borrow against a large amount of it to help fund your business.
• Medical expenses: The average cost of a hospital stay is 13,262. 4 If you have medical expenses insurance doesn’t cover, securing a loan with your life insurance could help you pay for them.
• Debt refinancing or consolidation: Borrowing against your death benefit could help you consolidate and refinance higher-interest debts, like personal loans and credit cards. This can help save you money on interest and streamline your monthly payments.

Remember the risks of a life insurance collateral assignment before using it for these or other situations. If you’re not sure whether it’s the best choice for you, consider speaking with a financial advisor to explore your options.

Get a life insurance quote

Collateral assignment of life insurance can be a good option for borrowing a significant amount of money at favorable rates and terms. However, it’s important to remember that defaulting on the loan or passing away with an outstanding balance could reduce the death benefit payout your beneficiaries receive.

If you need a way to help protect your loved ones for your entire life and receive a significant asset you could borrow against, Aflac’s whole life insurance policies with cash value can be a great option. Start chatting with an agent today to learn more.

Still have questions?

Explore your life insurance options.

1 Bankrate – Collateral assignment of life insurance. Updated April 5, 2024. https://www.bankrate.com/insurance/life-insurance/collateral-assignment/ . Accessed July 25, 2024.

2 Investopedia – What is a Collateral Assignment of Life Insurance? Updated April 30, 2023. https://www.investopedia.com/ask/answers/111714/what-collateral-assignment-life-insurance.asp . Accessed July 25, 2024.

3 Experian – Can I Withdraw Money From My Life Insurance? Updated August 19, 2024. https://www.experian.com/blogs/ask-experian/can-i-withdraw-money-from-my-life-insurance/ . Accessed August 22, 2024.

4 Debt.org – Hospital and Surgery Costs. Updated November 30, 2023. https://www.debt.org/medical/hospital-surgery-costs/ . Accessed July 25, 2024.

Content within this article is provided for general informational purposes and is not provided as tax, legal, health, or financial advice for any person or for any specific situation. Employers, employees, and other individuals should contact their own advisers about their situations. For complete details, including availability and costs of Aflac insurance, please contact your local Aflac agent.

Aflac coverage is underwritten by American Family Life Assurance Company of Columbus. In New York, Aflac coverage is underwritten by American Family Life Assurance Company of New York.

Aflac life plans - 68000 series: In Arkansas, Idaho, Oklahoma & Virginia, Policies: ICC1368100, ICC1368200, ICC1368300, ICC1368400. In Delaware, Policies A68100-A68400. 65000 series: In Virginia, Policies ICC0965JTO & ICC0965JWO. B61000 series: In Arkansas, Idaho, Oklahoma & Virginia, Policies: ICC18B61JWO & ICC18B61JTO. In Delaware, Policies B61JWO, B61JTO. B60000 series: In Arkansas, Idaho, Oklahoma & Virginia, Policies: ICC18B60C10, ICC18B60100, ICC18B60200, ICC18B60300, & ICC18B60400. Q60000 series/Whole: In Arkansas & Delaware, Policy Q60100M. In Idaho, Policy Q60100MID. In Oklahoma, Policy Q60100MOK. Not available in Virginia. Q60000 series/Term: In Delaware, Policies Q60200CM. In Arkansas, Idaho, Oklahoma, Policies ICC18Q60200C, ICC18Q60300C, ICC18Q60400C. Not available in Virginia.

Aflac Final Expense insurance coverage is underwritten by Tier One Insurance Company, a subsidiary of Aflac Incorporated and is administered by Aetna Life Insurance Company. Tier One Insurance Company is part of the Aflac family of insurers. In California, Tier One Insurance Company does business as Tier One Life Insurance Company (Tier One NAIC 92908).

In AR, DE, ID, OK and VA: Policies ICC21-AFLLBL21 and ICC21-AFLRPL21; and Riders ICC21-AFLABR22, ICC21-AFLADB22, and ICC21-AFLCDR22.

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Except in New York, individual insurance and group dental and vision insurance is offered by American Family Life Assurance Company of Columbus. In NY both group and individual coverage is offered by American Family Life Assurance Company of New York. Group policies are offered by Continental American Insurance Company (CAIC). CAIC is not licensed to solicit business in New York, Guam, Puerto Rico or the Virgin Islands. In CA, CAIC does business as Continental American Life Insurance Company (CAIC NAIC 71730) Dental and Vision plans are administered by Aflac Benefit Solutions, Inc. Aflac Worldwide Headquarters | Columbus, GA Aflac Group | Columbia, SC American Family Life Assurance Company of New York | Albany, NY Aflac’s Premium Life, Absence and Disability Services are available in all states, except Puerto Rico, Guam or the Virgin Islands, and are offered by Continental American Insurance Company (CAIC). Self-funded plans and absence services are administered by CAIC in all states but NY. In NY, self-funded plans and absence services are administered by and insurance is offered by American Family Life Assurance Company of NY. Administrative services are not insurance and are not considered legal advice. Products may not be available in all states and may vary depending on state law. Direct to Consumer Business is underwritten by Tier One Insurance Company, doing business as Tier One Life Insurance Company in California (Tier One NAIC 92908)

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What Is Collateral Assignment of Life Insurance?

Table of contents, key takeaways.

• Collateral assignment allows you to use a life insurance policy as assurance for a loan. The lender gets the first claim on the death benefit if you default.
• Permanent life insurance policies like whole and universal life are commonly used since they don't expire.
• A formal collateral assignment process involves paperwork with the lender and insurer.
• Benefits include potentially improving loan eligibility and getting a lower interest rate. Drawbacks include reduced death benefits for beneficiaries.
• Alternatives like borrowing against cash value or taking an unsecured loan may be cheaper than paying for life insurance you don't need.

If you'd like to borrow money through a loan, life insurance could help you qualify and get a lower interest rate. Through something called a collateral assignment of life insurance, you can set up an agreement where your policy pays the lender in case you can't.

Not every lender accepts this arrangement, and there are downsides, notably that your primary beneficiary is no longer first in line for the life insurance death benefit. However, in the right situation, it can be a useful financial strategy. Here's what to know about an assignment of life insurance and how to use it properly.

What Is Collateral?

Collateral is a valuable asset that can be used to secure a loan. When you borrow money, you legally agree to repay the lender, usually with scheduled payments and interest. But the lender is taking a risk that you won't pay them back.

When you put up collateral, the lender can legally take that asset if you don't pay back the debt. Real estate, vehicles, equipment and investment accounts are common examples of loan collateral.

What Is the Collateral Assignment of Life Insurance?

In a collateral assignment of life insurance, you use a life insurance policy to secure a loan. You first set up coverage as usual by applying for and buying some type of life insurance policy with a death benefit. If you already have a policy, you could use that too.

Then you fill out a collateral assignment form with the lender. This gives them the right to use the life insurance benefits to pay themselves back if you don't pay off their loan. This could happen if you default or if you happen to die before paying off the debt. With this assignment, you've agreed to use the life insurance death benefit to pay off the remaining loan balance first.

You'll still select a primary beneficiary , the person or entity you want to receive the insurance payout. But with a collateral assignment, if you die without paying off the loan, the life insurance death benefit pays off the debt first. Only if there's any remaining benefit amount does it go to your listed beneficiary. Once you pay off the debt, the assignment ends, and the life insurance would pay your beneficiary in full as usual.

Can You Use Any Type of Life Insurance?

It depends on what the lender is willing to accept. In theory, you could use any type of life insurance for this arrangement. However, some lenders may only accept permanent coverage, such as whole life or universal life . The reason is that permanent coverage doesn't expire as long as you or the lender make the premium payments. As a result, the lender can make sure they eventually collect the death benefit by making the premium payments themselves (they would add this cost to your outstanding debt). Another reason lenders may prefer permanent life insurance is because it can build cash value, a reserve of money while you're alive. This is another valuable asset the lender could take as repayment.

On the other hand, term life insurance  has a set expiration date. If you outlive the term, the coverage ends. While a lender could accept term life insurance as collateral, they take on the risk that you both fail to pay off the loan and outlive the term. In this case, the lender would lose their collateral and won't be certain to get their money back.

What Are Some Examples Using Life Insurance as Collateral?

Hypothetical scenarios may help better illustrate how life insurance can be used as collateral. Here are two examples to consider:

• Steve wants to take out a 15-year mortgage for $500,000. He currently does not have any life insurance. He agrees to buy a 15-year term policy  with a death benefit of $500,000 to use as a collateral assignment until he pays off the mortgage. He lists his daughter as the primary beneficiary. Ten years later, he passes away with $150,000 left on his mortgage. The term life insurance will first pay $150,000 to the lender to cover the outstanding debt. The remaining $350,000 will then go to his daughter.
• Kristi wants to take out a $100,000 personal loan to help start a business. She already owns a $300,000 whole life policy with $25,000 in cash value. She puts this policy up as collateral. Unfortunately, Kristi's business does not succeed, and she is unable to pay back any of the loan. The lender takes over the policy through the collateral assignment. They first take the $25,000 of cash value for repayment. Once Kristi passes away, the lender would use the death benefit to cover the remaining debt. Anything left would go to whoever Kristi listed as the beneficiary.

How Do You Set Up a Collateral Assignment?

While the exact process for setting up this arrangement will depend on your lender and insurer, there are a few common steps. Here are five actions you could take:

1. Review Your Lender's Requirements

You can ask your lender whether they allow a collateral assignment of life insurance. If so, check what they require for this arrangement. For example, do they allow all types of life insurance policies  or only certain ones, like whole life ? If you have an existing policy, would they accept it for the assignment? Or would you need to buy a new policy for this arrangement?

2. Set Up Your Life Insurance Coverage

If you already have life insurance and your insurer is willing to accept it, you could use it for the collateral assignment. If you don't have life insurance or your death benefit isn't large enough, you would need to purchase another policy. Be sure to ask your lender whether they only work with certain life insurance companies.

3. Fill Out the Collateral Assignment Forms

Contact your life insurance company for a collateral assignment form. This form lists information about your loan, such as the amount, the repayment schedule and the lender. Once you and your lender sign this form, your insurer can officially add the lender as the collateral assignee for your policy.

4. Finish Setting Up Your Loan

With your collateral assignment in place, you and the lender would then complete the loan application process. Once you get approved, they would send you the loan funds, secured using your life insurance.

5. Pay Off the Loan to End the Collateral Assignment

You would pay off your debt according to the lenders' payment schedule. Once you've made the final payment, you would contact your life insurance company to let them know. They would confirm with your lender and then end the collateral assignment. From that point on, the death benefit would go to your primary beneficiary, not to the lender.

What Are the Benefits of an Assignment?

• It can help your chances of qualifying for a loan. You aren't guaranteed to qualify for a loan. Having life insurance as collateral could make the difference for your approval. Collateral can make up for other issues, such as having a low credit score or small down payment.
• It can reduce your loan interest rate. When you put up collateral, you reduce the financial risk for the lender. This ensures they have another way to get their money back if you miss the loan payments. In exchange, they may offer you a lower interest rate. The numbers could potentially work out where the amount you save in interest is enough to cover your life insurance premiums or more.
• It can help protect your other assets. You could put up other assets for collateral, such as your home or car. But if you miss payments, the lender could take this property from you. While the same is true for life insurance, you might prefer this approach versus risking your home or your vehicle.

     Optimize your financial strategy by using life insurance as a valuable collateral asset. Get a Life Insurance Quote    

What Are the Possible Drawbacks?

• It reduces your life insurance benefits. When you have a collateral assignment of life insurance, the lender gets the first priority of collecting it. If your policy has cash value, the agreement might restrict your ability to take it out until you've paid off the debt. If you die without paying off your debt, the death benefit will first go to paying it off. Only if there's any benefit remaining will it go to your beneficiaries.
• It creates an extra insurance cost. To meet your collateral assignment agreement, you must have life insurance. The life insurance company will charge premiums. This is another cost on top of your loan payments.
• There is no guarantee of qualifying for life insurance. If you don't already have life insurance, you can try buying a policy for this arrangement. However, you are not guaranteed to qualify. You would need to undergo health underwriting and meet the provider's requirements. If you have health issues, it could drive up the insurance cost and make a collateral assignment not worth it. You could even be denied life insurance.

What Common Mistakes Should be Avoided When Assigning Collateral?

• Not checking with the lender's requirements first. Your lender might only accept certain types of life insurance policies or ones from specific companies. If you don't check before signing up, you might purchase a policy that the lender won't accept. Then you'd need to start the insurance application process over again before you can take out your loan.
• Naming the lender as the beneficiary. If you name the lender as your primary beneficiary, the lender is legally entitled to the full amount of your life insurance death benefit when you die. This is true even if the death benefit is larger than your unpaid loan balance. Make sure to go through the proper collateral assignment process so your life insurance only pays off your debt and nothing more. That way, any remaining benefit goes to whoever you've chosen as your beneficiary.
• Canceling your life insurance before paying off the debt. Your collateral assignment agreement requires you to keep your life insurance in place during the entire life of the loan. If you cancel the policy before then, the lender could increase your interest rate. They could also demand repayment of the entire loan at that moment since you breached the contract.
• Not having enough coverage for beneficiaries. A collateral assignment reduces the life insurance death benefit for your other beneficiaries, such as your spouse and children. Before using this agreement, make sure you have enough in either life insurance coverage or other assets to cover your final expenses and provide for family members depending on your income.

What Alternatives Could You Use for Your Loan?

• Use life insurance cash value. If your life insurance has cash value, would it be enough to cover your current financial needs? If so, you could withdraw the life insurance cash value. You could also borrow the money through a loan and then pay it back into your policy to use again in the future. However, both approaches will reduce the size of the death benefit for your beneficiary. You would also owe interest on a loan. If your withdrawal is more than what you paid in premiums, you'd owe income tax for taking out the gains. Compare these costs versus owing interest to a lender.
• Take out an unsecured loan. You could also see how much it would cost to borrow without putting up collateral. Just keep in mind the loan interest rate would be higher. You can then compare how much extra you would owe in interest versus the cost of paying life insurance. In some cases, it may be less expensive to borrow through an unsecured loan, especially if you don't need life insurance for other reasons.
• Use other assets. If you own a house, car or an investment account, you could put those up for collateral instead of life insurance. If you've paid off some of your mortgage, you could also borrow using a home equity line of credit. The drawback is that if you miss loan payments, you risk losing your home, car or any other asset you put up for collateral.
• Find a co-signer. If you are having trouble qualifying for a loan on your own, a co-signer could potentially help. This other person agrees to pay off the loan if you miss payments. This makes it safer for the lender. However, if you miss payments, you could hurt the credit score of the other person. They legally need to pay off the debt too.

Should You Consider a Collateral Assignment of Life Insurance?

A collateral assignment of life insurance can make sense if you already have life insurance or you are healthy enough to qualify for a new policy. It also could be worth using if you have addressed your life insurance needs already. Lastly, this arrangement can make sense if you don't want to risk your other assets or if you don't have any other assets for collateral.

If you don't have life insurance and don't think you could qualify for a new, affordable policy because of health issues, this approach might not be an option. If you have life insurance but don't want to risk not having enough coverage for your beneficiaries, this approach also might not be worth it.

To decide if this approach may be right for you, consider speaking with a financial professional . They can compare your other borrowing options and offer guidance based on your specific needs. If a collateral assignment is the best move, they can also help you with your insurance application.

     Evaluate if using life insurance as collateral aligns with your financial goals. Get a Life Insurance Quote    

• Withdrawals may be subject to charges, withdrawals of taxable amounts are subject to ordinary income tax, and, if taken before age 59½, may be subject to a 10% IRS penalty.
• Interest is charged on loans, they may generate an income tax liability, reduce the Account Value and the Death Benefit, and may cause the policy to lapse

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Collateral Assignment

What does collateral assignment mean.

Collateral assignment is the transferring of an asset’s right of ownership from the borrower to the lender up until the loan gets fully paid. The transferred asset can be the borrower’s life insurance.

Insuranceopedia Explains Collateral Assignment

A borrower’s asset may be one of the requirements for taking out a loan. That asset should be of considerable value, like a house or a car. The borrower yields the ownership right to the lender, which gives the latter a sense of security to back the loan.

The borrower gets their right to the asset once again after the loan is fully paid. However, if the borrower is unable to pay the loan, the lender becomes the ultimate owner of the asset.

When insurance is used as the collateral assignment, the lender is assigned as the beneficiary and may remain as such if the borrower is unable to pay the loan, thereby receiving the benefits paid out by the policy.

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Collateral Assignment of Life Insurance: Everything You Need to Know

• August 4, 2024

Written by:

Bella Gonzalez

Reviewed by:.

Jake Tamarkin, MBA

Jake is a nationally-licensed insurance agent with a Masters in Business Administration and CEO of Everyday Life. His expertise has been featured in: Investopedia, Life Insurers Council, Insurance Thought Leadership, Life-Annuity Agent, and Insurtech Insights.

Life insurance isn’t just about peace of mind for the future; it can also serve as a lifesaver when you’re looking for ways to secure a loan. This clever maneuver is known as a collateral assignment of life insurance. It’s a deal between you and your lender where your life insurance policy, specifically the cash value component, is used as collateral for a loan.

When assigning your life insurance policy as collateral for a loan, the lender will become a temporary beneficiary of your policy. If the assigner dies before repaying the loan, the lender can claim the death benefit up to the outstanding loan balance. If the policyholder defaults, the cash value of the policy will be collected.

Who can benefit from the collateral assignment of life insurance?

If you need to secure a loan but don’t have typical assets like a house or significant savings, collateral assignment of life insurance could be your ticket. It’s great for small business owners, entrepreneurs, and folks with sizable insurance policies but limited liquid assets. 

To use a life insurance policy as collateral, the policy term should be at least as long as the loan duration and should possess a cash value component equal to the loan amount.

What types of life insurance can be used as collateral?

To make this work, you’ll need a permanent life insurance policy that has a cash value component. This includes options like whole life, universal life, and variable life insurance. Unfortunately, term life insurance doesn’t quite make the cut, as it lacks a cash value.

How to use life insurance as collateral for a loan?

1. Ensure the lender accepts life insurance as collateral.

2. Apply for the collateral assignment through the bank or directly with the insurer. 

3. Fill out an “assignment of Life Insurance Policy as Collateral form” provided by your insurer. 

4. Submit the form to the insurer, and wait for approval.

5. Once the collateral assignment is approved, notify your bank or lender. 

6. Bank or lender will set the loan terms such as the interest rate, payment terms, and other obligations.

Is life insurance as collateral widely accepted? Do all banks accept it?

Typically, permanent life insurance policies such as whole life and universal life, which have a cash value component, can be used as collateral. Lenders such as banks want security, and the cash value component of a whole life insurance policy provides this. This cash value grows over time and can be used if the borrower defaults on the loan, which decreases the risk for the lender.

How is the loan amount determined when using life insurance as collateral?

The borrowing capacity is determined as a proportion of the cash value, varying across different insurance companies. Typically, the permissible borrowing range hovers around 90% to 95%. Applying these percentages to a cash value of $50,000, one could potentially secure a loan amounting to $45,000 to $47,500.

What happens when you are unable to pay back the life insurance loan?

The cash value of your policy will be collected by the lender. If this is insufficient, the amount you owe is deducted from the death benefit when you pass away. In some instances, you might also incur a substantial tax bill.

Is the collateral assignment of the life insurance agreement permanent? 

No, the collateral assignment of the life insurance agreement is not permanent. It’s tied to the lifespan of the loan. Once the loan is fully repaid, the assignment can be released, and the life insurance policy returns to its original beneficiary arrangement.

What are the tax implications of using life insurance as collateral for a loan?

If the amount you borrow directly from the insurance company is equal to or less than the total insurance premiums you have paid, it is not subject to taxation. However, If you surrender your policy, or allow it to lapse, and the total amount of outstanding loans and interest surpasses what you have paid in premiums, there is a possibility of incurring a tax liability. In essence, you would be required to pay income tax on any investment earnings in that scenario.

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What is collateral assignment of life insurance?

Don't know what collateral assignment of life insurance is that’s ok — read on to find out what you need to know..

by Nicole Dieker

When it comes to lending a borrower money, banks tend to play it safe. If, for example, you request a mortgage pre-approval letter, apply for a business loan, or prepare to take on a significant amount of debt, the bank or lender is going to want to ensure that you have the financial resources to pay off your debt without going into default. In some cases, your lender may request that you offer your life insurance policy as a form of collateral — that is, that you use the value of your life insurance policy as a way of guaranteeing the money you owe on your loan.

Creating a collateral assignment of life insurance might help you get approved for a loan or mortgage — but is it necessarily the wisest move? By giving a bank or lender a collateral assignment on your life insurance policy, you are giving them the right to claim any money you still owe them before your life insurance payout is distributed to your primary beneficiary (or beneficiaries). This means that your loved ones could receive fewer life insurance benefits, depending on whether you are able to pay off your debts and release the collateral assignment before you die.

We asked two Haven Life team members — Paya Schlass, Customer Success Manager, and Luis Martinez, Regulatory Compliance Analyst — to explain what this security agreement is for life insurance, why a lender might request that you include your life insurance policy as collateral, and what you can do to ensure that the collateral assignment doesn’t make it more difficult for your loved ones to receive their life insurance benefits.

In this article:

A collateral assignment of life insurance allows a borrower to use their life insurance policy as collateral on an existing debt.

“In some cases, when you apply for a loan, the lender may require that you buy a new life insurance policy or use an existing life insurance policy as collateral,” says Schlass. “With this security arrangement, if the insured dies, your policy will be paid out to your lender first before paying out to your primary beneficiary or beneficiaries.”

Adding a collateral assignment to your life insurance policy does not prevent you from designating life insurance beneficiaries such as partners and children, nor does it prevent your loved ones from receiving a financial benefit after you die. The collateral assignment simply specifies the order in which your life insurance payout is distributed.

“The assignment gets first priority of the death benefit,” explains Martinez. “The beneficiaries get whatever’s left.”

How much of the death benefit is a collateral assignee allowed to take? A collateral assignment for your life insurance coverage only allows the bank or lender to claim the amount of money still owed on an outstanding loan or debt. If you have a $500,000 life insurance policy and die while still owing $50,000 on a business loan, the lender could claim $50,000 of your death benefit — assuming, of course, that you listed that lender as a collateral assignee. If a lender is not a collateral assignee on your existing life insurance policy, they may still try to claim outstanding debts out of your estate; they just won’t have first dibs on your life insurance death benefit.

“Talk to your financial adviser before setting up a collateral assignment,” Martinez advises. This type of arrangement can have a significant impact on the way life insurance benefits are distributed for a policy owner, so make sure you have explored all of your options and are willing to list your life insurance policy as collateral before signing any life insurance collateral assignment forms.

What are some common life insurance collateral assignments?

If you owe money to an institution — or a person — you can list them as a collateral assignee on your life insurance policy. “Creditors can be whoever you owe money to,” Martinez explains. “Banks, credit card companies, individuals.”

That said, some types of collateral assignments are much more common than others. “Collateral assignment of life insurance is typically associated with business loans and mortgages,” says Martinez. If you’re launching a small business and applying for a loan to help you get started, the bank might request that you include your life insurance policy as collateral. This ensures that the bank will be able to collect the money you owe them even if you die before you are able to pay off your debt. Similarly, people who need a little extra boost when they begin the homebuying process might be able to offer their life insurance policy as collateral on their mortgage.

There are certain types of debts that rarely make it into collateral assignments of life insurance coverage. “It doesn’t really apply to student loans or credit card debt,” notes Martinez. (This doesn’t mean that these kinds of debts disappear when you die, however — in fact, many people don’t realize that most debts remain active after death , and creditors will be well-prepared to claim what they are owed.)

Why do people create collateral assignments of life insurance?

Since banks and loan companies are going to do their best to collect their money regardless of whether you make them a collateral assignee on your life insurance policy, why would people  sign a collateral assignment form?

The answer is simple. “Some lenders require you to set up a collateral assignment of life insurance as a condition for a loan,” explains Martinez. “Not always, but this does happen.”

When a lender requests a collateral assignment agreement, it means that the lender suspects that you might not have enough assets in your estate to cover the costs of your outstanding loan or mortgage — and the lender wants the additional security agreement that comes with knowing they’ll be able to collect on your life insurance policy if you fail to pay off your debts.

Collateral assignments of life insurance become even more important if you have the kind of whole life insurance policy that has an associated cash value — that is, money that can be withdrawn from the policy at any time. “If you default on your debts, the assignee could come after your life insurance policy’s cash value,” says Martinez. “ Haven Life policies have no cash value, so that isn’t an issue with us.”

It’s not just easier life insurance, it’s an easier life.

Learn about the perks that come with being a Haven Term policyholder.

How do you create a collateral assignment on your life insurance policy?

In most cases, you won’t be able to create a collateral assignment when you apply for life insurance online . Instead, you’ll complete an Assignment of Life Insurance Policy as Collateral form after you receive your new life insurance policy.

“At Haven Life, we only allow collateral assignment once a policy is issued,” Schlass explains. “If individuals are looking to collaterally assign their policy, they cannot do this at time of application. However, if they own a policy and decide to make the change during the life of the policy, we can support this.”

As Schlass notes, you can fill out an Assignment of Life Insurance Policy as Collateral form at any time during the life of your policy. Some people may fill out this form immediately after being approved for life insurance, especially if taking out a life insurance policy and creating a collateral assignment is one of the steps they need to complete to be approved for a mortgage or loan. Other people may have had life insurance coverage in place for years before finding themselves in a situation in which they need to create a collateral assignment of life insurance.

There’s one important detail associated with the Assignment of Life Insurance Policy as Collateral form that you should be aware of — and it’s the fact that the form does not include the amount of money you owe your assignee.

“When you add a collateral assignment to your life insurance policy, you’re signing the form but you’re not telling us how much the lien is for,” says Martinez. In other words, you’re trusting your creditor to keep track of the amount of money you owe them. As you continue to pay off your debts, the amount you owe your creditor will decrease — and the amount of money they can claim on your life insurance policy will get smaller and smaller.

What happens if you need to change your collateral assignment?

Let’s say you pay off your debt for an outstanding loan balance in full — what happens to your collateral assignment of life insurance? The best thing you can do after paying off a mortgage, business loan or other collaterally assigned debt is contact your life insurance company. Let them know that your debts from your outstanding loan are repaid and your life insurance policy should no longer be used as collateral.

“If you pay off your debts, contact your life insurance provider so they can release the assignee,” explains Martinez.

What happens if you don’t contact your life insurance company to change your collateral assignment of life insurance? Since you no longer owe any money to your assignee, they won’t be able to claim any portion of your life insurance policy’s death benefit — but since collateral assignments have to be settled before any money is distributed to your beneficiaries, contacting the assignee and confirming the debts have been repaid can slow down the process.

In most cases, it takes fewer than 24 hours for your beneficiaries to receive their life insurance payout ; if there is still a collateral assignee on your life insurance policy, it could take much longer. Since your beneficiaries may be depending on your life insurance policy to cover your final expenses, pay off medical bills or keep up with the costs of running a household, it’s important to ensure that they are provided for as quickly as possible — and, financially speaking, as much as possible.

“What’s your plan?” asks Martinez. “You’re purchasing a life insurance policy to ensure your loved ones are protected.” While a collateral assignment of life insurance can benefit your loved ones by allowing you to purchase a home, start a business or take out a loan when you really need it, paying off your debts and releasing the assignee will do even more to protect your loved ones long-term. As Martinez explains, “You’re banking on your policy to benefit your loved ones.”

Life insurance is more affordable than you think

About Nicole Dieker

Nicole Dieker has been a full-time freelance writer since 2012, with a focus on personal finance and habit formation. In addition to Haven Life, her work regularly appears at Lifehacker , Bankrate , CreditCards.com , and Vox . Dieker spent five years as a writer and editor for The Billfold , a personal finance blog where people had honest conversations about money, and is the author of Frugal and the Beast: And Other Financial Fairy Tales .

Our editorial policy

Haven Life is a customer-centric life insurance agency that’s backed and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe navigating decisions about life insurance, your personal finances and overall wellness can be refreshingly simple.

Haven Life is a customer centric life insurance agency that’s backed and wholly owned by Massachusetts Mutual Life Insurance Company (MassMutual). We believe navigating decisions about life insurance, your personal finances and overall wellness can be refreshingly simple.

Our content is created for educational purposes only. Haven Life does not endorse the companies, products, services or strategies discussed here, but we hope they can make your life a little less hard if they are a fit for your situation.

Haven Life is not authorized to give tax, legal or investment advice. This material is not intended to provide, and should not be relied on for tax, legal, or investment advice. Individuals are encouraged to seed advice from their own tax or legal counsel.

Our disclosures

Haven Term is a Term Life Insurance Policy (DTC and ICC17DTC in certain states, including NC) issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001 and offered exclusively through Haven Life Insurance Agency, LLC. In NY, Haven Term is DTC-NY 1017. In CA, Haven Term is DTC-CA 042017. Haven Term Simplified is a Simplified Issue Term Life Insurance Policy (ICC19PCM-SI 0819 in certain states, including NC) issued by the C.M. Life Insurance Company, Enfield, CT 06082. Policy and rider form numbers and features may vary by state and may not be available in all states. Our Agency license number in California is OK71922 and in Arkansas 100139527.

MassMutual is rated by A.M. Best Company as A++ (Superior; Top category of 15). The rating is as of Aril 1, 2020 and is subject to change. MassMutual has received different ratings from other rating agencies.

Haven Life Plus (Plus) is the marketing name for the Plus rider, which is included as part of the Haven Term policy and offers access to additional services and benefits at no cost or at a discount. The rider is not available in every state and is subject to change at any time. Neither Haven Life nor MassMutual are responsible for the provision of the benefits and services made accessible under the Plus Rider, which are provided by third party vendors (partners). For more information about Haven Life Plus, please visit: https://havenlife.com/plus

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What is collateral assignment of life insurance?

Collateral assignment of life insurance is a method of providing a lender with collateral when you apply for a loan. In this case, the collateral is your life insurance policy's face value, which could be used to pay back the amount you owe in case you die while in debt. Collateral assignment of life insurance is a common requirement for business loans, and lenders may require you to get a life insurance policy to be used for collateral assignment.

Explore Progressive's editorial standards for Answers articles to find out why you can trust the insurance information you find here.

How does collateral assignment of life insurance work?

If you die before fully repaying your loan, collateral assignment will allow the lender, or "assignee," to be repaid for the outstanding loan amount using your death benefit. If you pay back your loan fully before passing away, or if only a portion of your death benefit is needed to pay off your loan, your beneficiaries can still file a claim for the policy's death benefit .

What steps are required to apply for collateral assignment of life insurance?

Depending on your lender and the loan type and amount you're applying for, collateral assignment of your existing life insurance or a new life insurance policy may be required. Collateral assignment requirements are particularly common with business loans. Here's how to apply for collateral assignment of life insurance:

Understand the requirements

Find out if your lender will accept collateral assignment of an existing whole or term life insurance policy . If so, confirm that your current policy's death benefit amount is sufficient collateral for the loan. If the lender requires that you get a new life insurance policy for the collateral assignment, you may need to shop around for life insurance with a death benefit amount that's sufficient loan collateral.

Apply for life insurance

If you're buying a new life insurance policy , you'll apply with the insurer. Once you're approved, double-check with your lender that the policy you've qualified for meets their loan requirements.

Complete the collateral assignment form

Once your first life insurance premium is paid, you can proceed with completing a collateral assignment form via your insurer. On the form, you'll need to provide your lender's contact information so they can be added as the death benefit collateral assignee until your loan is repaid. The form also requires signatures from both the assignor (you) and assignee (your lender).

Proceed with your loan application

Once your bank can confirm they're the collateral assignee for your life insurance policy, you can proceed with your loan application.

Don't cancel your life insurance policy during the course of your loan and make your insurance payments on time to avoid a life insurance policy lapse ; otherwise, you could violate your loan contract. Your lender may then have the right to raise your loan's interest rate or demand full repayment of your outstanding loan balance.

Will collateral assignment affect my beneficiaries?

With collateral assignment, you should still name beneficiaries as usual, but the total death benefit available to them will depend on when you pay off your loan. If you pay it off before you pass away, your death benefit won't be affected. However, if you pass away before paying off your loan, the total death benefit your beneficiaries can file a claim for will be reduced by the amount needed to fully pay back your lender.

Your lender will be an assignee rather than a beneficiary, and the assignee can only claim up to the amount required to settle your loan. Any amount remaining may be claimed by your beneficiaries, so be sure to update your beneficiaries as needed while your policy is active.

Other ways life insurance can help you with a loan

Collateral assignment might not be the only way to qualify for the loan you need. If you have a whole life or universal life policy, consider how much cash value it currently has. Instead of borrowing from a lender, you may be able to borrow from your policy's cash value via a life insurance loan . Note that there will be limits to how much you can borrow without putting your coverage in jeopardy, and any part of the loan not repaid by the time you pass away may be deducted from your death benefit.

You can also choose to cash out your life insurance policy. This would end your coverage, and taxes and fees will apply, but you could use the policy's value to eliminate your need for a loan or reduce the amount you need to borrow. Consult with a financial advisor to understand the implications of your particular situation.

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What Is Collateral Assignment?

• Life insurance has many different, creative uses. Learn about life insurance assignments, or, collateral assignments and how they can be used to secure a loan.

There are many creative uses for life insurance. You can use it for a lot more than just paying for your funeral or covering debts you leave behind. There are ways to assign your life insurance policy to another party for a number of purposes. Collateral assignment is one of those processes.

Collateral assignment uses your life insurance policy as collateral. The lender is assigned as the primary beneficiary to insure they don’t lose money on a loan. If the borrower can’t pay, the lender sells the life insurance policy to cover the loan. If the borrower dies before paying off the loan, the lender takes what is owed from the death benefit.

The situation works out nicely for the lender, as generally death benefits not assigned to a lender are protected from debtors. Without collateral assignment, a lender could lose money in the event of a borrower's death.

To use a policy as collateral, it will likely need to be a whole life policy. Otherwise, the lender would not be able to sell it to recover its investment. After the loan is paid in full, the primary beneficiary on a collateral policy is generally reassigned to someone the policyholder chooses.   

Absolute Assignment 

Where collateral assignment only transfers the right of primary beneficiary, absolute assignment transfers ownership of the entire policy. The use of absolute assignment is broader than collateral assignment. It doesn’t always involve a loan.

One common use of absolute assignment is charitable donation. You can transfer ownership of a whole life policy to a charity and it sets itself as the primary beneficiary. This is can be more efficient in some cases than just setting a charity as a beneficiary and avoids delays and fees involved with the estate. You may also be able to write off your premium in this situation as a charitable donation. Absolute assignment cannot be revoked.

Collateral Assignment of Life Insurance

Collateral assignment of life insurance means using a policy as collateral for a loan. If the borrower dies before paying it back, the lender can take the unpaid amount from the insurance payout upon the borrower’s death.

In this guide, you’ll learn how collateral assignments work, why they’re used, and the pros and cons of using life insurance as collateral.

Table of Contents

What Is Collateral Assignment?

• Policy Options for Collateral Assignment

How to Use Life Insurance as Collateral for a Loan

• Life Insurance as Collateral: Pros & Cons
• Alternatives to Life Insurance

Did you know you can use  life insurance to secure an SBA loan for your growing business? Get started today.

Valuable assets (like a home or vehicle) typically serve as collateral for a mortgage or an auto loan. If you default on payments, the lender can repossess it to recover their money.

Lenders require reassurance for loans that aren’t directly tied to a physical asset. You can use a life insurance policy as loan collateral in these cases.

As owner of the life insurance policy , you collaterally assign it to the lender, which means:

• If you die before the loan is repaid, the death benefit covers your remaining loan balance
• Any remaining proceeds go to your named beneficiaries

Collateral vs Absolute Assignment of Life Insurance

There are two types of assignment for life insurance: collateral and absolute.

Collateral assignment of life insurance : You control the policy. It’s commonly used to secure a small business loan.

Absolute assignment : You transfer all policy rights to the assignee. It’s often used when a policy owner sells it to a third party for an immediate cash benefit.

Similarities between collateral and absolute assignment:

• Both involve the transfer of rights under a policy.
• Both require the consent of the insurance company.
• Both can be used as a means of managing financial risks or responsibilities.

Differences between collateral and absolute assignment:

Collateral assignment:

• Used to secure a loan or other financial obligation.
• The policy owner maintains ownership and control over the asset, except for the rights assigned as collateral.
• The lender (assignee) only has rights to the asset in the event of death or, in some cases, default.
• The assignment is temporary and removed when the loan is repaid.

Absolute assignment:

• The policy is fully transferred to a new owner.
• The original owner gives up all rights and control over the policy, including the right to name beneficiaries and access cash value.
• The new owner can manage the policy however they see fit, including selling it, borrowing against it, or changing its terms.
• The assignment is permanent; the original owner can’t reclaim rights to the policy without the new owner’s consent.

Life Insurance Assignee vs Beneficiary

A life insurance assignee is a person or entity to whom a policy’s rights have been transferred.

A beneficiary is a person, trust, or entity designated by a policy owner to receive the death benefit when the insured person dies.

Whether used for collateral assignment or not, your policy needs designated beneficiaries .

Here’s why:

• The lender only has a legal claim to the death benefit if you die before the loan is paid.
• If you pass away, the lender gets their payment, and the rest goes to your beneficiaries.
• If you repay the loan in full and die, the lender receives nothing, and your beneficiaries receive the full benefit.

Life Insurance Policy Options for Collateral Assignment

Using life insurance for collateral assignment when applying for loans is a common practice that almost every life insurance company and lender is equipped to handle.

Examples of when life insurance can be collaterally assigned include:

• Personal loans
• Business loans

There are two types of life insurance—term life insurance and permanent life insurance—and both kinds can be used for collateral assignment.

Term Life Insurance

Lenders typically accept term life insurance as collateral, provided that the policy aligns with the size and duration of the loan.

Coverage and term length must equal the loan’s terms– or exceed them.

For example, if you’re securing a 20-year loan, you would need a term life insurance policy that spans 20 years.

If you pass away before repayment, the insurance company pays the outstanding loan balance to the lender from your policy’s death benefit first. Any remaining amount after the loan is fully paid would then be distributed to the beneficiaries you have named on your policy.

If you repay the loan before passing, the collateral assignment ends, and the total death benefit amount is reserved for your beneficiaries.

Permanent Life Insurance

Lenders often find permanent life insurance policies appealing as collateral due to their unique cash value component.

Life insurance with cash value provides an added level of reassurance to the lender, ensuring the cash value will offset the loan if the borrower defaults. 

However, even though the policy’s worth grows over time, the death benefit must cover the entire loan.

If you pass away before the loan is repaid, the company would first pay the loan balance from your policy’s death benefit to the lender.

Any remaining proceeds from the death benefit would then be distributed to the beneficiaries named on your policy.

Learn more about the differences between term and permanent life insurance .

See what you’d pay for life insurance

If you’re looking to secure a loan with life insurance, you can buy a policy to do so or collaterally assign a policy you already own.

Collateral Assignment of a Life Insurance Policy You Already Own

To collaterally assign an existing policy, you and your lender must fill out a short form confirming the details.

You or your agent can request this form directly from the life insurance company.

Once the completed forms are back in the insurance company’s possession, they will review them and send confirmation in a few weeks.

• If you already own a life insurance policy worth enough to cover the loan, you can usually use it as collateral.
• If you currently have term life insurance, the remaining years on your term must be longer than the loan’s term.

Collateral Assignment of a New Life Insurance Policy

Buying a new life insurance policy for collateral assignment is similar to that of any other purpose for life insurance.

• Step 1: Determine the amount of life insurance coverage you need . While the coverage should be sufficient to cover the loan, you may consider additional obligations like income replacement for your family, mortgage payments, and more.
• Step 2: Apply for a life insurance policy as you would normally. List your chosen beneficiaries, such as your spouse, adult child, etc. At this stage, there’s no need to list the lender as a beneficiary.
• Step 3: Activate your policy. Then, request a collateral assignment form from your agent or insurer directly.
• Step 4: Complete the form and return it to the insurance company. After processing, the insurer acknowledges the collateral assignment. Then the lender obtains rights to the death benefit, up to the amount owed on the loan, if you die before the loan is repaid. Any remaining death benefit would be distributed to the other named beneficiaries.
• Step 5: While collateral assignment is active, policy control may be limited. The specifics of what actions are permissible can vary, so reviewing the terms of the loan and collateral assignment agreement is essential.
• Step 6: Collateral assignment terminates when the loan is paid. Your full ownership rights are then restored.

Explore the various ways business owners use life insurance to protect their business and their loved ones. 

Life Insurance as Collateral: Pros and Cons

Overall, using life insurance as collateral can be a sound and effective strategy for obtaining a loan, provided that it aligns with your financial circumstances and goals.

Collateral assignment impacts your control and financial protection for beneficiaries positively and negatively.

• Access to loans
• Loan approval
• Protection for beneficiaries
• Limited policy control
• Risk to beneficiaries
• Additional costs
• Policy loss

Alternatives to Collateral Assignment

Collateral assignment isn’t the only way to secure a loan. Knowing alternatives can help you decide what best aligns with your financial circumstances and goals.

Some examples include:

• Cash value: If you already own a permanent life insurance policy with accumulated cash value, you can borrow against this amount through policy loans .
• Unsecured loans: These do not require collateral and are primarily based on your creditworthiness. They often come with higher interest rates.
• Secured loans: These are backed by collateral that isn’t life insurance, like investments, savings accounts, or valuable property. If you default on a secured loan, the lender seizes the collateral.
• Home Equity Line of Credit (HELOC): This uses your home as collateral if you’ve built enough equity.
• Credit cards: Interest rates are higher than other loans, but credit cards can be used in a pinch.
• Grants or government programs: Grants or government programs might be available to provide funds with attractive terms.

Compare Life Insurance Quotes and Apply Today

The primary purpose of life insurance is to provide financial protection to those who depend on you. But life insurance has other uses as well, such as collateral assignment.

If you don’t yet have life insurance, start by getting quotes . Here at Quotacy, you can see quotes instantly without giving away any contact information. Compare policies from multiple top-rated insurers and apply with confidence.

The online application only takes a few minutes. When you submit yours, you’re assigned a dedicated life insurance agent who advocates for you. Your agent ensures you get the best possible rate and provides unbiased advice.

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Using Life Insurance For Collateral Assignment

Fact Checker - Licensed Life Insurance Agent

The most common way that life insurance policy protects you and your loved ones is by providing financial support to your family in the event of your untimely death.

In some situations, life insurance serves to replace lost income with death benefits, in others, life insurance can be used to pay off remaining debts and death expenses. 

Life insurance can also be used as a very helpful tool in order to obtain financing for a loan .

This process of using a life insurance policy to take out a loan is called “ collateral assignment ” of life insurance.

Before we discuss everything you need to know about the collateral assignment of life insurance, let’s take a quick peek at what we will be covering in this article:

What you will learn in this article (click to go to section):

• What is Collateral Assignment of Life Insurance?

How Does Collateral Assignment of Life Insurance Work?

• Can I Apply for Multiple Loans With Life Insurance as Collateral?
• How to Apply for Collateral Assignment of Life Insurance
• Requirements, Limitations, and Restrictions 
• What Happens in the Event of Default or Death?
• What if I Pay Off my Loan While Using Life Insurance as Collateral?
• Who Qualifies for Collateral Assignment of Life Insurance?
• Choosing a Beneficiary for Your Policy
• Best Life Insurance Companies for Collateral Assignment
• Finding a Life Insurance Policy to Use for Collateral Assignment

What is a Collateral Assignment of Life Insurance?

The collateral assignment of life insurance is a legal way for you to assign your life insurance policy as a form of collateral for a loan to banks.

With this, you can be far more likely to receive financing for loans you may not otherwise be able to secure because the bank knows they will get their money back no matter what.

The way collateral assignment of life insurance works is like this:

• You have a life insurance policy that is in your name. This coverage is paid for by you just like any regular life insurance policy.
• Once you have this coverage, you must apply for a collateral assignment of life insurance with both your life insurance company and the bank. (Below we describe how to apply for a collateral assignment of life insurance in detail.)
• Once the life insurance company clears you to use the policy as collateral for the loan, you must then specify to your lender that this is what you intend to do.
• From there, you simply wait for the bank to get back to you on your application, and if they approve, you have successfully used life insurance as collateral assignment on a loan from the bank!

Can I Apply For Multiple Loans With Life Insurance As Collateral?

You can apply to as many loans as you please using your life insurance policy as collateral, as long as the policy has a large enough death benefit to cover the total amount owed on the loans you are applying for.

How to Apply For Collateral Assignment Of Life Insurance

Applying through your bank.

There are some lenders who will consider using your existing life insurance policy for collateral assignment if you request it, but others might require you to take out a brand new policy specific for that purpose.

In either case, using life insurance for collateral assignment when applying for loans is a fairly common practice that almost every life insurance company and the bank is equipped to handle.

You start off the application for assignment by securing the loan with the bank in question. This is where you will discover the limitations and regulations the bank has regarding the collateral assignment of life insurance. Each lender has different policies.

Applying Through Your Insurer

Once you have found the right loan, you must fill out the collateral assignment form . Your insurer will be able to provide you with this form easily.

The form has to be filled out by every party involved, including yourself, the lender, and the insurance company. You can sign the forms at the time of your loan application or you can sign them after your policy has been issued.

If you are taking out a brand new life insurance policy, you are better off signing all of the documents for this at the beginning of the application. The time frame to request a collateral assignment and be accepted for it ranges between 24 hours and 48 hours.

Some banks might require that you notarize the form, which can add some time to the application and acceptance process.

Collateral Assignment Of Life Insurance Requirements, Limitations, & Restrictions

When it comes to applying for and using life insurance as collateral assignment for a loan, there are a few common requirements to keep in mind to make sure that you get the most out of your policy, and also to make sure that you can be accepted quickly and easily .

1. Beneficiary and Policyowner Requirements

Policyowners of a life insurance policy that qualifies for collateral assignment must be the owner of the policy . They do not necessarily need to be the insured or the beneficiary, but they must be the owner of the policy.

The policy owner must maintain payment of all premiums in order for this policy to remain in place as collateral.

2. Types of Life insurance policies that qualify for collateral assignment

Any type of life insurance policy is capable of being used as collateral assignment for loans, as long as the company that issues it does not have any rules against it being used as such.

Term Life Insurance

Term life insurance policies used as a collateral assignment for loans must have terms longer than the length of the loan . Additionally, if the loan is paid off prior to the expiration of the policy, the policy is no longer payable to the bank.

Be sure to notify your insurer in the event that you pay off a loan which used your life insurance policy as the collateral assignment. You can then assign a new beneficiary to the life insurance policy with their help.

Permanent Life Insurance

Permanent life insurance policies  can also be used as collateral assignment for loans from banks. In this case, any cash value accumulated by the policy is only accessible by the bank in order to maintain collateral in the case of a loan default.

3. Lender Rights

If you default on your loan , the bank reserves all rights to utilize your life insurance policy’s death benefit as a form of repayment for your defaulted payments.

On top of this, they reserve the right to take from your cash value on permanent life insurance policies, as mentioned above.

What Happens If You Die Or Default With Your Life Insurance Policy Being Used As Collateral Assignment?

A collateral assignment is a form of limited transfer, unlike an absolute assignment which gives over all of your policy with no chance of reversing it.

If you were to pass away before your loan is repaid the lender will receive whatever amount is still owed from your death benefit. The remaining balance will be given to your beneficiaries .

As long as you pay your premiums on time and your policy is current you can use this to secure any type of loan with any bank that will accept it.

The same goes for defaulting on your loan.  If you default, the bank only has access to the amount of death benefit that is owed to them. The rest is secure and still under your policy, to be paid out to beneficiaries in the event of your death.

What If I Pay Off My Loan While Using My Life Insurance Policy As Collateral?

If you pay off the loan entirely before you pass away, or before the end of your policy, then the lender is no longer entitled to any of your death benefit and the full death benefit continues into the hands of your beneficiary.

At this point with permanent life insurance policies, your access to cash value is reinstated as well.

Who Qualifies For Collateral Assignment Of Life Insurance?

Any policyholder that has a permanent or term life insurance policy can qualify for collateral assignment.

Not every company allows collateral assignment of life insurance policies, and therefore it is best that you speak with your life insurance provider to see what their limits are with regard to Collateral Assignment.

However, most life insurance companies are equipped to handle this easily.

Many life insurance providers do not care how you use the policy, as long as it is in a legal fashion, and they will likely sign your application for collateral assignment quickly and with minimal friction.

Choosing A Beneficiary For Your Life Insurance Policy With Collateral Assignment

If you are attempting a collateral assignment, your bank might ask you to assign them as the beneficiary.

DO NOT ASSIGN YOUR BANK AS THE BENEFICIARY OF YOUR LIFE INSURANCE POLICY! 

If you die and you only paid off half of your loan and you made the bank your beneficiary, the bank will receive the remaining balance of your entire death benefit.

If you were to take out a $100,000 loan and you assigned the bank as your beneficiary they would receive the entire amount even if the amount owed to the bank at the time of your passing was only $20,000.

You do not want this to happen.

Banks only require a collateral assignment and that means they are only entitled to the amount owed on your loan, an amount which theoretically decreases with time.

If you have no beneficiaries listed, the remaining amount will theoretically go to your estate. But there may not be anyone around to enforce this. 

You can choose whomever you please as your beneficiary on your life insurance policy, as long as it is not yourself. Just be sure the beneficiary you choose is not your bank, regardless of what they tell you .

Best Life Insurance Companies For Collateral Assignment Of Life Insurance 

SBLI Life Insurance is also known as Mutual insurance company and they provide affordable policies to smokers and non-smokers.  They were founded in 1907 and since they are a mutual company they are owned by the policyholders and not by the stockholders.

As such their primary objective is to show allegiance to the clients rather than to their investors. This particular company is popular because they help customers blend different term life insurance policies with whole life insurance policies.

They have an A , excellent, rating from A.M. Best. They have an A+ rating from the BBB. Their financial history has remained level and strong since their inception.

Sagicor is rated A- by A.M. Best with a financial rating of A- . They have been in business for over 60 years offering products across 45 states. Without undergoing a medical exam you can still qualify for coverage up to $500,000 .

If you don’t want to answer any medical questions you can still get covered under $250,000 with this particular company.

They are not favorable toward individuals with diabetes or people who want a 30-year term plan but they are perfectly suited for individuals who are looking for whole life insurance policies that offer collateral assignment options.

North American Company

The North American company has a solid financial strength rating. They are given a superior rating which is the second highest rating you can get, from A.M. Best.

They also have an A+ from the S&P rating and Fitch rating.  This company is also privately owned so they are able to invest in Secure assets rather than things like government bonds.

North American has an array of whole life insurance policies that are offered it to anyone 85 or younger and they have favorable terms for collateral assignment options.

Banner Life

Banner Life Insurance Company Offers an array of inexpensive universal life insurance products. However, they do not have a whole life insurance policy.

They are licensed to conduct business in every state but New York. If you are a New York resident you can still get coverage but you have to go through William Penn. They have a financial strength rating of excellent.

Finding A Life Insurance Policy To Use For Collateral Assignment

If you are looking for life insurance coverage which you can also use as collateral on a loan, then you want to take some time to make sure that you understand the stipulations of your bank and insurance provider.

On top of this, you want to be sure that the policy you choose offers great rates and is offered by a company with a history of paying out claims on time and when needed.

The easiest way to find the best life insurance coverage to use for collateral assignment is to speak with an independent life insurance agent who can help you compare life insurance policies and rates from dozens of the best life insurance companies on the market.

We are very experienced in this area and have the knowledge necessary about life insurance providers and collateral assignment with banks to ensure that you find the best coverage for your situation.

Give us a call today to speak with a professional, or get started online using our quoting tool for quick and easy life insurance quotes.

Ty Stewart is a founder and contributor of SimpleLifeInsure.com. He started researching and studying about life insurance when he got his first policy for his own family. He has been featured as a life insurance expert speaker at agent conventions and in top publications. As an independent licensed life insurance agent he has helped clients nationwide to secure affordable coverage while making the process simple.

I’m Bennett Bier , owner, author and fact checker of Simple Life Insure. I believe working with a small independent broker offers consumers more personal attention and superior customer service. As an independent agent licensed in all 50 states and the District of Columbia I have access to many of the top A+ rated life insurance carriers. This lets me locate a plan that you will qualify for while saving you money at the same time. Over the years I have mastered the art of underwriting, getting approvals even for my highest risk clients. I’m also likely the person that will answer the phone when you call.

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What Is A Collateral Assignment?

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Life insurance is often the key to securing a loan.

Frequently, lenders request a  collateral assignment of life insurance  as a requirement for loan approval.

Your bank, or lending institution, has an interest in guaranteeing the loan they provide will be paid back , regardless of your circumstances.

Think of an assignment of life insurance as collateral as a promise to your lender.

It’s the lender’s job to assess your ability to repay a loan, and the promise of a life insurance policy can make all the difference.

Here, we will cover life insurance as a collateral assignment in its entirety so that you can make an educated decision moving forward.

Table of Contents

• Definitions
• Requirements
• How To Decide

What Is Collateral Assignment Of Life Insurance?

A conditional assignment in which the lender is a recipient of the death benefit (or cash value) of a life insurance policy for an amount equivalent to the balance of the loan.

Let’s take a look at a couple of definitions related to collateral assignments:

• Collateral  – something offered (in this case, life insurance) as a guarantee of loan repayment if you default on your loan.
• In other words, your lender no longer qualifies for the death benefit or cash value of your policy once your loan is paid off.

SBA loans , structured settlement buyouts, and bank loans commonly require life insurance as collateral.

Requirements For Assignment Of Life Insurance As Collateral

There are two primary requirements to secure a loan through the assignment of a life insurance policy:

• The life insurance company must approve  the assignment (most do).
• The lender must accept  the life insurance policy as collateral.

Process Of Securing Collateral Assignment

The steps to securing your loan through the assignment of life insurance as your collateral are typically uncomplicated:

• Purchase life insurance  – be sure to name primary and contingent beneficiaries .
• A collateral assignment is accomplished via a collateral assignment form . Your life insurance carrier typically provides the form.
• Note – a collateral assignment can only be processed after your policy’s issuance.

Key Details

• List beneficiaries other than your lender (for example, your spouse). Your lender should NOT be your primary beneficiary.
• As a collateral assignee, your lender will ONLY receive the amount of life insurance proceeds which covers the balance (principal plus interest ) of your loan, should you pass away prior to payoff.
• The remaining death benefit (or cash value amount if utilizing a permanent life insurance policy) will go to your designated beneficiaries.

Important Note!

Collateral assignments are first-in-line for your life insurance proceeds. Your beneficiaries are second-in-line.

Said differently, your policy’s proceeds go to your lender first, in the event of your death.

Once your loan is satisfied, your beneficiaries receive the remaining death benefit.

Types Of Life Insurance Used As Collateral

Just about any form of life insurance can qualify for collateral assignment as long the lender accepts it as collateral.

You will want to select the best life insurance policy to fit your needs.

Consider the following types:

It’s common to be in a hurry to secure a loan.

No exam life insurance often takes weeks off of the application process, making this type of life insurance ideal for a collateral loan assignment.

What is it?  Life insurance issued without a medical examination of the insured.

No exam life insurance is available as term life insurance, universal life, and whole life insurance.

Is No Exam right for me?

There are a number of instances in which we recommend no exam life insurance:

• You need life insurance, fast . Some carriers will issue a no exam policy within minutes .
• You have a few health conditions . If you are in less than excellent health, you may qualify for better rates by skipping the paramedical exam.
• You haven’t seen a doctor in a number of years . It’s possible something might pop-up on your blood work that you are unaware of, like high cholesterol or elevated blood sugar.
• The idea of needles and nurses makes you wince . Yep, just go ahead and skip dreaded needle if you want.

Term life insurance is popular because you can purchase a large amount of coverage with cost-effective premiums.

What is it?  Life insurance issued for a specific period of time. For example, 10 or 20 years .

Term life insurance provides coverage for when you need it most. For instance, you likely need protection while you are raising a family and working.

Premium payments and death benefit are typically level (they stay the same) for the amount of time chosen.

Is Term right for me? 

Consider purchasing term if:

• You need a life insurance policy with a larger face amount.
• Your life insurance needs are for a particular amount of time.
• You are on a budget.

Whole life insurance , also called permanent life insurance, lasts your whole life.

What is it?  Lifelong life insurance protection which includes a cash value component.

Whole life insurance, as long as you make your premium payments, will not expire.

Your premium payments are typically level, and can even go away in later years.

Is Whole right for me?

Whole life insurance can make sense under certain circumstances:

• You want a cash value component to your policy.
• The policy loan features interest you.
• Life insurance coverage which does not expire is ideal for you.
• You plan to give a financial gift via life insurance.

Universal life insurance (UL) is a specific type of permanent life insurance.

What is it? A form of whole life insurance with flexible premium payments and an investment piece.

Universal life insurance is known for its adaptability.

Is Universal right for me? 

Universal life insurance includes unique characteristics:

• Market performance affects the investment component of your policy.
• Your premium payment amounts can be flexible. They are dependent on your life insurance needs and the needs of the policy.
• The death benefit is often adjustable.
• Your policy is permanent and lasts your whole life.

Guaranteed Universal

Guaranteed Universal life insurance (GUL) is ideal for someone who is looking for an affordable life insurance policy which would likely last your entire life.

What is it?   GUL is a hybrid of term and permanent life insurance products.

Guaranteed Universal is popular because it’s a cost-effective way to secure life insurance coverage until you reach a certain age, often over age 100.

Is Guaranteed Universal right for me?

Also called No Lapse , Guaranteed Universal life insurance has many appealing features:

• Policy length is determined by an age limit, not term length. For example, your GUL policy can last up to age 121.
• Your policy will likely be more expensive than term life insurance but cost less than whole life insurance.
• There is often not a cash value component.
• Your premium payments and death benefit are level.

You have the option to utilize the cash value of a permanent life insurance product (Whole Life, Universal Life, sometimes Guaranteed Universal Life) for collateral assignment. That way, your beneficiaries receive all of the death benefit.

Keep in mind , your access to the cash value of your policy will commonly restricted if you have a collateral assignment attached to it.

You will want to go about securing your collateral assignment in the best possible way and avoid potential pitfalls.

Pay close attention to our list of important do’s and don’ts:

• Purchase life insurance that is approved for collateral assignment
• Name primary and contingent beneficiaries
• Verify with your lender that the policy will qualify
• After loan payoff, obtain a release of assignment from lender
• Submit release of assignment to life insurance carrier

Don’t

• Assign lender as primary beneficiary
• Purchase a policy with a face amount that is less than your loan amount
• Let your policy lapse
• Lose the original policy
• Lose track of repayment schedule

Commonly Asked Questions About Collateral Assignments

It depends. The amount of time it takes to secure your collateral assignment is dependent on the carrier, the type of life insurance policy, and your unique needs. For instance, if you purchase a no medical exam life insurance policy, the process will be much faster than if you participate in a paramedical exam (fully underwritten policy). Potentially, your collateral assignment could be in place within days, or it might take weeks.

Keep in mind, you DO NOT want to list your bank or lending institution as your primary beneficiary. Instead, name those you care about most, and depend on you financially, as your beneficiaries. That way, your lender – as a collateral assignee – only receives a death benefit amount that equals the balance of your loan. The remaining policy proceeds will go to your beneficiaries.

Not necessarily. In general, a life insurance purchase does not require you to have a stellar credit rating. In fact, qualifying for a loan usually has stricter credit score requirements . If, however, you are going through bankruptcy proceedings , or you have recently, your life insurance application will likely be affected. Speak to an independent life insurance agent for information about bankruptcy and life insurance.

In a word, don’t. Plan on your lender being notified if you miss a premium payment. If you encounter financial hardship and find difficulty in making your premium payments, contact your lender right away to discuss options. Should you default on your life insurance policy, your lender could consider your loan to be in violation of the contractual provisions. Your lender may make premium payments on your behalf to keep the policy in force. Your loan will (almost always) have the payments made for you tacked on to the loan balance. If you are utilizing the cash-value of a whole life insurance policy as collateral, your lender will likely have the ability to pull funds from the cash-value to make your premium payments.

Yes. If you would like to use a different life insurance policy as a collateral assignment, speak to a life insurance agent about the process. As long as the other life insurance policy qualifies, you can change your collateral assignment. Remember, there are two primary requirements for the assignment of life insurance as collateral: 1. Your carrier must agree to the collateral assignment of the life insurance policy. 2. The lender must approve the collateral assignment – meaning the policy needs to be for an appropriate amount and length of time .

No. You do not need to be the insured on the life insurance policy. You do, on the other hand, need to be the policy owner . The policy owner has control of the life insurance contract and has the ability to designate a collateral assignment. Often the insured and policy owner are the same person.

This type of collateral assignment is unique to employers and their key employees. Split dollar plans are not designed for individuals looking to secure a loan. Essentially, a collateral assignment under a split dollar structure allows an employer to loan money to a key employee to make premium payments on a life insurance policy. In turn, the employee assigns the life insurance policy as collateral for the loan. The intended result is to provide additional value to employees who are vital to a company’s success.

Yes. As long as your policy meets the requirements, multiple lenders can accept your policy as a collateral assignment. For example, let’s say you are in the process of securing loans through your bank and an additional lending institution. Your bank loan is for $50,000 and your lending institution loan is for $80,000. The term lengths on your loans are 10 years and 15 years, respectively. In this hypothetical, say you own a 20-year term life insurance policy for $250,000. Your policy is for an amount and term length that would satisfy the collateral needs of both loans. As long as the life insurance company and lenders agree, your policy can be used as a collateral assignment for the two loans.

Possibly. You will typically need written consent from your lender prior to taking out a loan. Remember, policy loans are available through whole life insurance. In essence, your lender must agree that the collateral assignment is not put in jeopardy as a result of a policy loan. You will want to contact your lender to discuss your options.

Contact your lender as soon as your loan is paid off. The lender will provide a formal release of collateral assignment form. The form surrenders their rights to your life insurance policy. You will submit the form to your life insurance carrier . That way, your beneficiaries will not encounter delays to your policy’s proceeds.

Is Collateral Assignment Right For Me?

The collateral assignment of life insurance DOES make sense if:

• You are in the process of securing a loan with a collateral assignment stipulation.
• You do not have cash reserves to use as collateral for loan approval.

The collateral assignment of life insurance does NOT make sense if:

• Your loan can be approved without a collateral requirement.
• Another acceptable (and preferred) form of collateral, like cash, is available.

Final Thoughts

There a number of important things you need to know if you are in the process of establishing a loan with a collateral assignment requirement:

• Your life insurance carrier must approve  the assignment, while your lender must accept the assignment.
• Most types of life insurance policies qualify as collateral.
• Your lender should be your collateral assignee , NOT your primary beneficiary.
• A collateral assignment can take just a  few days , however, it may require weeks, so plan accordingly.

Finally, the process of establishing a collateral assignment of life insurance is typically simple and straightforward, but feel free to ask someone for help.

Life insurance is an invaluable tool for securing an important loan.

Heidi Mertlich

Heidi Mertlich is the owner of NoPhysicalTermLife.com. She is an independent life insurance agent specializing in no medical exam life insurance. Heidi is also an author for LifeInsurancePost.com, an online community of life insurance experts.

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BestLifeRates.org, LLC. provides independent information for the purpose of providing consumers insight into obtaining the best life insurance coverage from the best life insurance company they could obtain, subject to underwriting. No mention of an insurance company or its prices is an offer for life insurance, and all users and applicants shall be subject to any and all underwriting requirements by the insurance company in which you apply. We attempt, within reason, to ensure all quotes are up to date, though rates change periodically and are never guaranteed.

Life Insurance Collateral Assignment [Pros and Cons]

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If you’re considering leveraging your assets to secure a loan, your life insurance policy might hold untapped potential as collateral. This strategic move can offer you a pathway to obtain the financing you need without risking your home or other valuable assets. It’s a method that not only provides lenders with the assurance of repayment but also preserves the integrity of your personal estate. As you navigate this option, it’s crucial to weigh the benefits against the potential impacts on your policy’s intended beneficiaries and ensure the approach aligns with your broader financial objectives.

Collateral Assignment of Life Insurance

Table of contents, key takeaways, what is a collateral assignment of life insurance, pros and cons of assigning life insurance benefits, understanding collateral, how the life insurance collateral assignment process works, what types of life insurance can be assigned as collateral, examples of life insurance as collateral, setting up a collateral assignment, common mistakes to avoid in a collateral assignment, evaluating the suitability of a collateral assignment of life insurance, life insurance for collateral assignment faqs.

• Is a Life Insurance Collateral Assignment Right for You?
• Strategic Financing : Utilizing your life insurance policy as collateral for a loan can be a strategic way to secure necessary financing without jeopardizing other personal assets, offering a safer alternative to traditional collateral like homes or cars.
• Loan Qualification and Terms : This approach can facilitate easier loan qualification and potentially more favorable loan terms due to the added security it provides to lenders, often resulting in lower interest rates.
• Impact on Beneficiaries : While using life insurance as collateral can protect other assets, it’s important to consider the potential reduction in the death benefit available to your beneficiaries, which could impact their financial security.
• Policy Eligibility and Process : Both term and permanent policies are eligible for collateral assignment, but the process involves specific steps, including policy application, collateral assignment form completion, and adherence to lender requirements.
• Seek Professional Advice : Given the complexities involved in using life insurance as collateral, obtaining personalized advice from a life insurance professional is crucial to navigate the process effectively and ensure alignment with your financial goals.

A collateral assignment of life insurance is a conditional assignment that appoints a lender as an assignee of the policy. Similar to using other types of collateral for a loan – such as a property or a vehicle – if the loan is not repaid, the lender has a claim to some or all of the life insurance policy’s death benefit, and in some instances, the policy’s cash value.

With a collateral assignment of life insurance the lender is not a policy beneficiary. Therefore, having the lender be named as a collateral assignee instead, you can specify that the lender is entitled only to a portion of the death benefit (i.e., the amount of the unpaid balance on the loan). The remainder of the death benefit would then go to our named beneficiary.

Consult with an Expert

There are advantages and potential drawbacks when using life insurance as collateral for a loan.

On the plus side, having collateral gives a lender more security that you will repay the loan, making it easier to qualify. Likewise, this repayment security can result in a lower interest rate and payment for the borrower.

In addition, using the death benefit on a life insurance policy as loan collateral can keep other assets – such as the borrower’s home, car, and savings – protected from loss if the loan defaults. And, you can still have named beneficiary(ies) on the policy who receive the remainder of the death benefit proceeds.

There are, however, some potential disadvantages of using a life insurance collateral assignment, too. For instance, with the lender as an assignee, it can reduce the amount of proceeds left for survivors – which could put loved ones into financial hardship to come up with more funds to replace income or pay off other debts of the insured.

If the borrower does not yet have life insurance – but plans to obtain it as collateral – the policy’s premium cost can raise the borrower’s out-of-pocket expenses. Further, if the borrower has specific health issues, they may not qualify for coverage (or if they do qualify, it could be at a higher premium rate).

In addition, if the life insurance policy lapses for any reason, it could violate the terms of the loan, as there would no longer be any collateral causing problems with the lender.

Pros and Cons of Using a Life Insurance Collateral Assignment

Collateral is the item pledged as security for the repayment of a loan. If the borrower defaults on loan payments, the lender will receive the collateral.

Having collateral can help to secure a loan because the lender knows that, even if the borrower stops making payments (either due to death or other circumstances), they will receive something of value in return.

Because collateral can make a loan more secure for a lender, the borrower may also receive a lower interest rate than they would with an unsecured loan (i.e., a loan that does not have collateral).

Collateral for loans can also include items such as:

• – Property (such as with a home mortgage or home equity line of credit)
• – Vehicles
• – Investments, like stocks, bonds, and CDs
• – Savings/cash/money markets
• – Business equipment
• – Collectibles (i.e., art, jewelry, etc.)
• – Precious metals

If you plan to use a life insurance collateral assignment strategy when applying for a loan, you should go through the following steps in order:

• Understand the requirements . First, you should know the type of policy a lender will accept as collateral – or even if a lender will accept life insurance. If you need to purchase a new policy, obtain several quotes from highly-rated life insurers before you commit to one.
• Apply for a policy if you do not already have one . Next, fill out the application for life insurance coverage. You may have to undergo life insurance underwriting before the company approves you for a new policy, which could require undergoing a medical examination and answering in-depth health-related questions.
• Fill out a collateral assignment form . This form will include listing the lender’s information and naming them as assignees on the policy’s death benefit. A Medallion Signature Guarantees may be required.
• Obtain approval from your lender that the insurance company has made them the collateral assignee . Only after you receive this approval should you apply for your loan. You can then add any necessary information about the life insurance policy on the loan application.
• End the collateral assignment . Once your loan has been repaid, let the life insurance company know so they can confirm with the lender and get rid of the collateral assignment.

A lender will generally require that the policy’s death benefit be at least as much as the loan balance amount. That way, the death benefit will reimburse the lender if you pass away before repaying the loan.

If you take out a new life insurance policy, the application process is the same as applying for one without a collateral assignment. However, you must complete a collateral assignment form with the insurance company that lists the lender as an assignee.

We recommend that you walk through this process with a life insurance professional who is familiar with how a collateral assignment works and who can answer any of the questions or concerns that you may have.

A borrower may use term and permanent life insurance for a collateral assignment. But, because each financial institution has different requirements, it is crucial to check and see which one(s) are eligible for your particular transaction. If both term and permanent life insurance policies are acceptable, compare the cost and benefits of each before moving forward.

For example, because the coverage on a term life insurance policy only lasts for a pre-set period (such as 10 or 20 years), a lender may prefer that the borrower have permanent life insurance coverage for the borrower’s lifetime.

Also, a permanent life insurance policy may allow the lender access to the funds in the cash value to make loan payments if the borrower defaults. In this case, the lender may restrict the policyholder’s access to the cash value to protect the lender’s collateral, and this is why many lenders prefer permanent insurance over term life insurance for collateral assignments.

Some examples of cash value life insurance policies include:

• A whole life insurance policy
• A guaranteed universal life insurance policy
• An indexed universal life insurance policy
• A variable universal life insurance policy

Which cash value life insurance policy is best for a collateral assignment?

You should consider which life insurance policy will provide the most stability, as well as any additional features and benefits that would make it more advantageous.

If you simply need a permanent life insurance policy with a death benefit but don’t need cash value, then a guaranteed universal life insurance policy is a great choice.

However, if you need cash value but value stability and predictability, then a whole life insurance policy may be the better option.

Indexed universal life insurance provides some peace of mind since it provides a floor to protect the policy’s cash value, in contrast to a variable universal life policy where you have the potential for higher returns but with a greater risk of loss due to a down market.

Life insurance can be used as collateral for SBA and small business loans for business related expenses such as upgrading equipment, purchasing inventory, or hiring additional employees. If the borrower could not repay the loan, then the lender would be able to take over the policy and take whatever available cash value is in the policy. If more debt is still due, the lender can collect out of the death benefit upon the borrower passing, with any remaining death benefit going to the beneficiary.

Mortgage loan

Another example of using life insurance as collateral is for a mortgage. Rather than take out credit life insurance which would name the lender as the beneficiary, a collateral assignment would first pay the lender for the remaining loan balance, with the remaining death benefit proceeds going to the policy’s beneficiary.

For example, if John needed collateral to get a $500,000 30 year mortgage, he could use his $1,000,000 life insurance policy’s death benefit. As times goes by the mortgage balance would go down, so he would only owe the lender the amount left on the mortgage, with the remaining death benefit going to his beneficiary (his spouse). If he passed away in year 20 with $150,000 still left on the mortgage, the insurance company would pay the lender $150,000, with the remaining $850,000 death benefit going to his spouse.

An in force life insurance policy is required to complete a collateral assignment form. If you are purchasing a new policy, you may request a collateral assignment form after signing the policy application and paying the first premium.

A life insurance collateral assignment form includes the following:

• – Your personal information (name, date of birth, contact details
• – Name and contact information of the lender
• – Life insurance policy number
• – Your Social Security number

Even though the policyholder must notify the insurance company about the collateral assignment on a policy, other than their obligation to meet the terms of the contract, the insurer is not actively involved in the loan agreement.

After paying off the loan balance, you will receive a written release once the lender agrees that you have met all loan terms. If so, the lender sends the release to the insurance company.

The collateral assignment on the life insurance policy will end at that time. If you keep the policy in force, you can keep the current beneficiary as the sole recipient of the death benefit proceeds, and you could add additional beneficiaries to the policy.

Some of the most common mistakes to avoid with a collateral assignment of life insurance can include:

• – Ignoring the lender’s requirements
• – Adding incorrect beneficiary designation(s)
• – Cancelling the life insurance policy prematurely
• – Leaving insufficient coverage for beneficiaries

Any of these scenarios could jeopardize the loan and cause issues with the lender. Likewise, it could also put your beneficiary(ies) in a financial bind.

Alternative Loan Options

Although life insurance can provide viable collateral for a personal or business loan, it may not always be the best option – especially if a borrower cannot qualify for coverage or pay the added cost of the premium.

So, some potential alternatives to a collateral assignment of life insurance could include one or more of the following:

• – Opting for an unsecured loan from another source, such as a bank or credit card
• – Utilizing other assets that may be sold or borrowed against and used as collateral for a loan
• – Taking out a home equity loan or line of credit
• – Seeking a co-signer – particularly if that individual has strong credit and could increase the chances of loan qualification and possibly even a lower interest rate

While not all situations are suitable for this strategy, some conditions that may favor a collateral assignment include:

• – A policy with a significant build-up of cash value
• – Other financial resources for beneficiaries (at least until repayment of the loan)

Even with the many advantages of a life insurance collateral assignment, they aren’t ideal in every situation. Some scenarios where a collateral assignment may not be ideal are:

• – If the policyholder will have difficulty keeping the policy in force
• – If the insured is unable to qualify for a policy due to health or other issues

Because there is no one-size-fits-all strategy when using life insurance as collateral for loans, you should first discuss your objectives with a life insurance expert who is well-versed in how a collateral assignment works and where they may (or may not) be the right solution.

Is collateral assignment life insurance the same as credit life insurance?

No, life insurance collateral assignment differs from credit life insurance, as the latter requires that you name the lender as the sole beneficiary of the death benefit, whereas with collateral assignment the lender only gets reimbursed for the total amount owed on the loan with the remainder going to your beneficiary.

What if the policy is considered a modified endowment contract?

If your policy is classified as a modified endowment contract and you’ve used it as collateral, all accumulated earnings within the policy must be reported as your income through an IRS Form 1099-R. It’s advisable to seek guidance from your tax advisor prior to proceeding with the collateral assignment.

How to Determine if Life Insurance Collateral Assignment is Right for You

If you need a personal or business loan, offering collateral to the lender could help you to qualify more readily – and possibly even obtain a lower interest rate on borrowed funds. But even so, many factors are involved when assigning life insurance benefits – and if you or the lender set up the assignment incorrectly, it could result in unfavorable financial consequences in both the short and long term.

So, you must obtain personalized financial advice from a life insurance specialist who can guide you through the process and ensure that you are on the right track. At Insurance and Estates, our primary focus is helping our clients use life insurance for various needs.

Due to our familiarity with different life insurance carriers, we can assist you with finding the best policy for your specific objectives. If you have any questions about using life insurance to secure a loan – or if you’re ready to begin setting up a life insurance collateral assignment – contact Insurance and Estates today.

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What is a Collateral Assignment of Life Insurance?

by Jeff Root

Last Updated: July 2020

A collateral assignment of life insurance is a contract that allows the death benefit of a life insurance policy to be used as collateral for a loan.

Collateral assignments are usually used in business loans. However, it can also be used for equipment loans, structured settlement buyouts , and other loans.

How Does a Collateral Assignment of Life Insurance Work?

In the event of the death of the person who is named on the life insurance policy, the lender who has the insurance policy assigned as collateral gets paid first.

A collateral assignment will always take precedence over beneficiary claims for the proceeds of the death benefit. When a business owner applies for a business loan and wants to use their death benefit as collateral, the loan company must then ascertain whether should the owner die, will it affect the business, and cause the loan to default.

The death benefit on the life insurance policy is there as security that the lender will get the loan repaid should the recipient of the loan die.

It is important to remember that although only the policy owner can pledge the death benefits of a policy to the lender, they may not necessarily be the individual named on the policy. This individual could be their spouse or even the director of the company.

How to Set Up a Collateral Assignment of Life Insurance

When setting up a collateral assignment of life insurance, the lender should never be named as the beneficiary of the policy.

Setting Up the Beneficiary of the Life Insurance Policy

The beneficiaries should be the loved ones of the person named on the policy, as should the named person die, the loan will get paid off first, and then the collateral assignment is released and the death benefit will be paid to these beneficiaries.

When taking out life insurance at the same time as assigning the collateral, the collateral assignment form must be submitted with the life insurance application , so make sure you choose a life insurance agent who thoroughly understands the collateral assignment process.

Types of Life Insurance You Can Use for Collateral

In order to set up a collateral assignment of life insurance, there is no particular type of life insurance policy required by a lender.

The only stipulation is that the actual life insurance policy itself must be assignable. The loan policyholder must always make sure that the life insurance company is aware of and will allow the use of the policy as collateral for a loan.

An existing life insurance policy can be used to satisfy the lender’s requirements as long as the amount of the death benefit on the policy is enough to cover the loan amount required.

Here are some examples of policies accepted for collateral assignment:

• Term life insurance
• Whole life insurance
• Universal life insurance
• Second-to-die insurance

What Happens to the Collateral Assignment After the Loan is Paid?

If a loan is taken out using a collateral assignment of the life insurance policy, here is what happens when the loan is repaid in full. If the person insured on the policy is still living, then the lender relinquishes all rights to any death benefit on the policy and they will return all documents.

Keep Your Life Insurance Company Informed

Most life insurance companies will have strict rules that must be followed to ensure the collateral assignment of the life insurance policy will be allowed and they must always be informed that the assignment has been made.

The life insurance company will need to submit written notification to the lender that the collateral assignment of life insurance has been filed. This could be as a separate cover letter with a copy of the executed collateral assignment form or a just a stamped filed copy of the collateral assignment form itself.

The Lender will Need Information About Your Life Insurance Policy

The lender will also need to make further checks before allowing the loan to go ahead. They will need to check that there is no collateral assignment of the life insurance policy already in place and that all life insurance premiums are not only up to date, but have also been made for a period of at least six months.

Also, they will check that if the policy has a cash surrender value, there have been no borrowings secured against that and that the original life insurance policy is not required in order to make a claim.

Some types of loans have a cash surrender value. This is the amount that an insurance company will payout to the policyholder if the life insurance policy is terminated before it reaches maturity. If there is a filed collateral assignment of life insurance against the policy, any monies paid out will be used to pay off the balance of the loan before either the policyholder or their beneficiaries.

Filing the Collateral Assignment of Life Insurance

When a life insurance company sets a collateral assignment of life insurance, this usually takes about seven to ten days to be filed and acknowledged. However, some companies may expedite this if the collateral assignment is required more urgently.

If you need help with setting up a collateral assignment of life insurance, contact us.

Companies like SelectQuote and Zander Insurance are high volume call centers and often don’t see collateral assignments all the way through.

We’ve helped hundreds of people set up collateral assignments and have expert life insurance agents who can help. Our agents have a thorough understanding of the needs of the collateral assignment process and will be able to guide you through this and ensure that all the requirements of the loan company are met.

Reader Interactions

February 11, 2015 at 3:38 pm

Would collateral assignment of a life insurance policy help in securing a mortgage or a refinance?

February 11, 2015 at 3:44 pm

William, No it wouldn’t.

June 23, 2015 at 9:46 am

Im attempting to complete a 5yr delayed property settlement and want to guarantee my adult daughter receives the death benefits from a whole life policy on my ex spouse. Im entitled 1/2 of everything including his retirement so he is being nice. I don’t trust him to not change her as the beneficiary so can I have the death benefit assigned to her like a collateral assignment to ensure the payout goes directly to her?

July 3, 2015 at 12:10 pm

Kathy, the easiest way to structure this would be to make yourself the owner of the policy. Simply fill out a “change of ownership” form. Only the owner can change the beneficiary of a policy. In other words, you’ll be the “owner” and he’ll be the “insured”. It’s done all the time.

July 6, 2015 at 7:35 pm

I have a large term for policy. Which I have held for 15 yrs. I would like to sell it or use it as collateral. What company can I call?

July 7, 2015 at 9:28 am

Mike, No on the collateral unless you’re trying to secure a loan. I need more information if you want to sell, specifically your age. I’ll email you.

October 22, 2020 at 10:09 am

I was a beneficiary on my dad’s life insurance policy, and which he recently passed. I contacted the life insurance company and they told me a bank was the owner and beneficiary for the policy now. What does this mean?

November 12, 2020 at 11:59 pm

That means your dad likely had an SBA loan or some other type of loan that was collateralized with life insurance. With your fathers death, the life insurance company will be paying the bank to cover the loan.

HOWEVER, most of the time the bank only receives what was left on the loan and the rest will be paid to the beneficiary. I’d look into that.

And sorry for your loss. Good luck!

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Collateral Assignment of Life Insurance: A Comprehensive Overview

As the saying goes, “Life is uncertain, so you need to be prepared.” And one of the ways to be prepared for life’s uncertainties is through life insurance . But did you know that you can use your life insurance policy as collateral? Enter the world of collateral assignment of life insurance. This comprehensive overview will explore the ins and outs of collateral assignment, shedding light on this often-overlooked strategy. It’s a knowledge that can prove invaluable in uncertain times.

• updated last on June 11, 2024

Understanding how collateral assignment works is crucial whether you are a policyholder or a lender. For instance, you can use your life insurance policy as collateral to secure a loan for a major home renovation, potentially obtaining better interest rates due to the reduced risk for the lender. Alternatively, you could transfer ownership of the policy to a family member, ensuring their financial security in the event of your passing. It’s a versatile tool that can provide financial protection and flexibility when you need it most.

Join us as we dive deep into the mechanics of collateral assignment, discussing the benefits, risks, and important considerations. From the legal aspects to the potential impact on your beneficiaries, this comprehensive guide will empower you with the knowledge you need to make informed decisions about collateral assignment of life insurance. So, let’s embark on this enlightening journey together.

What is a Collateral Assignment of Life Insurance?

Collateral assignment of life insurance is a financial arrangement that can offer significant benefits. It allows a policyholder to assign their life insurance policy as collateral to a lender in exchange for a loan or other financial benefits. This arrangement can unlock the policy’s cash value or death benefit, providing a way for individuals to access funds while maintaining coverage for their beneficiaries. If the policyholder defaults on the loan, the lender can access the policy’s proceeds to recoup the outstanding debt. This understanding can empower individuals to make informed decisions about their financial planning.

While collateral assignment can offer flexibility and access to funds when needed, it’s important to be aware of the potential risks. Policyholders must carefully consider the implications of such an arrangement. Understanding the mechanics of collateral assignment, its benefits, risks, and potential impact on the policy and beneficiaries is crucial before deciding to assign your life insurance policy as collateral. This balanced understanding will help you make an informed decision about whether collateral assignment is the right choice for you.

How Does Collateral Assignment Work?

If the policyholder defaults on the loan, the lender can access the policy’s cash value to recover the outstanding debt. However, it’s important to note that the lender’s claim is limited to the amount of the loan plus any accrued interest and fees. Any remaining funds beyond what is needed to satisfy the debt will be paid to the policy’s beneficiaries upon the insured’s death.

Collateral assignment can be a valuable tool for policyholders who need access to funds for a specific purpose, such as funding a business venture, purchasing a home, or covering unexpected expenses. By leveraging the value of their life insurance policy, policyholders can obtain loans at more favorable terms and interest rates compared to other types of unsecured loans.

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Benefits of Collateral Assignment of Life Insurance

Another critical advantage of collateral assignment is the potential for lower interest rates on loans compared to unsecured loans. Since the lender has the security of the policy as collateral, they may be more willing to offer favorable terms, such as lower interest rates or more extended repayment periods. This can result in significant cost savings for the policyholder over the life of the loan, providing a positive outlook on your financial planning.

Additionally, collateral assignment allows policyholders flexibility in using the loan proceeds. Whether for funding a business, covering medical expenses, or purchasing a home, the funds obtained through collateral assignment can be used for various purposes based on the policyholder’s needs and priorities. This versatility empowers you to make the best financial decisions, making collateral assignment a versatile financial tool for policyholders seeking additional liquidity.

Risks and Considerations of Collateral Assignment

Another consideration is the risk of policy lapse if the policyholder cannot repay the loan. This underscores the need for policyholders to be vigilant in monitoring their loan balances. Suppose the outstanding debt exceeds the policy’s cash value. In that case, the policy may risk lapsing, resulting in the loss of coverage and potential financial consequences for the policyholder and their beneficiaries. It’s crucial for policyholders to carefully monitor their loan balance and ensure timely repayment to avoid any lapses in coverage.

Furthermore, policyholders should know the potential tax implications of collateral assignment. Depending on the arrangement’s specifics and the loan amount, there may be tax consequences associated with using the policy as collateral. Reassuringly, consulting with a financial advisor or tax professional can help policyholders understand the tax implications and make informed decisions about collateral assignment, providing them with the support and guidance they need.

Types of Loans That May Require Collateral Assignment

Collateral assignment of life insurance can be used to secure various types of loans, depending on the lender’s requirements and the policyholder’s needs. Common examples of loans that may require collateral assignment include:

• Business Loans : Entrepreneurs and business owners can leverage the value of their life insurance policies to secure loans for business expansion, working capital, or other business-related expenses, providing a reassurance of financial security.
• Real Estate Loans : Homebuyers or property investors may leverage their life insurance policies to secure loans for purchasing real estate or funding property renovations.
• Education Loans : Parents or students seeking funding for education expenses can use the collateral assignment of life insurance to obtain education loans at favorable terms, offering a hopeful outlook for their financial future. Medical Loans : Individuals facing high medical costs may use their life insurance policies as collateral to cover medical expenses or fund specialized treatments.

By understanding the specific requirements of each type of loan and how collateral assignment can be used as a viable option for securing financing, policyholders can make informed decisions about leveraging their life insurance policies for various financial needs. It’s important to note that while collateral assignment can provide access to funds, it also comes with certain risks and benefits.

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How to Initiate a Collateral Assignment of Life Insurance

• Determine Loan Need : Identify the specific financial need or purpose for which you require a loan and assess whether collateral assignment is the appropriate option to meet that need.
• Contact Lender : Reach out to potential lenders who offer loans that can be secured by a collateral assignment of a life insurance policy and inquire about their terms and conditions.
• Review Collateral Assignment Agreement : Carefully review the collateral assignment agreement provided by the lender, which outlines the terms, conditions, and responsibilities of both parties.
• Consult with Professionals : Seek guidance from financial advisors, insurance agents, or legal experts to ensure you fully understand the implications of collateral assignment and its impact on your policy.
• Sign Agreement : Once you are satisfied with the terms of the collateral assignment agreement, sign the document and provide any necessary documentation to the lender to formalize the arrangement.
• Monitor Loan Repayment : Keep track of your loan balance, interest payments, and repayment schedule to ensure that you meet your obligations and avoid any potential policy lapse or default risks.

By following these steps and staying informed throughout the process, policyholders can navigate the complexities of collateral assignment and make informed decisions that align with their financial goals and priorities.

Important Terms and Conditions to Understand

When embarking on the collateral assignment of life insurance, it’s crucial to empower yourself by comprehending the key terms and conditions that govern the arrangement. Some significant terms to grasp include:

• Loan Amount : For instance, if you have a life insurance policy with a face value of $ 100,000 and you assign it as collateral for a loan, the loan amount would be the total value of the policy, i.e., $ 100,000.
• Interest Rate : The rate at which interest is charged on the outstanding loan balance, which may vary depending on the lender and the terms of the agreement.
• Repayment Schedule : The timeline and structure for repaying the loan, including the frequency of payments, due dates, and any penalties for late payments.
• Default Provisions : The conditions under which the lender may declare the loan in default and take action to recover the outstanding debt, including accessing the policy’s cash value.
• Policy Protection : These are the provisions that provide a safety net for the policyholder’s rights and interests, ensuring that the collateral assignment does not transfer ownership of the policy to the lender, thereby offering a sense of security and reassurance.

Grasping these terms and conditions is a key to confidently and clearly navigating the collateral assignment process, ensuring you are fully informed about your rights and obligations under the agreement.

Common Misconceptions About Collateral Assignment

Despite its potential benefits, collateral assignment of life insurance is often surrounded by misconceptions and misunderstandings. Some common misconceptions include:

• Loss of Ownership : Many people mistakenly believe that collateral assignment transfers ownership of the policy to the lender when it simply creates a security interest in the policy’s value.
• Impact on Beneficiaries : Some individuals may be concerned that collateral assignment will negatively impact their beneficiaries by reducing the policy’s death benefit. However, proper planning and management can help mitigate these risks.
• Complexity of Process : There is a perception that collateral assignment is a complex and convoluted process, but policyholders can navigate the process smoothly and effectively with the proper guidance and support.

Policyholders can make informed decisions that align with their financial goals and priorities by dispelling these misconceptions and gaining a clear understanding of how collateral assignment works.

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Alternatives to Collateral Assignment of Life Insurance

While collateral assignment can be a valuable strategy for accessing funds and leveraging the value of a life insurance policy, there are alternative options that policyholders may consider based on their specific needs and circumstances. Some alternatives to the collateral assignment of life insurance include:

• Policy Loans : Borrowing against the policy’s cash value through a policy loan, which allows policyholders to access funds without needing to assign the policy as collateral.
• Surrendering Policy : Surrendering the policy in exchange for the cash value provides a lump sum payout but may result in the loss of coverage and potential tax consequences.
• External Financing : Exploring traditional loans or lines of credit from financial institutions or lenders that do not require a collateral assignment of life insurance.

By exploring these alternatives and weighing the pros and cons of each option, policyholders can make informed decisions about how best to leverage their life insurance policies to meet their financial needs and goals.

Is Collateral Assignment of Life Insurance Right for You?

As with any financial decision, weighing the benefits and risks, and carefully assessing your circumstances before proceeding with collateral assignment is essential. However, the importance of consulting with professionals cannot be overstated. By staying informed, proactive, and diligent in managing your policy and financial affairs, with the guidance of experts, you can make the most of collateral assignment and use it as a strategic tool in your financial planning arsenal.

Remember, life insurance is not just about protecting your loved ones—it can also be a valuable asset that provides financial flexibility and security when needed. So, consider the possibilities of collateral assignment and explore how it can complement your financial strategy and goals. Embrace the opportunities that collateral assignment of life insurance offers, and embark on a journey towards greater financial empowerment and peace of mind. The potential for a more secure and flexible financial future is within your reach.

Frequently Asked Questions

Who can authorize to assign a life insurance policy as collateral for a loan?

To authorize a life insurance policy as collateral for a loan, the insured must specifically endorse it in writing. The only person who can endorse the policy is an authorized representative from the insurer or the insured themselves.

What Are the Benefits of Collateral Assignment of Life Insurance?

Collateral assignment of life insurance provides many benefits, including more flexibility and control over the policy, improved liquidity in case of an unexpected financial need, tax benefits, and excellent safety against creditors. The key benefit is that the insured can leverage their life insurance policy as collateral to secure a loan or line of credit. This type of asset-back lending may be used for business expansion, investment, debt consolidation, and many other uses.

What is an example of collateral assignment?

An example of a collateral assignment is when an insurance policy is assigned to a third party as security for a loan or the repayment of an existing debt. The collateral assignment creates a legally binding agreement between the insurer, the lender, and the debtor.

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Home > Finance > How Is Collateral Assignment Used In A Life Insurance Contract?

How Is Collateral Assignment Used In A Life Insurance Contract?

Modified: February 21, 2024

Discover how collateral assignment is utilized in life insurance contracts to provide financial security and peace of mind. Explore the benefits and implications of this finance strategy today!

(Many of the links in this article redirect to a specific reviewed product. Your purchase of these products through affiliate links helps to generate commission for LiveWell, at no extra cost. Learn more )

Table of Contents

What is collateral assignment, benefits of collateral assignment in a life insurance contract, how does collateral assignment work, steps involved in collateral assignment, risks and considerations of collateral assignment, examples of collateral assignment in life insurance contracts, comparison with other methods of securing loans, legal and financial implications of collateral assignment.

Collateral assignment is a legal and financial concept that involves using a life insurance policy as collateral for a loan. In simple terms, it is an arrangement where the policyholder pledges their life insurance policy to a lender as security for borrowing money. Essentially, the policyholder assigns their rights to the policy’s death benefit to the lender in case the loan is not repaid.

When a life insurance policy is collateral-assigned, it means that the policyholder retains the ownership of the policy, but the lender has the right to receive the policy’s death benefit up to the outstanding loan amount. In the event of the policyholder’s death, the insurance company pays the death benefit directly to the lender to cover the remaining loan balance, and any remaining funds are then distributed to the policy’s beneficiaries.

Collateral assignment is commonly used by individuals and businesses as a means to secure loans or lines of credit when traditional forms of collateral, such as real estate or other assets, are not available or desirable. It provides lenders with additional security and reduces their risk, as they have a guaranteed source of repayment in case of default.

It is important to note that while collateral assignment can be used for various types of life insurance policies, it is most commonly associated with permanent life insurance policies, such as whole life or universal life, rather than term life insurance. This is because permanent policies have a cash value component that can be used as collateral, whereas term policies do not have cash value and are typically designed to provide a death benefit only for a specific term.

Collateral assignment offers several benefits for both policyholders and lenders involved in a life insurance contract:

• Access to Funds: Collateral assignment allows policyholders to leverage the value of their life insurance policy to obtain much-needed funds. This can be especially useful for individuals or businesses facing financial challenges or requiring capital for investment or business growth.
• Favorable Loan Terms: By assigning a life insurance policy as collateral, borrowers may enjoy more favorable loan terms, such as lower interest rates or longer repayment periods, compared to unsecured loans. Lenders are often more willing to offer competitive rates due to the reduced risk associated with having a guaranteed repayment source.
• Retained Ownership: With collateral assignment, the policyholder retains ownership of the life insurance policy and continues to enjoy its benefits, including the potential for cash value accumulation and the ability to designate beneficiaries. This allows individuals to protect their loved ones financially while also meeting their immediate borrowing needs.
• Flexibility: Collateral assignment provides flexibility in borrowing against the policy. Unlike traditional loans that may require reapplication and approval for future withdrawals or advances, policyholders can access additional funds from their life insurance policy without going through a lengthy and cumbersome approval process.
• Tax Advantages: Collateral assignment generally does not trigger a taxable event for the policyholder, as long as the loan is repaid. This can provide tax benefits and preserve the tax-advantaged status of the life insurance policy’s cash value growth and death benefit proceeds.

It is important to consult with financial advisors or insurance professionals to fully understand the benefits and limitations of collateral assignment and how it aligns with individual financial goals and circumstances. While it offers advantages, policyholders must also consider the potential risks and implications of assigning their life insurance policy as collateral.

Collateral assignment involves a series of steps to ensure a smooth and legally binding agreement between the policyholder, the lender, and the insurance company. Here’s an overview of how collateral assignment works:

• Loan Application: The borrower applies for a loan and agrees to use their life insurance policy as collateral. The lender assesses the borrower’s creditworthiness and determines the loan amount and terms.
• Collateral Assignment Agreement: Once the loan is approved, the borrower and the lender enter into a collateral assignment agreement. This agreement outlines the terms of the collateral assignment, including the loan amount, interest rate, repayment schedule, and the rights and obligations of each party.
• Notification to the Insurance Company: The borrower notifies the insurance company that they are assigning their policy as collateral for a loan. They provide the necessary documentation, including the collateral assignment agreement and any additional forms required by the insurance company.
• Policy Endorsement: The insurance company reviews the collateral assignment documents and determines whether to endorse the assignment. Once endorsed, it becomes part of the policy’s terms and conditions.
• Loan Disbursement: The lender disburses the loan funds to the borrower, according to the agreed-upon terms. The borrower can use the funds for their intended purpose, such as paying off debts, investing, or covering business expenses.
• Repayment and Policy Premiums: The borrower is responsible for repaying the loan according to the agreed-upon schedule. This includes making regular loan payments, as well as continuing to pay the premiums on the life insurance policy to keep it in force.
• Loan Repayment and Death Benefit: In the event of the policyholder’s death before the loan is fully repaid, the insurance company pays the death benefit to the lender up to the outstanding loan amount. If there is any remaining death benefit, it is distributed to the designated beneficiaries of the policy.

It is crucial for both the borrower and lender to understand and adhere to the terms of the collateral assignment agreement, as any violation or default of the agreement can have significant consequences. Consulting with legal and financial professionals can help ensure a thorough understanding of the process and the rights and obligations of all parties involved.

Collateral assignment involves several key steps to establish a legally binding agreement between the policyholder, lender, and insurance company. Here are the steps typically involved in the collateral assignment process:

• Loan Application: The borrower applies for a loan and indicates their intention to use their life insurance policy as collateral.
• Loan Agreement: The borrower and lender negotiate and finalize the terms of the loan, including the loan amount, interest rate, repayment period, and any other relevant conditions.
• Collateral assignment documents: The lender provides collateral assignment documents, including the assignment agreement, to the borrower.
• Review and Approval: The borrower reviews the collateral assignment agreement and seeks legal advice if necessary. If satisfied, the borrower signs the agreement.
• Notification to the Insurance Company: The borrower notifies the insurance company of their intention to assign their policy as collateral. This typically involves submitting the collateral assignment agreement, along with any required forms and documentation, to the insurer.
• Insurance Company Review: The insurance company reviews the collateral assignment documents to ensure they comply with their policies and guidelines.
• Endorsement: If the insurance company approves the collateral assignment, they endorse the policy to indicate the assignment status. This endorsement becomes part of the policy’s terms and conditions.
• Loan Disbursement: Once the collateral assignment is in effect, the lender disburses the loan funds to the borrower as agreed upon in the loan agreement.
• Loan Repayment: The borrower is responsible for making the scheduled loan payments, including both the principal and interest, according to the terms of the loan agreement.
• Policy Premium Payments: The policyholder must continue paying the premiums on the life insurance policy to keep it in force. Failure to do so may result in the policy lapsing, which could have implications for the collateral assignment.
• Death Benefit Payout: In the event of the policyholder’s death before the loan is fully repaid, the insurance company pays the death benefit directly to the lender to cover the outstanding loan amount. Any remaining death benefit is then distributed to the designated beneficiaries of the policy.

It is crucial for both the borrower and lender to understand and adhere to the terms and conditions set forth in the collateral assignment agreement. Consulting with legal and financial professionals can help ensure a smooth collateral assignment process and minimize any potential risks or complications.

While collateral assignment offers benefits, it is important to consider the potential risks and implications associated with this arrangement:

• Reduced Death Benefit: Collateral assignment reduces the policy’s death benefit by the outstanding loan amount. This means that the intended beneficiaries may receive less than expected in the event of the policyholder’s death, potentially impacting their financial security.
• Loss of Flexibility: Once a life insurance policy is collateral-assigned, there may be limitations on the policyholder’s ability to make changes or access the policy’s cash value. Any modifications to the policy, such as increasing coverage or taking withdrawals, may require the lender’s consent.
• Default and Policy Lapse: Failing to repay the loan or meet the policy’s premium payments can result in default. Defaulting on the loan could lead to the lender exercising their rights to the policy’s cash value or death benefit, potentially causing the policy to lapse and leaving the policyholder without coverage.
• Unfavorable Loan Terms: While collateral assignment can provide access to funds and favorable loan terms, borrowers must ensure they thoroughly understand the terms and conditions. High interest rates or unfavorable repayment terms could potentially lead to financial strain or difficulties in meeting loan obligations.
• Possible Negative Impact on Credit: Should the borrower default on the loan, it can have a negative impact on their credit history and credit score. This can make it more challenging to secure future loans or obtain favorable interest rates on credit products.
• Risk of Loan Acceleration: In certain cases, the lender may have the right to accelerate the loan repayment if specific events occur, such as a significant change in the policy’s cash value or the policyholder’s financial circumstances. This could create unexpected financial burdens on the borrower.

Before entering into a collateral assignment agreement, borrowers should carefully assess their ability to repay the loan and consider alternative options. It is advisable to consult with financial advisors or insurance professionals to fully understand the risks involved, evaluate the impact on the policy’s benefits, and determine if collateral assignment aligns with their financial goals and circumstances.

Collateral assignment can be utilized in various scenarios where individuals or businesses require access to funds and have a life insurance policy with sufficient value. Here are a few examples of how collateral assignment can be used:

• Business Loans: A small business owner may have a whole life insurance policy with a substantial cash value. They can collateral assign the policy to secure a business loan to finance expansion or cover operational expenses. The lender would have the assurance that in the event of default, they can recoup their loan amount from the policy’s death benefit.
• Personal Debt Consolidation: An individual with multiple high-interest debts, such as credit card balances or personal loans, may choose to collateral assign their life insurance policy and obtain a loan at a lower interest rate to consolidate their debt. This can help simplify their finances and potentially reduce their overall interest payments.
• Estate Planning: High-net-worth individuals may use collateral assignment as part of their estate planning strategy. By assigning their life insurance policy to a trust, they can access funds during their lifetime for various purposes while ensuring a guaranteed source of repayment for any loans taken against the policy.
• Medical Expenses: In some cases, individuals may have significant medical expenses not covered by insurance. Collateral assignment can be used to secure a loan to cover these expenses, with the policy serving as collateral, offering more favorable loan terms than unsecured medical loans.
• Education Funding: Parents or students may choose to collateral assign a life insurance policy to secure a loan for education expenses. This can be a viable option when other forms of financial aid are insufficient or unavailable, allowing the borrower to access funds and invest in their education.

These examples illustrate different situations where collateral assignment can provide individuals and businesses with financial flexibility and access to funds using the cash value of their life insurance policies. It is important to note that each scenario should be carefully evaluated, taking into consideration the specific terms and conditions of the policy, loan agreement, and individual financial circumstances.

When it comes to securing loans, collateral assignment offers unique advantages and considerations compared to other methods of loan security. Here is a comparison:

• Collateral Assignment vs. Traditional Collateral: Collateral assignment provides an alternative to traditional forms of collateral, such as real estate or vehicles. It allows individuals who may not have tangible assets to secure loans using the value of their life insurance policies. This can be advantageous for those who have substantial life insurance coverage but limited assets.
• Collateral Assignment vs. Personal Guarantees: In some cases, lenders may require personal guarantees when securing loans. Personal guarantees involve the borrower or a third party assuming responsibility for loan repayment if the borrower defaults. Collateral assignment offers a more concrete and direct form of security, as the lender can rely on the life insurance policy’s death benefit as repayment.
• Collateral Assignment vs. Unsecured Loans: Unsecured loans, such as credit cards or personal lines of credit, do not require any form of collateral. While unsecured loans generally have higher interest rates, collateral assignment can provide borrowers with more favorable terms due to the reduced risk to lenders. Collateral assignment also allows individuals to borrow larger amounts than they might be eligible for with unsecured loans.
• Collateral Assignment vs. Cash Value Loans: Permanent life insurance policies, such as whole life or universal life, often accumulate cash value over time. Some policyholders may choose to take out loans directly from the policy’s cash value instead of collateral assignment. While cash value loans offer flexibility and do not affect the death benefit, they may incur interest charges and reduce the policy’s cash value growth potential.
• Collateral Assignment vs. Co-Signers: Co-signers are individuals who agree to take responsibility for loan repayment if the borrower defaults. While co-signers can increase the chances of loan approval for individuals with limited credit history or income, collateral assignment eliminates the need for co-signers by using the life insurance policy as direct security.

It is essential for borrowers to carefully evaluate their options and consider the specific terms, interest rates, and risks associated with each method of loan security. Collateral assignment provides a viable alternative for individuals with substantial life insurance coverage and serves as a valuable strategy for accessing funds while leveraging the value of their policies.

Collateral assignment in a life insurance contract carries both legal and financial implications that need to be understood by policyholders considering this arrangement:

• Legal Obligations: Collateral assignment involves a legally binding agreement between the policyholder, lender, and insurance company. The terms and conditions must be reviewed and understood by all parties involved to ensure compliance and avoid any potential legal disputes.
• Policy Modification Restrictions: Once a life insurance policy is collateral-assigned, certain modifications, such as reducing coverage or surrendering the policy, may require the lender’s approval. These restrictions can limit the policyholder’s flexibility in managing their insurance needs and may impact their ability to make changes as circumstances change.
• Potential Policy Lapse: Failure to continue paying policy premiums can result in the policy lapsing, which can have significant implications. If the policy lapses, the collateral assignment may become void, and the lender may lose their right to the policy’s death benefit as repayment.
• Impacts on Beneficiaries: Collateral assignment reduces the policy’s death benefit by the outstanding loan amount. This means that beneficiaries may receive less than expected. It is essential for policyholders to communicate the collateral assignment to their beneficiaries to avoid confusion or potential disputes in the future.
• Potential Tax Consequences: While collateral assignment generally does not trigger a taxable event, policyholders should consult with tax professionals to understand the potential tax implications based on their individual circumstances. Changes in policy ownership or assignment may have tax consequences that need to be considered.
• Loan Repayment Obligations: Collateral assignment involves the responsibility to make regular loan payments according to the agreed-upon terms. Failure to meet these obligations can result in default and may lead to the acceleration of the loan or loss of the policy.
• Credit History: The collateral assignment and associated loan will be reflected in the borrower’s credit history. Defaulting on the loan or missing payments can negatively impact their credit score and make it more challenging to secure future credit or loans.

Given the potential legal and financial implications, it is crucial for policyholders to thoroughly understand the terms of the collateral assignment agreement, seek expert advice when necessary, and carefully assess their ability to meet loan obligations and policy premium payments.

Consulting with legal and financial professionals can help policyholders navigate the legal and financial complexities and ensure the collateral assignment aligns with their individual goals and circumstances.

Collateral assignment in a life insurance contract can be a valuable tool for individuals and businesses seeking access to funds. By utilizing the value of their life insurance policy as collateral, borrowers can secure loans and enjoy various benefits, including favorable loan terms and retained policy ownership.

However, it is crucial to carefully consider the risks and implications associated with collateral assignment. Policyholders should assess their ability to repay the loan and understand the potential impact on the policy’s death benefit and flexibility.

Before entering into a collateral assignment agreement, it is recommended to work with financial advisors or insurance professionals who can provide guidance and ensure all legal and financial aspects are thoroughly understood. They can help navigate the complex terms and conditions, evaluate other loan security options, and align the collateral assignment with individual financial goals.

Overall, collateral assignment can be a powerful tool that provides financial flexibility and potentially better loan terms. By understanding the process and implications, borrowers can make informed decisions that suit their specific circumstances and help them achieve their financial objectives.

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