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What Is a Collateral Assignment of Life Insurance?

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

collateral assignment companies

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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Using your life insurance policy as collateral is one way of securing a loan without the risk of using your home or car. Most loans are either secured or unsecured, and while an unsecured loan does not require collateral, they are not always the most affordable or available option to many loan seekers. Bankrate breaks down the collateral assignment of life insurance process along with alternative options to help you decide what type of loan may be best for you.

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Whole life insurance combines life insurance with an investment component.

  • Coverage for life
  • Tax-deferred savings benefit if premiums are paid
  • 3 variations of permanent insurance: whole life, universal life and variable life include investment component

Term life insurance is precisely what the name implies: an insurance policy that is good for a specific term of time.

  • Fixed premium over term
  • No savings benefits
  • Outliving policy or policy cancellation results in no money back

This advertising widget is powered by HomeInsurance.com, a licensed insurance producer (NPN: 8781838) and a corporate affiliate of Bankrate. HomeInsurance.com LLC services are only available in states where it is licensed and insurance coverage through HomeInsurance.com may not be available in all states. All insurance products are governed by the terms in the applicable insurance policy, and all related decisions (such as approval for coverage, premiums, commissions and fees) and policy obligations are the sole responsibility of the underwriting insurer. The information on this site does not modify any insurance policy terms in any way.

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?

There are several reasons why you might want to use life insurance as collateral for a loan. Among them:

  • It can be affordable. Depending on your age, health, the type and value of policy, life insurance costs vary. However, life insurance premiums may be less than what you would pay for an unsecured loan with higher interest rates.
  • You are not jeopardizing your personal property. By using life insurance as collateral, you might be able to take out a secured loan without putting your home or vehicle at risk. If you pass away before the loan is repaid, the lender will use funds available from your life insurance policy’s death benefit to pay off the loan.
  • It may be attractive to lenders. Many financial institutions view life insurance as a good option for collateral, knowing that they will very likely have the money to pay off your loan in the event of your death.

Of course, there are also some situations in which a collateral assignment of life insurance is not the best option. Some people are unable to obtain affordable life insurance due to their age or health complications. It can also be difficult to use an existing life insurance policy as collateral for a loan; a lender may require you to take out a new policy, specifically for the purpose of the collateral assignment.

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

If you would like to take out a loan using life insurance as collateral, your first step should be to find a lender willing to issue this type of loan. After you confirm the lender’s requirements, you may be able to use your existing life insurance policy (if the lender will allow it) or you might need to purchase a new policy for a collateral assignment.

If you take out a new policy, the application process is the same as applying for any other type of life insurance and may require extensive underwriting, including a medical exam. After you have purchased the new policy, you will need to ask the insurance company for a collateral assignment form that you will need to complete, noting your lender as an assignee. Generally, a lender will not be listed as a beneficiary. The beneficiary(ies)will be the person you would like to receive any leftover benefits not claimed by the lender.

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

Both main types of life insurance, term life insurance and permanent life insurance , can be used to secure a loan. If you have a policy that falls into a subcategory of permanent life insurance, such as whole life, universal life, variable life or variable-universal life, these too are eligible to be used as collateral. However, each financial institution will likely have different requirements. Make sure to discuss these requirements with your lender before purchasing life insurance with the specific intention to use it as collateral. If more than one option is available, you may want to compare the cost of premiums for each type of policy.

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.

Cash value life insurance

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, related articles.

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Almost there couple of quick questions, share this infographic, best life insurance companies that allow assignment of collateral (2022), life insurance companies that allow the assignment of collateral are fairly common. a collateral assignment will make the lender the immediate beneficiary of your policy. if you pay off your loan before you die, you can dismiss your collateral assignment and make sure your beneficiaries receive the full death benefit., it’s all about you. we want to help you make the right coverage choices..

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What You Should Know

  • A collateral assignment allows you to pay off a loan with your life insurance death benefit
  • Lenders may or may not accept a collateral assignment depending on the type of policy you have
  • If you pay off your loan before you die, you can remove the collateral assignment in order for your beneficiaries to receive the full death benefit of your life insurance policy

If you need to take out a loan, or if you have taken out a loan, and you need collateral, you may be curious to learn about life insurance companies that allow the assignment of collateral.

Plenty of life insurance companies allow you to use a collateral assignment with your policy.

Essentially, a collateral assignment on your life insurance policy allows you to name a lender as your beneficiary. When you die, if your loan has not been paid off, the lender will receive the full payment of the loan from your death benefit.

If any amount remains from your death benefit, your beneficiaries will receive the money.

There are alternatives to using your life insurance policy as collateral, such as a collateral assignment with your mortgage. You can see a collateral assignment of a life insurance sample by doing a bit of research online.

When you look for a collateral assignment example, you can see how the process works and whether the loan you have or a future loan you may need will require that you use your life insurance policy as collateral.

As you shop around for life insurance companies that allow the assignment of collateral, be sure to use online quote tools to compare multiple companies at once and see how much you could save on your policy.

You may want to consult a life insurance guide to make sure you know the ins and outs of different policies and how much you might expect to pay for life insurance.

In fact, you can use our free quote tool above to find and compare rates from top life insurance companies in your state.

Which life insurance companies allow collateral assignments?

While there are some life insurance companies that don't allow collateral assignments, there are plenty of companies that do. Depending on where you live, you likely have a lot of options if you want to use a collateral assignment with your life insurance policy.

Some of the top life insurance companies that may allow you to use a collateral assignment include:

  • Northwestern Mutual
  • Banner Life
  • Pacific Life
  • Guardian Life
  • New York Life
  • John Hancock
  • Mutual of Omaha

In order to know for sure whether a life insurance company will allow for a collateral assignment of your policy, you may need to speak to a representative. You can do this as you shop around for life insurance policies online.

What is considered the collateral on a life insurance policy loan?

A collateral assignment on a life insurance policy allows for you to use the death benefit of a life insurance policy to pay off a loan.

In order to use a collateral assignment on your life insurance, you will need to use the following process:

  • Apply for a life insurance policy and name your beneficiaries.
  • Complete a collateral assignment of life insurance form naming your lender.
  • Wait for the life insurance company to acknowledge the collateral assignment.
  • If the loan is paid in full, the lender must send a form to that effect to ensure your beneficiaries receive the full benefit of your policy.

In order for you to create a collateral assignment on your life insurance policy, you must find a company that allows it, and you also need to make sure you have a lender that accepts life insurance as collateral.

How is a collateral assignment used in a life insurance contract?

If you have a collateral assignment in effect, your lender will get the death benefit of your life insurance policy if you pass away before paying off your loan.

If your death benefit exceeds the amount of your loan, your beneficiaries will receive the remainder. Most of the time, lenders won't accept a collateral assignment on a term life insurance policy because it may expire before the loan is paid.

With a whole or permanent life insurance policy, a lender would be more likely to accept a collateral assignment as a potential payment.

Once you pay off your loan, you can dissolve your collateral assignment. But you will need the lender to agree and submit a form that states you've paid your loan and that the collateral assignment should no longer be in place.

Should I use a collateral assignment on my life insurance policy?

You could potentially benefit from a collateral assignment if you need a particular type of loan. People who need a small business loan or a Small Business Administration (SBA) loan often consider using a collateral assignment.

If you don't need a loan, or you have a loan you will easily be able to pay off, a collateral assignment on your life insurance policy will not be necessary.

As you search for life insurance companies that allow you to use a collateral assignment, be sure to get quotes from different companies and see how much a policy might cost.

The price for a life insurance policy will vary based on your age, your gender, and the type of life insurance policy you want. You may want to look for a digital life insurance company that offers online quotes .

When you shop, be sure to use our free quote tool below to find the best rates based on your unique needs.

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About The Author: Deborah Goldberg

Insurance and Finance Writer

Deborah Goldberg is an insurance, finance, and homesteading expert. She has experience as an editor and offsite marketing specialist with Boostability.

Specializing in online SEO and tech, she has been quoted in Pilotcore. She also researches and advocates on disability and accessibility topics. When not editing, she is creating art and writing.

Collateral Assignment

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A collateral assignment involves granting a security interest in the asset or property to a lender. It is a lawful arrangement where the borrower promises an asset or property to the lender to guarantee the debt repayment or meet a financial obligation. Moreover, in a collateral assignment, the borrower maintains asset ownership, the lender holds the security interest, and the lender has the right to seize and sell the asset in event of default. This blog post will discuss a collateral assignment, its purpose, essential considerations, and more.

Key Purposes of a Collateral Assignment

Collateral assignment concerns allocating a property's ownership privileges, or a specific interest, to a lender as loan collateral. The lender retains a security interest in the asset until the borrower entirely settles the loan. If the borrower defaults on loan settlement, the lender can seize and market the collateral to recover the unpaid debt. Below are the key purposes of a collateral assignment.

  • Enhanced Lender Protection: The primary purpose of the collateral assignment is to provide lenders with an added layer of security and assurance. Also, by maintaining a claim on the borrower's properties, lenders lower their risk and improve the probability of loan settlement. In case of default, the lender can sell the collateral to recover the unpaid balance. This security authorizes lenders to offer loans with lower interest rates, as the threat associated with the loan is reduced.
  • Favorable Loan Terms: Collateral assignment allows borrowers to access financing on more favorable terms than unsecured loans . However, the terms of the loan will vary depending on the borrower’s creditworthiness and the value of the collateral. Generally, lenders are more willing to extend larger loan amounts and lower interest rates when they have collateral to fall back on. The presence of collateral reassures lenders that they have a viable means of recouping their investment, even in case of default. This increased confidence often leads to more competitive loan offers for borrowers.
  • Unlocking Asset Value: Collateral assignment enables borrowers to leverage the value of their assets, even if those assets are not readily convertible into cash. For instance, a business owner with valuable machinery can assign it as collateral to secure a business loan. This arrangement allows the borrower to continue utilizing the asset for operational purposes while accessing the necessary funds for expansion or working capital. Collateral assignment, thus, enables the efficient allocation of resources. However, the collateral will still be considered in determining the loan amount and terms.
  • Access to Higher Loan Amounts: When borrowers promise collateral against a loan, lenders can present greater loan amounts than for other unsecured loans. The worth of the collateral serves as a reassurance to lenders that they can recover their investment even if the borrower fails to settle the loan. Therefore, borrowers can obtain higher loans to finance important endeavors such as purchasing property, starting a business, or funding major projects.
  • Diversification of Collateral: Collateral assignment offers flexibility for borrowers by allowing them to diversify their collateral base. While real estate is commonly used as collateral, borrowers can utilize other valuable assets such as investment portfolios, life insurance policies, or valuable personal belongings. This diversification allows borrowers to access financing without limiting themselves to a single asset, thereby preserving their financial flexibility.

Steps to Execute a Collateral Assignment

A collateral assignment is a financial procedure that involves utilizing an asset as security for a loan or other responsibilities. Below are the essential steps involved in the collateral assignment process.

  • Assess the Need for Collateral Assignment. The initial step in collateral assignment is determining whether collateral is necessary. Lenders or creditors may require collateral to mitigate the risk of default or ensure repayment. Evaluating the value and marketability of the proposed collateral is crucial to ascertain if it meets the lender's requirements.
  • Select Appropriate Collateral. The next step involves choosing a suitable asset for collateral assignment. Common classifications of collateral comprise stocks, real estate, bonds, cash deposits, and other valuable assets. The collateral's value should be sufficient to cover the loan amount or the obligation being secured.
  • Understand Lawful and Regulatory Requirements. Before proceeding with collateral assignment, it is essential to comprehend the lawful and regulatory provisions specific to the jurisdiction where the transaction happens. Collateral assignment laws can vary, so seeking advice from legal professionals experienced in this area is advisable to ensure compliance.
  • Negotiate Provisions. Once the collateral is recognized, the collateral assignment provisions must be negotiated among the concerned parties. It includes specifying the loan amount, interest rates, repayment terms, and any further duties or limitations associated with the collateral assignment.
  • Prepare the Collateral Assignment Agreement. The collateral assignment agreement is a lawful document that typically includes details about the collateral, the loan or obligation being secured, and the rights and responsibilities of both parties. It is highly advised to engage the services of a legal specialist to prepare or review the contract.
  • Enforce the Collateral Assignment Agreement. After completing the collateral assignment agreement, it must be executed by all involved parties. This step ensures that all necessary signatures are obtained and copies of the agreement are distributed to each individual for record-keeping objectives.
  • Notify Relevant Parties. To ensure proper recognition and recording of the collateral assignment, it is important to notify all relevant parties. It may involve informing the lender or creditor, the custodian or holder of the collateral, and any other pertinent stakeholders. Sufficient documentation and communication will help prevent potential disputes or misunderstandings.
  • Record the Collateral Assignment. Depending on the nature of the collateral, it may be necessary to record the collateral assignment with the appropriate government authority or registry. This step provides public notice of the assignment and establishes priority rights in case of multiple claims on the same collateral. Seeking guidance from legal professionals or relevant authorities can determine if recording the collateral assignment is required.
  • Monitor and Maintain the Collateral. Throughout the collateral assignment term, it is crucial to monitor and maintain the value and condition of the collateral. This includes ensuring insurance coverage, property maintenance, and compliance with any ongoing obligations associated with the collateral. Regular communication between all parties involved is essential to address concerns or issues promptly.
  • Terminate the Collateral Assignment. Once the loan or obligation secured by the collateral is fully satisfied, the collateral assignment can be terminated. This involves releasing the collateral from the assignment, updating relevant records, and notifying all parties involved. It is important to follow proper procedures to ensure the appropriate handling of the legal and financial aspects of the termination.

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Key Terms for Collateral Assignments

  • Security Interest: It is the legal right granted to a lender over the assigned collateral to protect their interests in case of borrower default.
  • Collateral Valuation: The process of determining the worth or market value of the assigned collateral to assess its adequacy in securing the loan.
  • Release of Collateral: The action taken by a lender to relinquish its claim over the assigned collateral after the borrower has fulfilled the loan obligations.
  • Subordination Agreement : A legal document that establishes the priority of multiple creditors' claims over the same collateral, typically in the case of refinancing or additional loans.
  • Lien : A legal claim or encumbrance on a property or asset, typically created through a collateral assignment, that allows a lender to seize and sell the collateral to recover the loan amount.

Final Thoughts on Collateral Assignments

A collateral assignment is a valuable instrument for borrowers and lenders in securing loans or obligations. It offers borrowers access to profitable terms and more extensive loan amounts while reducing the risk for lenders. Nevertheless, it is essential for borrowers to thoughtfully assess the terms and threats associated with collateral assignment before proceeding. Seeking professional guidance and understanding the contract can help ensure a successful and beneficial financial arrangement for all parties involved.

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A veteran real estate attorney with experience ranging from drafting and negotiating land development agreements, to purchase and sale and lease agreements for multifamily and large commercial proects.

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I have 13+ years of experience as a real estate, construction, and general transactional lawyer focused on drafting and negotiating commercial leases, purchase and sale agreements, contractor and design professional agreements, etc.

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I'm in general practice with an emphasis on real estate, litigation, and contracts

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Hailing from Central Texas, Jordan Pender graduated from Baylor University in 2017 with his Bachelor of Arts degree and in 2021 he graduated from Baylor Law School with his Juris Doctor. Since August of 2021, Jordan has been working as an associate attorney for The Law Office of Gregory K. Simmons in Killeen, Texas focusing in general civil litigation. Areas of expertise include: Family Law, Contractural disputes, Business entity formation and planning, and Landlord & Tenant disputes.

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Transactional attorney with experience in drafting, reviewing and negotiating contracts related and ancillary to commercial leasing. Licensed in CA and NY.

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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.

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Definition and Examples of Collateral Assignment

How collateral assignment works, alternatives to collateral assignment.

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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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Best life insurance companies that allow assignment of collateral (2024), life insurance companies that allow assignment of collateral allow you to take out a loan against the value of your life insurance policy. collateral assignment means the lender of your loan will become the temporary beneficiary of your death benefit. once your loan is repaid, the lender is removed from your policy., free car insurance comparison.

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Written by:

Dorothea Hudson

Insurance and Finance Writer

Dorothea Hudson has been professionally writing in many spheres since 2013. She has written on entertainment, insurance, finance, travel, technology, AI, renewable energy, crypto, fundraising, and real estate for many websites. Her work has been published for British retailer Marks and Spencer, Kroger Magazine, the Vision Group, and more. Her passions include writing, music, running, travel, te...

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Jimmy McMillan

Licensed Life Insurance Agent

Jimmy McMillan is an entrepreneur and the founder of HeartLifeInsurance.com, an independent life insurance brokerage. His company specializes in life insurance for people with heart problems. He knows personally how difficult it is to secure health and life insurance after a heart attack. Jimmy is a licensed insurance agent from coast to coast who has been featured on ValientCEO and the podcast...

UPDATED: Nov 27, 2023

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Advertiser Disclosure : We strive to help you make confident life insurance decisions. Comparison shopping should be easy. We are not affiliated with any one life insurance provider and cannot guarantee quotes from any single provider. Our life insurance industry partnerships don’t influence our content. Our opinions are our own. To compare quotes from many different companies please enter your ZIP code on this page to use the free quote tool. The more quotes you compare, the more chances to save.

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On This Page

  • Many lenders allow you to use your life insurance policy as collateral for a loan
  • The lender becomes the temporary beneficiary of the death benefit on your loan
  • Once the loan is repaid, the lender is removed from your policy
  • If you die before the loan is paid off, the lender is repaid whatever they’re owed

When you first consider getting life insurance, it’s usually from a desire to provide financial security for your loved ones after your death. However, many people don’t realize that their policies can be used as collateral for a loan.

Companies are often excited to use a life insurance policy for collateral on a loan because they know their loan is guaranteed to be paid.

The most common type of insurance that can be used as collateral is whole life insurance. Companies often include a cash accumulation with their whole life plan.

If you’re interested in life insurance companies that allow assignment of collateral,  enter your ZIP code in our free tool above to compare life insurance quotes from local companies. Read More: Types of Life Insurance

Table of Contents

Which life insurance companies allow assignment of collateral?

People have been using their life insurance policy as collateral for a long time. For many people, the use of a whole life policy for collateral is a key reason they purchase coverage.

The process is simple: a borrower offers a portion of their death benefit as a collateral assignment for a loan. This is a conditional assignment — as soon as the loan is paid, the lender is removed from the policy.

Lenders prefer using a policy as collateral because the loan is guaranteed to be repaid, one way or another. If you pass away during the term of the loan, they’ll be paid out. If you default on the loan, they can lay claim to the cash value of your policy.

Because of the nature of using your policy as collateral, most life insurance companies pay little attention to what you borrow.

Most lenders accept whole life policies as collateral, so a good place to start looking is the average life insurance rates with the best whole life insurance companies.

Here is a list of rates for $100,000 in whole life insurance for men:

Here is a list of rates for $100,000 in whole life insurance for women:

As you can see, the younger you sign up for a policy, the cheaper your monthly rates will be.

What is considered the collateral on a life insurance policy loan?

The collateral of a life insurance policy loan is the simple process of assigning a lender as the temporary primary beneficiary of your insurance, making them the beneficiary of your death benefit.

The only person that can use their policy to take out a loan is the owner of the policy. That might not be the person who is insured.

For example, a husband can own a life insurance policy for his wife. In this case, the husband — not the wife — is the only person who can use it for a loan.

If you die before your loan is paid off, the lender will receive as much of your life insurance death benefit as they need to cover your loan. After the loan is paid off, the rest of your life insurance benefit goes to the original beneficiary or beneficiaries.

Once the loan is repaid in full, the lender is removed from your policy.

How to Use Your Policy as Collateral

The process of using your life insurance as collateral is surprisingly simple. Most of the paperwork is done between borrower and lender, mostly leaving the insurance company out of the process.

Once you and a lender agree on using your policy for collateral, you need to notify your insurance company. It’ll help you set the lender up as a conditional beneficiary.

That is where your insurance company’s involvement is likely to end.

Other than that, the requirements are simple. Your policy needs to stay current. Some lenders may want you to sign up for a new policy that would start at the same time as your loan, while some will work with a plan you currently have.

While there aren’t many life insurance companies that don’t allow assignment of collateral, some lending companies won’t work with a term policy.

Often, term policies don’t last as long as the loan and don’t accumulate a cash value like whole life does, which means it can’t be used in case of default.

However, if you end up buying term life, you can probably find a lender that will work with you no matter what your policy looks like.

Is using your life insurance for collateral safe?

For the most part, using your life insurance for collateral is perfectly safe. However, there is one major thing you should watch for.

Take this collateral assignment of life insurance sample as a cautionary tale:

When you go to a bank to use your policy as collateral to secure a loan, they will ask you to make them the primary beneficiary. Since that is why you’re there, you agree. The paperwork is signed, and you’ve secured your loan.

If you were to die before the loan was paid off, your entire death benefit would be paid to the bank — none would go to the people you bought the policy for in the first place.

It’s critical that you use a conditional collateral assignment. If you die before the loan is paid off with the lender as conditional and not the primary beneficiary, they are only entitled to as much money as is needed to pay off the loan.

How to Find Life Insurance Companies That Allow Assignment of Collateral

It’s exciting to know you can use your life insurance policy to secure a loan, especially since your intended beneficiaries are still protected in the future.

Affordable life insurance companies that allow assignment of collateral can provide you with the funds you need. If you’re ready to explore possible quotes, enter your ZIP code below to get started.

Case Studies: Best Life Insurance Companies That Allow Assignment of Collateral 

Case Study 1: Building a Business

Jack, a small business owner, needed funds to expand his business operations. Rather than opting for a traditional loan with high-interest rates, he explored the option of using his whole life insurance policy as collateral.

After conducting research and comparing rates, Jack found a reputable life insurance company that allowed assignment of collateral. By using his policy as collateral, Jack secured a loan with favorable terms and lower interest rates, allowing him to grow his business without compromising his family’s financial security.

Case Study 2: Debt Consolidation

Emily had accumulated several high-interest debts that were becoming overwhelming. She was concerned about her financial stability and wanted to find a solution to manage her debt effectively. After learning about the possibility of using her whole life insurance policy as collateral, Emily decided to explore this option further.

She connected with a life insurance company that allowed collateral assignment and obtained a loan against her policy’s cash value. With the loan proceeds, Emily successfully consolidated her debts and improved her overall financial situation.

Case Study 3: Financing Home Renovation

John and Susan wanted to renovate their home to accommodate their growing family. However, they were hesitant about taking on additional debt through traditional home improvement loans. Instead, they discovered that their whole life insurance policies could be used as collateral to secure a loan for the renovation project.

With the help of a reliable life insurance company, John and Susan accessed the cash value of their policies and obtained a loan with favorable terms to fund their home renovation, ensuring that their family’s financial future remained protected.

Frequently Asked Questions

What does it mean to assign collateral on a life insurance policy loan.

Assigning collateral on a life insurance policy loan means using your life insurance policy as security for a loan. The lender becomes the temporary beneficiary of the death benefit, and once the loan is repaid, the lender is removed from your policy.

Can I use the cash value of my policy as collateral?

Yes, the cash value of a whole life insurance policy can be used as collateral for a loan. However, the loan amount will typically be a percentage of the cash value rather than the full amount.

Are there any restrictions on how I can use the loan obtained through collateral assignment?

In most cases, there are no restrictions on how you can use the loan obtained through collateral assignment. You can use it for any purpose, such as paying off debts, covering medical expenses, or financing a business.

Can I assign collateral on multiple life insurance policies?

Yes, you can assign collateral on multiple life insurance policies if they meet the requirements of the lender. However, keep in mind that the total loan amount will depend on the combined cash values and death benefits of all the policies.

Can I assign collateral on a life insurance policy that I don’t own?

No, you can only assign collateral on a life insurance policy that you own. If you are the insured person but not the policy owner, you will need the policy owner’s consent to use it as collateral.

Will the lender have access to my policy information?

The lender will have access to the necessary policy information for the collateral assignment process. However, they typically do not have access to your policy details beyond what is required for the loan arrangement.

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What Is A Collateral Assignment Of Life Insurance?

A couple signing up for Collateral Assignment

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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.

A woman signing up for Collateral Assignment.

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.

A form to sign up for Collateral Assignment.

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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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.

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

How Is A Collateral Assignment Used In A Life Insurance Contract?

How Is A Collateral Assignment Used In A Life Insurance Contract?

Published: October 14, 2023

Discover how collateral assignments are utilized in life insurance contracts, providing financial security and peace of mind. Learn about the benefits and considerations involved in this strategic financial tool.

(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

Introduction, what is a collateral assignment, understanding life insurance contracts, how a collateral assignment works, benefits and uses of collateral assignments, risks and considerations, limitations and restrictions, how to set up a collateral assignment.

When it comes to financial matters, having a solid understanding of various concepts and strategies is crucial. One such concept is a collateral assignment, which plays a significant role in the world of life insurance contracts. Understanding how a collateral assignment works can provide you with valuable insights into how to manage and leverage your life insurance policy to meet your financial needs.

A collateral assignment involves using your life insurance policy as collateral for a loan or other financial transaction. It allows you to borrow against the cash value of your policy without surrendering the policy itself. This strategy can be particularly useful if you need access to funds for a specific purpose, such as starting a business, financing education expenses, or facing unexpected medical bills.

In order to grasp the significance of collateral assignments, it’s important to have a solid understanding of life insurance contracts. Life insurance is a contractual agreement between a policyholder and an insurance company. The policyholder pays regular premium payments, and in return, the insurance company provides a death benefit to the policy’s beneficiaries upon the policyholder’s death. Additionally, certain types of life insurance policies, such as whole life or universal life insurance, accumulate a cash value over time.

The cash value in a life insurance policy can be used in various ways. One option is to surrender the policy and receive the accumulated cash value. However, this may result in the termination of the policy and the loss of its associated benefits. Another option is to take a policy loan against the cash value. This allows the policyholder to access funds while keeping the policy intact.

This is where a collateral assignment becomes relevant. Instead of taking a policy loan, a policyholder can use a collateral assignment to borrow money from a lender by assigning a portion of the life insurance policy’s death benefit as collateral. In this arrangement, the lender becomes the assignee of the policy and is entitled to receive a portion of the death benefit if the policyholder passes away before the loan is repaid. This arrangement provides security to the lender and allows the policyholder to access funds without surrendering the policy.

In the following sections, we will delve deeper into how a collateral assignment works, its benefits and uses, as well as the considerations, limitations, and steps involved in setting it up.

A collateral assignment is a legal agreement that allows a policyholder to assign a portion of the death benefit from a life insurance policy as collateral for a loan or other financial obligation. It serves as a way to secure the loan by providing the lender with a potential source of repayment in the event of the policyholder’s death. This arrangement allows the policyholder to access funds without surrendering the policy or disrupting its financial benefits.

With a collateral assignment, the policyholder remains the owner of the life insurance policy and retains control over other aspects of the policy, such as changing beneficiaries or making withdrawals from the cash value. The assigned portion of the death benefit serves as collateral for the loan or debt, and if the policyholder passes away before the loan is repaid, the lender has the right to receive the assigned portion of the death benefit to satisfy the outstanding debt.

It’s important to note that a collateral assignment does not transfer ownership of the policy to the lender. Instead, it grants the lender a limited interest in the policy specifically for the purpose of securing the loan. Once the loan is repaid, the collateral assignment is released, and the policy returns to the full control of the policyholder.

A collateral assignment can be used for various financial purposes, including personal loans, business financing, or even as a form of security for a surety bond. The flexibility of this arrangement allows policyholders to leverage the accumulated cash value and death benefit of their life insurance policy to meet their financial needs without sacrificing the long-term benefits of the policy.

It’s worth noting that the availability and terms of collateral assignment can vary depending on the insurance company and the specific policy. Some policies may have limitations on the amount that can be assigned or require approval from the insurance company before the assignment can be made. It’s important to review the policy terms and consult with the insurance provider or a financial advisor to understand the specific guidelines and implications of a collateral assignment.

In the next section, we will explore how a collateral assignment works within the context of a life insurance contract.

Before delving deeper into how a collateral assignment works, it’s essential to have a solid understanding of life insurance contracts. A life insurance contract is a legal agreement between a policyholder and an insurance company, wherein the policyholder pays regular premium payments in exchange for financial protection for their loved ones in the event of their death.

Life insurance contracts come in various forms, but the two main types are term life insurance and permanent life insurance. Term life insurance provides coverage for a specific period, typically 10, 20, or 30 years. If the policyholder passes away during the term, the insurance company pays out a death benefit to the beneficiaries named in the policy. Permanent life insurance, on the other hand, provides lifelong coverage and includes a cash value component that accumulates over time.

The cash value in a permanent life insurance policy, such as whole life or universal life insurance, grows gradually over the years through premium payments and potential investment gains. This cash value can be accessed by the policyholder through withdrawals or policy loans, providing a source of liquidity that can be utilized for various financial needs.

One of the key advantages of permanent life insurance policies is their ability to accumulate cash value on a tax-deferred basis. This means that any growth in the cash value is not subject to immediate taxation, allowing the policyholder to potentially build a substantial cash reserve over time.

Furthermore, permanent life insurance policies often provide additional benefits such as the ability to participate in the insurance company’s profits through dividends, the option to increase or decrease the death benefit, and even the flexibility to adjust premium payments.

Given the unique features and advantages offered by permanent life insurance policies, they are often the type of policy chosen for a collateral assignment. The combination of death benefit protection and cash value growth make permanent life insurance policies an ideal asset to use as collateral for loans or other financial obligations.

Now that we have a basic understanding of life insurance contracts and their various components, let’s explore how a collateral assignment works in conjunction with a life insurance policy in the next section.

Now that we understand the basics of life insurance contracts, let’s dive into how a collateral assignment works within the context of these policies. A collateral assignment involves assigning a portion of the death benefit from a life insurance policy as collateral for a loan or other financial obligation.

Here’s a step-by-step breakdown of how a collateral assignment typically works:

  • The policyholder identifies a need for funds and seeks a loan or financing.
  • The policyholder and the lender determine the amount of the loan and agree on the terms and conditions.
  • A collateral assignment agreement is drafted, which outlines the terms of the assignment, including the assigned portion of the death benefit, the loan amount, and the repayment terms.
  • The collateral assignment agreement is signed by the policyholder, the lender, and the insurance company, acknowledging the assignment and providing consent for the assignee to receive a portion of the death benefit in the event of the policyholder’s death.
  • Upon the policyholder’s passing, the lender files a claim with the insurance company, providing necessary documentation to establish the validity of the claim.
  • The insurance company verifies the claim and disburses the assigned portion of the death benefit to the lender to satisfy the outstanding debt.
  • If there are remaining funds from the death benefit after repaying the loan, they are distributed to the designated beneficiaries of the policy.

It’s important to note that the policyholder remains the owner of the life insurance policy and retains control over other aspects of the policy, such as changing beneficiaries or making withdrawals from the cash value. The assigned portion of the death benefit is solely used as collateral for the loan, and the lender only has a claim to that specific portion.

It’s crucial for both the policyholder and the lender to understand the terms and conditions of the collateral assignment, including any limitations or restrictions set by the insurance company. Some common restrictions may include a maximum assignment amount, a requirement to maintain the policy in-force, or a provision for the policyholder to replace the collateral assignment with another form of security if requested by the insurance company.

By using a collateral assignment, the policyholder can access funds while keeping the life insurance policy intact. This can be particularly advantageous in situations where surrendering the policy would result in the loss of the accumulated cash value and other benefits.

In the next section, we will explore the various benefits and uses of collateral assignments within the realm of financial planning.

Collateral assignments offer several benefits and serve various uses within the realm of financial planning. Let’s explore some of the key advantages and common uses of collateral assignments:

1. Access to Funds

One of the primary benefits of a collateral assignment is the ability to access funds without surrendering the life insurance policy. By using the death benefit as collateral, the policyholder can secure a loan or obtain financing for personal or business purposes. This allows individuals to meet immediate financial needs without disrupting their long-term insurance coverage.

2. Retention of Policy Benefits

Unlike policy loans, which require repayment with interest, collateral assignments allow policyholders to retain the full benefits of their life insurance policies. These benefits can include the death benefit for beneficiaries, potential cash value growth, and the ability to participate in policy dividends. By using a collateral assignment, policyholders do not have to forfeit these valuable features.

3. Lower Interest Rates

When compared to other types of loans, collateral assignments often offer lower interest rates. This is because the loan is backed by the assigned portion of the life insurance policy’s death benefit, providing additional security for the lender. Lower interest rates can result in significant cost savings for the policyholder over the life of the loan.

4. Flexible Repayment Terms

Collateral assignments provide flexibility in terms of loan repayment. Policyholders and lenders can negotiate repayment terms that align with the borrower’s financial capacity, allowing for customized repayment schedules. This flexibility can help borrowers manage their cash flow effectively and repay the loan on terms that suit their specific needs.

5. Diverse Financial Uses

Collateral assignments can be used for a wide range of financial purposes. Common uses include funding education expenses, starting or expanding a business, purchasing or renovating a property, financing a major purchase, or covering unexpected medical expenses. The versatility of collateral assignments allows policyholders to leverage their life insurance policies to meet various financial goals.

6. Potential Tax Advantages

Collateral assignments may offer potential tax advantages depending on the specific circumstances. For example, if the loan proceeds are used for investment purposes or to generate income, the interest paid on the loan may be tax-deductible. It’s crucial to consult with a tax advisor or financial expert to understand the tax implications of a collateral assignment in your specific situation.

By leveraging the benefits and uses of collateral assignments, policyholders can maximize the value of their life insurance policies and utilize them as a valuable financial asset. However, it’s essential to consider the potential risks and limitations associated with collateral assignments, which we will explore in the next section.

While collateral assignments offer several advantages, it’s important to fully understand the potential risks and considerations before entering into such an arrangement. Here are some key factors to keep in mind:

1. Impact on Death Benefit

Assigning a portion of the death benefit as collateral can reduce the overall amount payable to beneficiaries upon the policyholder’s death. It’s crucial to assess the impact of this reduction on the intended financial protection for loved ones and ensure that the remaining portion of the death benefit is still sufficient to address their needs.

2. Default Risk

If the policyholder fails to repay the loan, the lender may have the right to claim the assigned portion of the death benefit, potentially leaving beneficiaries with a reduced payout. It’s important to have a robust repayment plan in place and make timely payments to avoid default and the potential loss of policy benefits.

3. Policy Lapse

If the policy lapses due to missed premium payments or other reasons, the collateral assignment may become void, and the lender loses their security interest in the life insurance policy. Policyholders should ensure they have a sufficient plan in place to maintain premiums and keep the policy in force to protect the collateral assignment.

4. Limited Flexibility

Once a collateral assignment is in place, it restricts the policyholder’s ability to make changes to the policy, such as increasing or decreasing coverage, accessing the cash value, or changing beneficiaries. It’s important to evaluate whether the potential benefits of a collateral assignment outweigh the loss of flexibility in managing the life insurance policy.

5. Complex Documentation

Collateral assignments involve drafting and signing complex legal documents, including the collateral assignment agreement. It’s crucial to fully understand the terms and conditions of the agreement and consider seeking professional advice to ensure that all parties involved are clear on their rights and obligations.

6. Insurance Company Regulations

Each insurance company may have specific regulations and requirements regarding collateral assignments. It’s important to review the policy terms and consult with the insurance provider to understand any restrictions, limitations, or approval processes associated with collateral assignments.

Considering these risks and considerations is essential to make informed decisions when considering a collateral assignment. Seeking guidance from a financial advisor or insurance professional can help assess the suitability of a collateral assignment and its potential impact on your overall financial plan.

In the next section, we will explore any limitations and restrictions that may apply to collateral assignments.

While collateral assignments can be valuable tools, there are certain limitations and restrictions that policyholders should be aware of. These limitations can vary depending on the insurance company and the specific policy. Here are some common limitations and restrictions to consider:

1. Assignment Limits

Insurance companies often impose limits on the amount that can be assigned from a life insurance policy. This limit is typically a percentage of the policy’s death benefit. It’s essential to review the policy terms to understand the maximum allowable assignment amount.

2. Policy Approval

In some cases, insurance companies require policyholder approval before a collateral assignment can be implemented. This approval process may involve submitting an application, providing financial information, or meeting certain criteria determined by the insurance company.

3. Maintaining Policy In-Force

To retain the collateral assignment, policyholders must keep the life insurance policy in force, which includes paying premiums on time. If the policy lapses or is terminated, the collateral assignment may become void, and the policyholder may lose the associated benefits.

4. Replacement of Collateral

In certain situations, insurance companies may require the policyholder to replace the collateral assignment with another form of security if requested. This requirement ensures that the insurance company is adequately protected against potential losses.

5. Removing the Collateral Assignment

If the policyholder wishes to remove the collateral assignment, they will need to follow the specified procedure outlined by the insurance company. This often involves submitting a formal request, providing necessary documentation, and obtaining the insurance company’s approval.

6. Financial Institution Requirements

Financial institutions, such as banks or lenders, may have their own specific requirements for collateral assignments. These requirements may include minimum loan amounts, credit checks, or additional documentation. It’s important to familiarize yourself with the lender’s guidelines to ensure a smooth collateral assignment process.

7. Legal and Financial Advice

Due to the complex nature of collateral assignments, it’s wise to seek advice from legal and financial professionals. They can provide guidance on the legal implications, tax considerations, and overall suitability of a collateral assignment based on your specific circumstances.

Understanding these limitations and restrictions is crucial when considering a collateral assignment. It’s important to review the policy documents, consult with the insurance company and relevant professionals, and ensure compliance with all applicable regulations to navigate the process successfully.

In the next section, we will outline the general steps involved in setting up a collateral assignment.

Setting up a collateral assignment requires careful consideration and following specific steps. While the exact process may vary depending on the insurance company and the lender, here are some general guidelines to help you navigate the setup process:

1. Assess Your Financial Needs

Determine the amount of funds you need and the purpose for which you require the loan or financing. Assess your financial situation and ensure that a collateral assignment aligns with your overall financial goals and needs.

2. Identify the Lender

Research potential lenders that offer collateral assignments and select one that best meets your requirements. Consider factors such as interest rates, loan terms, and reputation when making your decision.

3. Consult with professionals

Seek the advice of financial and legal professionals who specialize in life insurance policies and collateral assignments. They can guide you through the process, provide expert recommendations, and ensure that you fully understand the implications and obligations associated with a collateral assignment.

4. Review Policy Terms

Review the terms of your life insurance policy, paying particular attention to any provisions related to collateral assignments. Understand the limitations, restrictions, and requirements set by your insurance company.

5. Draft the Collateral Assignment Agreement

Work with legal professionals to draft a collateral assignment agreement that outlines the terms and conditions of the assignment. This agreement should clearly specify the assigned portion of the death benefit, the loan amount, the repayment terms, and any other relevant provisions.

6. Obtain Signatures and Consent

Ensure that all parties involved, including yourself, the lender, and the insurance company, sign the collateral assignment agreement. The insurance company’s consent is crucial to acknowledge and approve the assignment.

7. Submit Documentation

Provide the necessary documentation to the insurance company and the lender to establish the collateral assignment. This may include copies of the collateral assignment agreement, policy documents, and any other requested information.

8. Stay Informed and Compliant

Keep track of your loan repayments and stay informed about any updates or changes related to the collateral assignment. Comply with the terms and conditions stated in the collateral assignment agreement, including making timely payments to the lender and maintaining the life insurance policy in force.

Remember that these steps are general guidelines, and the specific process may vary based on your unique situation and the requirements set by the insurance company and the lender. Consulting with professionals experienced in collateral assignments will ensure a smooth and successful setup process.

In the final section, we will conclude our discussion on collateral assignments and summarize the key points to remember.

Collateral assignments serve as a valuable tool in leveraging the benefits of a life insurance policy while accessing funds for various financial needs. By assigning a portion of the death benefit as collateral, policyholders can secure loans or financing without surrendering their policies or disrupting the benefits associated with them.

We began by understanding the basics of collateral assignments and the concept of life insurance contracts. We then explored how a collateral assignment works within the context of a life insurance policy, outlining the steps involved in setting one up.

Collateral assignments offer several benefits, including access to funds, retention of policy benefits, lower interest rates, flexible repayment terms, and diverse financial uses. However, it’s important to consider the potential risks and limitations associated with collateral assignments, such as the impact on the death benefit, default risk, limited flexibility, and complex documentation.

It’s essential to carefully evaluate your financial needs, consult with professionals, review policy terms, and draft a well-structured collateral assignment agreement. By following these steps and staying compliant with the agreement, you can navigate the collateral assignment process successfully.

To ensure a smooth and efficient setup process, it’s advisable to seek guidance from financial advisors, insurance professionals, and legal experts who can provide personalized advice based on your specific circumstances.

In summary, a collateral assignment can be a powerful strategy to utilize the accumulated cash value and death benefit of a life insurance policy while addressing immediate financial needs. However, it’s crucial to conduct thorough research, seek professional advice, and fully understand the implications and obligations associated with collateral assignments.

By carefully weighing the benefits, risks, and considerations, you can make informed decisions and effectively use collateral assignments to enhance your financial plan and achieve your goals.

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What should lenders consider in 2024 for collateral risk?

There is a renewed focus on collateral risk. How does that impact appraisal technology?

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The GSEs are taking a closer look at how they evaluate collateral risk. Appraisal modernization is vital. Gareth Borcherds , managing director Ascent Software Group outlines the three categories to be aware of, how appraisal modernization can help scale new initiatives and more in this executive conversation.

HousingWire: What should lenders consider in 2024 for collateral risk?

Gareth Borcherds: Collateral risk is an area where we’ve seen a lot of renewed focus and attention. The GSEs are focusing much attention on how they go about evaluating collateral risk. If we are paying attention to how they talk about it, I think we can categorize their thoughts into three categories.

Reduction in reliance on full appraisals. Many reasons given for appraisal modernization stem from appraisal turnaround times. But it’s more than just dealing with the appraiser shortage and the longevity of the industry. Collateral risk is a component of the loan that takes into consideration the credit risk of the borrower in addition to the collateral. I think that we are going to see more lenders continue to introduce more appropriate collateral evaluations relative to the credit risk. Appraisals are a high cost for borrowers and are not always needed. 

Higher quality appraisals. On the flip side, when a credit risk decision needs to have a very accurate collateral risk decision , we are going to need better quality appraisals. The benefit of reducing the number of full appraisals required is that, when we do get an appraisal, we can push for a higher quality and more accurate report. Appraisal quality is a problem the GSEs are deeply concerned about and are putting a lot of focus on trying to address. Lenders should be careful with trying to enforce appraisal quality after they get a report back. Appraisal quality starts the moment an appraisal is requested and the biggest factor that will determine success is who the appraisal goes to.

Collecting better data on collateral. To enable the two points above, the GSEs know they need more data. The two initiatives around appraisal modernization really serve one purpose and that’s getting more data over time to the GSEs about properties. The property data collection and Universal Appraisal Dataset 2.0 update serve this one goal of providing better property data. Property data in its current state is a big barrier to a lot of technology companies. They are in a unique position to make sure they get the data they need.

HW: How have recent appraisal modernization changes such as ACE + PDR affected collateral risk management?

GB: Appraisal modernization is about two things.

  • Getting better property data to improve automated collateral risk decisions in the future
  • Better aligning collateral risk decisions to credit risk decisions so there are more options available.

There is still an abundance of work to do to help the industry understand what appraisal modernization means and how it affects them. I think the most important aspect to understand is that the reduction in full appraisals is a good thing for most lenders. When you are order a PDR/PDC report, you’ve essentially gotten an appraisal waiver. Anything that comes from the property data collected will not be any different than any of the problems that would come from an appraisal, but you don’t have to worry about the value.

The problem we currently face is this: How do we scale these new initiatives so they can be fulfilled with the same level of efficiency as appraisal and other things? We need more technology and vendors to be in the space and capable of fulfilling these products. An effort Jaro is heavily invested in making a reality for our customers.

HW: How can AMCs and appraisal desks improve their vendor selection and management?

GB: Part of our JaroDesk platform is built specifically to help do this. Finding the right vendor for an assignment is the No. 1 factor in the success of any collateral risk order. With the updates, I believe the clarifications to Appraiser Independence Requirements (AIR) draw renewed attention to the required focus of picking the right vendor.

We’ve written and talked about appraiser quality and selection before, and I still think this is an area that (if given the attention it requires) will drive a lot of improvements across the entire process. The inconsistency in appraisal quality is a staggering problem, but until lenders are required to pick the best appraiser or vendor rather than picking based on relationships or preference of a loan team, we aren’t going to force the appraisal industry to improve their ability to deliver higher quality reports.

The most important thing a lender can do right now is make sure they are defining criteria and tools to make sure they are only using the vendors that are delivering quality collateral reports to them.

HW: What tools does Jaro offer to help AMCs, appraisal desks and lenders manage risk?

GB: Jaro is more than just an order management platform. We have a full end-to-end product suite that allows us to have a hand in the entire collateral risk process and report. Our platform consists of three products, JaroDesk (Order & Vendor Management), JaroKit (Report Writing Tools) and JaroInspect (Property Inspection Data Collection). Within our platform, lenders, AMCs, and even appraisers can get all the tools they need to obtain property data and valuation reports.

Our vendor management capabilities are constantly growing. We have ways of identifying which appraisers are updating their appraisal practices to be better data driven analysis rather than relying on outdated appraisal techniques. We can then use these items to predict the likelihood of an appraiser delivering an appraisal report that is going to have quality issues. We hope to put these tools in the hands of our customers and drive the conversation with appraisers in the industry that it’s time we start improving our processes and quality.

Through this entire platform, we inject a slew of data collection and overlay that with artificial intelligence (AI) and machine learning tools to help inform the next decision. Our goal is to provide collateral risk parties to get access to everything they need to make the right decisions throughout the entire process.

To learn more about Jaro, visit  tryjaro.com .

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Home » Insurance » Life » Collateral Assignment of Life Insurance Policy Proceeds

Collateral Assignment of Life Insurance Policy Proceeds

If you're seeking a loan and lack conventional collateral, consider using your life insurance policy as collateral. This innovative approach can help you secure the financing you need while ensuring your loved ones are financially protected.

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Are you looking for a way to secure a loan, but do not have the credit rating or typical collateral in order to do so?

Then you might want to consider the assignment of life insurance policy as collateral for a loan .

This relatively new field in the obtainment of loans uses your own life insurance policy as the means for you to obtain the type of loan you want.

The collateral assignment of life insurance policy proceeds is a relatively simple one, but there are a few steps that need to be taken before you can take full advantage of this method.

Table of Contents

Finding insurance companies that allows collateral assignment, lender accepting the insurance policy proceeds as collateral, collateral assignment example, life insurance for your family, the bottom line – collateral assignment of life insurance policy proceeds.

The first question before the assignment of a life insurance policy as collateral for a loan can be processed is whether your life insurance company will allow it to happen.

Many of them do have specific requirements and they need to be followed for the collateral assignment of life insurance policy can take place.

If the answer is no, at least you can eliminate that method of obtaining your loan and in the future obtain a life insurance policy that will not have these restrictions.

Most of the insurance carriers that we work with do allow for collateral assignment of your policy as long as you identify a lender that will accept it.

There are companies out there that specialize in working with both lenders and life insurance companies that can help you obtain the goal of collateral assignment of a life insurance policy for the purposes of getting a loan.

In most cases, they follow a step-by-step approach that starts with contacting the lender to see what type of life insurance qualifies as collateral. The company will ensure getting the exact wording necessary so that the next step can be taken.

Now you apply for the life insurance that qualifies for the loan, in some cases it may not need a medical exam which generally is more expensive but can be done in a few days or it may require an exam and be fully underwritten which is less expensive but takes a few weeks.

If you currently have a policy that qualifies for the assignment of a life insurance policy as collateral for the loan, then this step can be avoided.

Do you need life insurance fast? Are you in overall good health? There are guaranteed acceptance insurance policies and simplified issued policies that require little to no medical exams and are issued rather quickly.

The lender will now accept the life insurance as collateral for your loan, usually, they are consulted beforehand to ensure that all the wording and legal language requirements are met and that the application is essentially approved before it is sent in to avoid any unwanted surprises.

Once it is approved, the forms are signed by both the lender and the life insurance company so that the process can take the final step of providing you with the loan that you need.

Sample Collateral Assignment Form

This rather straightforward process can be quite technical in nature and needs an experienced, knowledgeable company to make the transaction work so that you can get the loan you desire while satisfying the needs of both the lender and the life insurance company.

This way, all the potential problems are ironed out beforehand and you get the loan you want.

If you are looking for another method to obtain a loan, then using your life insurance policy proceeds or having one drawn up can be the way to get what you need.

We recently had a real estate developer who needed a $4 million term life policy to cover his bank loans. He needed to get his life insurance fast, so we went with the carrier we felt would issue the quickest based on his situation.

Within 4 weeks the policy was in force and he was completing the collateral assignment forms to hand over to his banks. Keep in mind that the assignment forms do not need to be completed until after you receive your policy from the insurance company.

The idea of using a life insurance policy as collateral is relatively new. These plans are an excellent way to secure a loan that you wouldn’t be able to get otherwise.

One thing to always be aware of is the life insurance protection that you’re giving your loved ones. Life insurance plans are a great way to close a loan, but that’s not the main reason for these plans.

Regardless of why you’re buying life insurance, there are plenty of options for you to choose from. If you want the cheapest, you should buy a term plan with a medical exam .

The required medical exam is pivotal in deciding how much you pay. The better results that you get from the medical exam, the lower your insurance rates are going to be.

Aside from the medical exam, there are several other key factors that can change how much you pay. One of those is tobacco usage . If you smoke , you’ll need to set aside twice as much for your plan.

Utilizing life insurance policies as collateral for loans offers a novel approach to secure financing, especially when traditional avenues might be inaccessible.

While this method provides flexibility and alternative solutions, it’s paramount to remember the primary purpose of life insurance: safeguarding loved ones’ futures.

Engaging with knowledgeable professionals in both insurance and lending spheres ensures a seamless transaction that respects the policy’s intent.

About the Author

collateral assignment companies

Jeff Rose, CFP® is a Certified Financial Planner™, founder of Good Financial Cents , and author of the personal finance book Soldier of Finance . He was a financial planner for 16+ years having founded, Alliance Wealth Management, a SEC Registered Investment Advisory firm, before selling it to focus on his passion - educating the masses on the importance of financial freedom through this blog, his podcast, and YouTube channel. Jeff holds a Bachelors in Science in Finance and minor in Accounting from Southern Illinois University - Carbondale. In addition to his CFP® designation, he also earned the marks of AAMS® - Accredited Asset Management Specialist - and CRPC® - Chartered Retirement Planning Counselor. While a practicing financial advisor, Jeff was named to Investopedia's distinguished list of Top 100 advisors (as high as #6) multiple times and CNBC's Digital Advisory Council. Jeff is an Iraqi combat veteran and served 9 years in the Army National Guard. His work is regularly featured in Forbes, Business Insider, Inc.com and Entrepreneur.

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11 comments.

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I am in the same boat as Sheryl. My insurance company, Primerca, will do a collateral loan, but I can’t find a lender. Any ideas?

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Does New York Life allow their whole life insurance policies to be used as collateral?

collateral assignment companies

@ Lisa You would have to double check with them, but doubtful. You would probably be only to borrow off the cash value if there was any.

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I am trying to find a lender for my insurance to be used as a collateral assignment – may I contact you?

@J. We unfortunately don’t have any lender contacts. Most of our clients already have relationships with existing lenders before they contact us regarding collateral assignment.

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I already have a cash value life insurance and would like to see if I can use it as a collateral to obtain a loan. Please let me how I can go about doing it. I am also interested in getting another policy.

@ Meix Teurn The answer is yes. The bank is not going to look at the cash value of the policy, they are concerned with the death benefit of the policy.

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Do you know of lenders who accept life insurance policies as collateral for a loan. I retired from the U.S.Postal Service with a life insurance policy worth over 200k. Instead of leaving it to charity, I would like to use it as a means to assign it for a loan. I have already verified with the Office of Personnel Management in Washington that it is allowed. I have no family, therefore I would be interested in using it as collateral or to sell part of the policy. The premiums are taken out of my annuity every month which is relatively inexpensive compared to the payout. The polivy includes a basic amount equal to my last year of salary plus five times that amount as a optional multiple.

@ Herbert Contact our office and we can talk about some of your options.

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I have a policy that offers this option however no banks seem to accept. do you have any that you can refer?

@ Sheryl That’s strange. We’ve issued tons of policies and getting collateral assignment has never been an issue. Who is your policy with?

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IMAGES

  1. Guidelines for Collateral Assignment of Life Insurance

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COMMENTS

  1. A Collateral Assignment of Life Insurance

    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...

  2. Collateral Assignment of Life Insurance

    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...

  3. Collateral Assignment of Life Insurance

    Log In Collateral assignment of life insurance leverages your life insurance as loan collateral. Find out how it works and what's required.

  4. Best Life Insurance Companies That Allow Assignment of Collateral (2022

    Life insurance companies that allow the assignment of collateral are fairly common. A collateral assignment will make the lender the immediate beneficiary of your policy. If you pay off your loan before you die, you can dismiss your collateral assignment and make sure your beneficiaries receive the full death benefit.

  5. Collateral Assignment: All You Need to Know

    GET FREE PROPOSALS No Upfront Payment Required, Pay Only If You Hire. Home Types of Contracts Collateral Assignment Excellent Jump to Section Key Purposes of a Collateral Assignment Steps to Execute a Collateral Assignment Key Terms for Collateral Assignments Final Thoughts on Collateral Assignments

  6. 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. Peace of mind doesn't have to break the bank Don't wait until it's too late.

  7. What Is Collateral Assignment?

    Insurance Life Insurance What Is Collateral Assignment (of a Life Insurance Policy)? By Justin Pritchard Updated on November 10, 2021 Reviewed by Samantha Silberstein Fact checked by Meredith Mangan In This Article Definition and Examples of Collateral Assignment How Collateral Assignment Works Alternatives to Collateral Assignment Photo:

  8. Best Life Insurance Companies That Allow Assignment of Collateral (2024)

    Which life insurance companies allow assignment of collateral? People have been using their life insurance policy as collateral for a long time. For many people, the use of a whole life policy for collateral is a key reason they purchase coverage.

  9. What Is Collateral Assignment of Life Insurance?

    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. Tory Crowley Associate Editor & Licensed Life Insurance AgentTory Crowley is an associate editor and a former licensed insurance agent at Policygenius.

  10. What Is A Collateral Assignment Of Life Insurance?

    Updated 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?

  11. What Is A Collateral Assignment?

    Collateral - something offered (in this case, life insurance) as a guarantee of loan repayment if you default on your loan. Conditional Assignment - your collateral assignment is conditional, meaning it is subject to specific conditions and terms, as opposed to an absolute assignment. In other words, your lender no longer qualifies for the ...

  12. What Is Collateral Assignment of Life Insurance?

    Nathan Paulus | Edited by Rae Osborn | Quality Verified 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.

  13. What is a Collateral Assignment of Life Insurance?

    Life Insurance Basics Life Insurance 101 What is a collateral assignment of a life insurance policy? Jul 30, 2021 • 5 Minute Read share Need a loan but worried about having collateral to back it up? Consider a source you haven't thought about yet - your life insurance policy.

  14. How Is A Collateral Assignment Used In A Life Insurance Contract

    1. Access to Funds. One of the primary benefits of a collateral assignment is the ability to access funds without surrendering the life insurance policy. By using the death benefit as collateral, the policyholder can secure a loan or obtain financing for personal or business purposes.

  15. What Is Collateral Assignment of Life Insurance?

    Key Takeaways Collateral assignment allows you to use a life insurance policy as assurance for a loan. The lender gets first claim on the death benefit if you default. Permanent life insurance policies like whole life and universal life are commonly used since they don't expire. Term life may also be accepted.

  16. What Is Collateral Assignment of Life Insurance?

    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 ...

  17. Collateral Assignment of Life Insurance

    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:

  18. What should lenders consider in 2024 for collateral risk?

    Collateral risk is a component of the loan that takes into consideration the credit risk of the borrower in addition to the collateral. I think that we are going to see more lenders continue to ...

  19. PDF INSTRUCTIONS FOR COLLATERAL ASSIGNMENT FORM Step 1

    Collateral Assignment INSTRUCTIONS FOR COLLATERAL ASSIGNMENT FORM Step 1 - Print and Complete Form. Definitions: Assignor - The person to give or share certain contractual rights by this assignment, generally the contract owner or authorized representative. Assignee - The person or entity to receive certain contractual rights by this assignment.

  20. Collateral Assignment of Life Insurance Policy Proceeds

    The first question before the assignment of a life insurance policy as collateral for a loan can be processed is whether your life insurance company will allow it to happen. Many of them do have specific requirements and they need to be followed for the collateral assignment of life insurance policy can take place.

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