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

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

Definition and Examples of Collateral Assignment

How collateral assignment works, alternatives to collateral assignment.

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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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What Is Collateral Assignment of Life Insurance?

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Updated: December 14, 2023

On This Page:

• How It Works
• Overview of Application Process
• Pros and Cons
• Impact on Beneficiaries
• Alternatives

Related Content

Advertising & Editorial Disclosure

Collateral assignment of life insurance is an arrangement where a policyholder uses the face value of their life insurance policy, which can be a term or permanent life insurance policy, as collateral to secure a loan. If the policyholder dies before the loan is paid off, the lender is prioritized to receive a portion of the death benefit equivalent to the outstanding loan balance. The remaining benefit then goes to the policy's beneficiaries.

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

How Collateral Assignment of Life Insurance Works

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

For your beneficiaries, this arrangement means the death benefit they receive could be reduced. If you die with an outstanding loan balance, the lender is paid first from the policy's proceeds. Any remaining amount goes to your beneficiaries only after the loan is settled.

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

Applying for Collateral Assignment

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

Obtain a Collateral Assignment Form

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

Fill Out the Form Correctly

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

Signed by Both Policyholder and Lender

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

Submit Completed Form

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

Await Approval or Rejection From Insurance Company

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

Receive a Letter of Acknowledgment

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

Obtaining Required Documentation

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

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

Pros and Cons of Collateral Assignment

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

Impact of Collateral Assignment on Beneficiaries

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

Your Lender Will Be Paid First

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

Any Remaining Death Benefit Will Be Disbursed to Your Beneficiaries

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

Alternatives to Collateral Assignment

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

These questions covers various topics related to collateral assignments, including the requirements, implications for beneficiaries and what happens under various scenarios.

How does collateral assignment differ from naming a beneficiary?

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

Can any type of life insurance policy be used for collateral assignment?

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

Can the policyholder still change beneficiaries after a collateral assignment?

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

What happens if I cancel my life insurance before paying off the debt collateralized with my policy?

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

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

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

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

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

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

About Nathan Paulus

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

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

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Collateral assignment of life insurance

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

What is collateral assignment of life insurance?

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

Why use life insurance as collateral?

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

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

Pros and cons of using life insurance as collateral

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

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

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

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

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

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

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

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

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

Alternatives to life insurance as collateral

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

Unsecured loan

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

Secured loan

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

Life insurance loan

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

Home equity line of credit (HELOC)

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

Frequently asked questions

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

What is collateral insurance and how does it work?

What does life insurance cover?

What is an irrevocable beneficiary?

Life insurance death benefits

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What Is a Collateral Assignment of Life Insurance?

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

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

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

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

Key Takeaways

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

How a Collateral Assignment of Life Insurance Works

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

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

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

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

Example of Collateral Assignment of Life Insurance

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

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

Alternatives to Collateral Assignment of Life Insurance

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

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

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

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

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

What Are the Benefits of Collateral Assignment of Life Insurance?

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

What Kind of Life Insurance Can Be Used for Collateral?

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

Is Collateral Assignment of Life Insurance Irrevocable?

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

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

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

The Bottom Line

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

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What Is A Collateral Assignment Of Life Insurance?

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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.

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How Does Applying for Collateral Assignment Work?

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

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

There is an:

Application process.

Underwriting process.

Offer that you’ll receive.

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

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

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

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

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

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

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

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

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

What about Missed Payments and Cash Value Life Insurance?

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

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

Who Can You Add as a Collateral Assignee?

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

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

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

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

Common Collateral Assignees Include:

💵 Bank loans

💳 Credit cards

🏡 Mortgages

💼 Business loans

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

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

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

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

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

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

Tips to Make Sure Your Life Policy Is Paid Out Quickly

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

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

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

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

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

The Benefits of Using Collateral Assignment of Life Insurance

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

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

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

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

What Are Some Alternatives to Collateral Assignment?

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

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

What Is Term Life?

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

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

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

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

What Is Cash Value?

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

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

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

Our Verdict on Collateral Assignment

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

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

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

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

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

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

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

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

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

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

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

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

Where Can I Learn More about Life Insurance?

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

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

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

Collateral Assignment for Life Insurance: A Comprehensive Guide

When you apply for a loan, the lender wants to make sure you have the financial resources to repay your debt. In some cases, the underwriter may ask you to provide a form of collateral. This is typically something of value that you pledge to forfeit to the lender if you default on the loan.

Depending on your circumstances, you may be able to use your life insurance policy as a form of collateral. This could help improve your approval chances for a loan or a mortgage, but there are some important things to understand before utilizing it. Learn how collateral assignment in life insurance works, explore the upsides and downsides of choosing this option, and some alternatives you may want to consider.

Table of Contents

What does it mean to have collateral assignment of life insurance.

Collateral assignment of life insurance allows the lender to be the primary recipient of your life insurance policy’s death benefit if you have an outstanding loan balance when you die. Some assignments also allow the lender to tap into the policy’s cash value if you default on your loan. While using life insurance as collateral does not prevent you from naming your own primary and contingent beneficiaries , it does mean that the lender is paid in full before anyone else. Once the loan balance is covered, your named beneficiaries receive whatever is left.

In some cases, collateral assignment allows the lender to take over your entire policy if you stop making payments on your loan. If you stop paying your policy premiums, the lender may also take over premium payments and add the cost to your principal balance. Collateral assignment can vary depending on the lender and the insurance carrier , so it’s important to carefully read all documents before signing any agreements.

When Is Collateral Assignment Used?

Although life insurance collateral can be used for many types of lending agreements, collateral assignments are commonly used for mortgages and business loans rather than for student loans or credit card debt. They are also not used for unsecured loans, as these types of loans do not require collateral. 

It’s fairly common for a lender to request collateral assignment of whole life insurance and other types of permanent life insurance policies since they have a cash value that’s accessible at any time. This may allow the lender to access the cash value upon your default instead of only having protection when you die.

How Life Insurance Collateral Works

When you take out a loan with an assignment of life insurance, the application process is similar to the process for other types of loans. The main difference lies in the assignment of the insurance policy, which you can do by contacting the insurance carrier and requesting the required paperwork. 

If you and your spouse co-own a life insurance policy, you must both agree to the assignment and be listed as co-assignors. If your spouse does not agree, you cannot use that policy as collateral. It’s also important to note that lenders generally limit the amount of your policy value that you can use for collateral. For example, you may only be able to use 50% to 90% of the policy’s cash value when you collateralize your loan. Each lender and insurance carrier may have different rules, so it’s important to confirm this before completing your application.  

In some cases, you may also need to get permission from the life insurance company to use the policy as collateral. Once the request is approved and the paperwork completed, the lender can move forward with the underwriting process and either approve or deny your loan request.

When you’ve paid off your debt, you can contact your insurance carrier and let them know you need to release the collateral assignee for your life insurance. As long as your loan has been paid, the lender cannot make a claim against your policy, even if you forget to take this step. However, collateral assignments must be settled before funds are distributed to your beneficiaries, so completing this process can help your beneficiaries avoid unnecessary delays.

Term vs. Permanent Life Policies

Lenders generally prefer permanent policies for collateral assignment, but some may accept a term life policy as long as the insurance coverage term lasts at least as long as your loan term. Each lender is different, so you need to confirm the requirements when applying for your loan.

The lender may also prefer a permanent policy because it can provide access to its cash value. Since term policies have no cash value, there’s no recourse for the lender until you die and they’re able to access the policy’s death benefit.

Current vs. New Policies

Some lenders allow you to collaterally assign a life insurance policy you already have in place, while others may require you to take out a new policy. Your ability to use an existing policy also depends on whether the insurance company allows collateral assignment. 

Some insurance companies also do not allow you to complete a collateral assignment during the application process. In this case, you need to finish the process of setting up your policy, then file paperwork to complete the life insurance assignment. Keep this in mind when determining your timeline to complete the required steps. 

Assignees vs. Beneficiaries

When assigning a lender to our policy, you do not name the lender as your beneficiary . Instead, you name the lender as an assignee and designate your beneficiaries in the same way you would with a non-assigned life insurance policy.

If you die before you finish repaying your loan, the lender receives the outstanding loan balance. Your beneficiaries then receive the remainder of the death benefit. If you’ve named multiple beneficiaries, they each receive their designated percentage of the remaining balance.

Should You Consider Using Your Life Insurance as Collateral?

While using your life insurance as collateral may be an option for you, it’s important to carefully consider the pros and cons of doing so. This can help you determine whether it’s a good option for you or if you may want to consider an alternative.

Pros  

If your bank requests a life insurance collateral assignment, you may consider agreeing based on the following advantages: 

• Improved loan approval odds:  Assigning your life insurance policy as collateral may help you get approved for a loan so you can reach your financial goals, such as starting a business or buying a home.
• Asset protection:  When you use a life insurance policy as collateral, you’re not risking other assets, such as your home or retirement account.
• Affordable rates:  Due to the certainty collateral assignment adds to a loan application, lenders may be willing to offer lower interest rates on collateralized loans.
• Tax benefits:  When you use a life insurance policy as collateral, there are no tax implications. This may not be the case if you take out a policy loan or a withdrawal. 

Cons  

While collateral assignment may initially seem like a great idea, there are some potential drawbacks to consider before making your decision:

• Estate planning issues:  If you die before your loan is paid off, the collection of collateral could throw off your estate plan and leave your beneficiaries without the financial security you originally planned to provide.
• Loss of control:  When you use an insurance policy as collateral, you’re required to keep it in place until the loan is paid off. Otherwise, the lender could take out another policy on your behalf and add the premiums to the principal of your loan. 
• Limited access to cash value:  Some forms of collateral assignment may limit your ability to access your policy’s cash value, which reduces your financial flexibility.
• May require a new policy:  Some lenders do not allow borrowers to use existing policies as collateral, and taking out a new policy requires time, effort, and additional expense. 

Alternatives to Collateral Assignment

If you’re not sure that collateral assignment is the right option for you, then you might consider exploring some alternatives. Here are a few options that may help you get the cash you need. 

Utilize a Life Insurance Cash Value Loan  

Rather than assigning your policy to the lender, you could directly tap into your cash value by taking out a life insurance loan. However, to take advantage of this option, you need to have your policy in place long enough to build up sufficient cash value, which can take several years. When you die, your unpaid loan balance and interest charges are also deducted from the death benefit.

Cash Surrender

You may consider giving up your permanent life insurance policy and taking the cash surrender value . Before choosing this option, keep in mind that it requires canceling your policy, potentially leaving you without coverage or in need of a replacement policy. You may also be subject to penalties if your policy is still in the surrender period when you initiate the cancelation.

Take Out a Home Equity Loan

If you’re not comfortable using your life insurance policy as collateral, you may consider taking out a home equity loan instead. This type of loan uses your home as collateral rather than your life insurance policy. This may also be an option if you do not already have a life insurance policy in place or your lender requires you to take out a new policy and you have health issues that prevent you from being approved for life insurance coverage.

Take Out an Unsecured Loan

Unsecured loans are not backed by collateral. This could be an option if you do not want to take the chance of losing your current assets. However, keep in mind that unsecured loans may be harder to get and typically have higher interest rates than collateralized loans.

Take Out a Term Life Insurance Policy  

In some cases, the lender may not require collateral assignment, but borrowers want to ensure their debts are paid upon their death. You can accomplish this by purchasing a term life insurance policy with a term that is equal to your loan term. This allows you to sidestep the collateral assignment process while still providing your heirs with the funds needed to pay off your remaining debt. The beneficiaries can also use any remaining death benefit as they see fit.

As you weigh your options, consider how each alternative fits with your current needs, risk tolerance, and comfort level.

Plan for your family’s future. Get a life insurance quote today.

Collateral Assignment

What does collateral assignment mean.

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

Insuranceopedia Explains Collateral Assignment

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

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

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

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What Is A Collateral Assignment?

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Life insurance is often the key to securing a loan.

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

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

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

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

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

Table of Contents

• Definitions
• Requirements
• How To Decide

What Is Collateral Assignment Of Life Insurance?

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

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

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

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

Requirements For Assignment Of Life Insurance As Collateral

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

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

Process Of Securing Collateral Assignment

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

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

Key Details

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

Important Note!

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

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

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

Types Of Life Insurance Used As Collateral

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

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

Consider the following types:

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

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

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

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

Is No Exam right for me?

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

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

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

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

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

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

Is Term right for me? 

Consider purchasing term if:

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

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

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

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

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

Is Whole right for me?

Whole life insurance can make sense under certain circumstances:

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

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

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

Universal life insurance is known for its adaptability.

Is Universal right for me? 

Universal life insurance includes unique characteristics:

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

Guaranteed Universal

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

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

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

Is Guaranteed Universal right for me?

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

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

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

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

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

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

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

Don’t

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

Commonly Asked Questions About Collateral Assignments

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

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

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

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

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

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

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

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

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

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

Is Collateral Assignment Right For Me?

The collateral assignment of life insurance DOES make sense if:

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

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

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

Final Thoughts

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

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

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

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

Heidi Mertlich

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

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

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

Modified: February 21, 2024

Learn how collateral assignments are used in life insurance contracts to secure financing and protect financial interests. Understanding the role of finance in these arrangements is crucial for individuals and businesses alike.

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Table of Contents

Introduction, definition of a collateral assignment in a life insurance contract, how does a collateral assignment work, parties involved in a collateral assignment, benefits of a collateral assignment in a life insurance contract, risks and considerations associated with a collateral assignment, types of collateral assignments, process of setting up a collateral assignment, examples of situations where collateral assignments are used.

Welcome to the world of life insurance and finance! In the realm of insurance contracts, there are various aspects and nuances that play a crucial role in determining the coverage and benefits you receive. One such aspect is a collateral assignment in a life insurance contract.

A collateral assignment refers to the process of assigning a portion or the entirety of your life insurance policy as collateral for a loan or other financial arrangement. This means that you can use your life insurance policy as security to obtain funds or fulfill certain financial obligations.

Understanding how a collateral assignment works and its implications is important, as it can provide you with financial flexibility and peace of mind. In this article, we will delve into the intricacies of collateral assignments in life insurance contracts, exploring the parties involved, the process of setting it up, and various benefits and risks associated with it.

Whether you are a policyholder seeking to unlock the value of your life insurance policy or a financial institution considering utilizing life insurance as collateral, this article will provide you with a comprehensive understanding of collateral assignments and how they can be effectively utilized.

A collateral assignment in a life insurance contract is a legal mechanism that allows a policyholder to use their life insurance policy as collateral for a loan or other financial transaction. It involves assigning a portion or the entirety of the policy’s death benefit to a lender or creditor as security.

When a collateral assignment is made, the policyholder is essentially granting the lender or creditor an interest in the policy. This interest gives the lender the right to receive the death benefit payout to cover the outstanding loan balance or fulfill the financial obligation in the event of the policyholder’s death.

It is important to note that a collateral assignment is not a transfer of ownership of the policy. The policyholder still maintains control over the policy, including the ability to make changes, name beneficiaries, and access any available cash value. The assignment is solely for the purpose of securing the debt or obligation.

Collateral assignments are commonly used in situations where a policyholder wants to borrow against the cash value of their life insurance policy. By assigning a portion of the death benefit as collateral, the lender can have confidence in the repayment of the loan, as the funds will be obtained from the policy proceeds if necessary.

In addition to loans, collateral assignments can be utilized for other financial arrangements, such as fulfilling a legal obligation, securing a business loan, or providing assurance to a business partner or investor. The flexibility of collateral assignments makes them a valuable tool in managing financial obligations and leveraging the value of a life insurance policy.

Now that we have an understanding of what a collateral assignment is, let’s explore how it actually works in practice. When a policyholder decides to create a collateral assignment, they must follow a specific process to ensure the assignment is properly executed.

The first step is for the policyholder to approach the lender or creditor with whom they wish to enter into a financial arrangement. This could be a bank, financial institution, or even a business partner. The policyholder and lender will negotiate the terms of the loan or obligation, including the amount, interest rate, repayment schedule, and any other relevant conditions.

Once the terms are agreed upon, the policyholder will need to submit a formal request to their life insurance provider. This request will outline the details of the collateral assignment, including the amount or percentage of the policy’s death benefit that will be assigned as collateral.

The life insurance provider will then assess the request and determine whether they are willing to accept the collateral assignment. This evaluation typically involves a review of the policy’s terms and conditions and an analysis of the policy’s cash value and death benefit.

If the insurance provider approves the collateral assignment, they will provide the necessary documentation for the assignment to be executed. This documentation may include an assignment form or agreement that specifies the details of the assignment, such as the lender’s information, the assigned amount, and any conditions or restrictions.

Once the assignment is formalized, the lender or creditor will have a collateral interest in the policy, meaning they will have a legal claim to the assigned portion of the death benefit in the event of the policyholder’s death. This interest provides the lender with the assurance that the funds required to satisfy the loan or obligation will be available.

It is important for the policyholder to regularly communicate with both the lender and the life insurance provider to ensure that the assignment remains in effect and that any changes or updates are properly documented. This helps to maintain the integrity and validity of the collateral assignment.

It is worth noting that a collateral assignment does not impact the policyholder’s ability to name beneficiaries or access the cash value of the policy. The assignment only comes into effect if the policyholder passes away and there is an outstanding loan or obligation to be fulfilled.

Now that we understand the mechanics of how a collateral assignment works, let us explore the parties involved in this process in the next section.

A collateral assignment in a life insurance contract involves several parties, each playing a distinct role in the process. Let’s take a closer look at these parties:

• Policyholder: The policyholder is the individual who owns the life insurance policy and wishes to create a collateral assignment. They are responsible for initiating the process and obtaining the necessary approvals from both the lender and the insurance provider.
• Lender or Creditor: The lender or creditor is the party providing the loan or with whom the policyholder has a financial arrangement. They require collateral to secure their position and ensure repayment of the debt or fulfillment of the obligation. The lender can be a financial institution, bank, business partner, or any other entity providing the funds.
• Life Insurance Provider: The life insurance provider is the company that issued the life insurance policy to the policyholder. They play a vital role in the collateral assignment process by evaluating the request, approving the assignment, and providing the necessary documentation. The insurance provider will also be responsible for disbursing the death benefit in accordance with the assignment in case of the policyholder’s death.
• Assignee: The assignee is the party to whom the collateral assignment is made. In the context of a collateral assignment, the assignee is typically the lender or creditor. They hold the collateral interest in the policy and have a legal claim to receive a portion or the entirety of the death benefit to satisfy the outstanding loan or obligation.
• Beneficiaries: Beneficiaries are individuals or entities named by the policyholder to receive the death benefit in the event of their death. It is important to note that the collateral assignment does not affect the beneficiaries’ rights or entitlements. The beneficiaries will receive any remaining portion of the death benefit after the assigned amount is paid to the assignee.

The collaboration and cooperation among these parties are essential to successfully execute a collateral assignment. Effective communication and documentation are vital throughout the process to ensure clarity, enforceability, and the fulfillment of obligations by all parties involved.

Now that we have explored the parties involved, let’s move on to the next section, where we will discuss the benefits of a collateral assignment in a life insurance contract.

Collateral assignments in a life insurance contract offer several benefits to both the policyholder and the lender or creditor involved. Let’s explore some of these advantages:

• Access to Funds: For the policyholder, one of the main benefits of a collateral assignment is the ability to access funds when needed. By assigning a portion of the death benefit as collateral, the policyholder can secure a loan or fulfill a financial obligation without having to liquidate other assets or disrupt their financial plans.
• Lower Interest Rates: Lenders often view collateral assignments as a lower-risk form of lending. As a result, they may offer more favorable interest rates compared to unsecured loans. This can result in cost savings for the policyholder and lower interest expenses over the life of the loan.
• Flexible Repayment Terms: Collateral assignments can provide flexibility in terms of repayment. Lenders are more likely to offer longer repayment periods and more lenient terms when the loan is secured by a collateral assignment. This can help the policyholder manage their cash flow and make payments that align with their financial situation.
• Preservation of Policy Benefits: With a collateral assignment, the policyholder can still retain control over their life insurance policy. This means they can continue to benefit from features like cash value accumulation and potential dividend payments. Additionally, the policyholder can still name beneficiaries who will receive the remaining death benefit after the assigned amount is paid to the lender or creditor.
• Assurance to the Lender or Creditor: From the lender or creditor’s perspective, a collateral assignment provides added security and assurance. They have the guarantee that if the policyholder passes away, the funds required to repay the loan or fulfill the financial obligation will be available through the assigned portion of the death benefit.

By leveraging a collateral assignment, both the policyholder and the lender can benefit from the arrangement. The policyholder gains access to funds and favorable loan terms, while the lender or creditor gains the assurance of repayment through the collateralized life insurance policy.

It is important to note that the benefits of a collateral assignment may vary depending on the specific terms and conditions set by the lender and the insurance provider. Policyholders should carefully review and understand the terms of the collateral assignment before entering into any financial arrangements.

Now that we have explored the benefits, let’s move on to the next section, where we will discuss the risks and considerations associated with a collateral assignment in a life insurance contract.

While collateral assignments in a life insurance contract offer benefits, there are also risks and considerations that should be taken into account by both the policyholder and the lender or creditor. It is crucial to fully understand these factors before entering into a collateral assignment. Let’s explore some of the key risks and considerations:

• Potential Impact on Death Benefit: A collateral assignment reduces the available death benefit to the policyholder’s beneficiaries. The assigned portion of the death benefit will be paid to the lender or creditor to repay the loan or fulfill the financial obligation. As a result, the policyholder should carefully evaluate the impact of this reduction on the intended financial protection for their loved ones.
• Limited Flexibility: Once a collateral assignment is in place, it can limit the policyholder’s ability to make changes to the life insurance policy. This includes reducing coverage, surrendering the policy, or making alterations to beneficiaries or ownership. It is important for the policyholder to consider their long-term financial goals and potential future needs before creating a collateral assignment.
• Risk of Policy Lapse: If the policyholder fails to meet the loan repayment obligations, there is a risk that the policy could lapse, leading to a loss of coverage. This could occur if the assigned portion of the death benefit is insufficient to cover the outstanding loan balance. Policyholders should ensure they have a repayment strategy in place and understand the consequences of not meeting their obligations.
• Change in Risk Profile: For the lender or creditor, a collateral assignment carries the risk of changes in the policyholder’s health or insurability. If the policyholder’s health deteriorates significantly, they may become uninsurable or face higher premiums. This may impact the lender’s ability to recover their funds in the event of the policyholder’s death.
• Consideration of Alternatives: Before entering into a collateral assignment, both the policyholder and the lender should consider alternatives for securing funds or managing financial obligations. This could include exploring traditional loan options, seeking collateral options other than a life insurance policy, or even engaging in a different financial arrangement that reduces risk and provides flexibility.

It is crucial that both parties carefully assess the risks and considerations associated with a collateral assignment and seek professional advice if necessary. Understanding the potential downsides and making informed decisions can help mitigate risks and ensure the desired outcomes are achieved.

Now that we have examined the risks and considerations, let’s move on to the next section, where we will explore the types of collateral assignments in a life insurance contract.

Collateral assignments in a life insurance contract can take different forms, depending on the specific needs and circumstances of the policyholder and the lender or creditor. Let’s explore some of the common types of collateral assignments:

• Partial Assignment: In a partial assignment, the policyholder assigns only a portion of the death benefit as collateral. This allows them to retain a portion of the death benefit to protect their beneficiaries while still providing security to the lender or creditor.
• Complete Assignment: In a complete assignment, the policyholder assigns the entire death benefit as collateral. This means that the full payout of the policy will go towards repaying the loan or fulfilling the financial obligation, leaving no remaining death benefit for beneficiaries.
• Revolving Assignment: A revolving assignment allows the policyholder to borrow against the life insurance policy multiple times over a specified period. As the policyholder repays the loan, the collateral assignment is adjusted accordingly, making the remaining death benefit available for future borrowing.
• Irrevocable Assignment: An irrevocable assignment means that the collateral assignment cannot be changed or canceled by the policyholder without the consent of the lender or creditor. This provides additional security to the lender, ensuring the continuity of the collateralized coverage.
• Conditional Assignment: A conditional assignment involves specific conditions that must be met for the collateral assignment to take effect. For example, the assignment may only be triggered if the policyholder defaults on the loan, or if certain events, such as bankruptcy, occur.

It is important for the policyholder and the lender to discuss and decide on the most appropriate type of collateral assignment based on their specific needs and objectives. The type of collateral assignment chosen will have implications on the level of coverage for the policyholder’s beneficiaries and the level of security for the lender or creditor.

Before entering into a collateral assignment, it is advisable to consult with financial and legal professionals who can provide guidance on the various types and help determine the best-suited option for the specific situation.

Now that we have explored the types of collateral assignments, let’s move on to the next section, where we will discuss the process of setting up a collateral assignment in a life insurance contract.

The process of setting up a collateral assignment in a life insurance contract involves several steps to ensure its proper establishment. Let’s break down the process:

• Identify the Need: The first step is for the policyholder to identify the need for a collateral assignment. This could include the desire to secure a loan, fulfill a financial obligation, or meet other specific requirements.
• Seek Professional Advice: It is advisable for the policyholder to seek guidance from financial and legal professionals who can provide expert advice on the collateral assignment process, review the terms and conditions, and ensure that all legal requirements are met.
• Negotiate with the Lender: The policyholder will need to negotiate the terms of the loan or financial arrangement with the lender or creditor. This includes discussing the loan amount, interest rate, repayment schedule, and any other relevant conditions.
• Consult with the Insurance Provider: The policyholder should reach out to their life insurance provider to inquire about the collateral assignment process. The insurance provider will provide the necessary information, documentation, and requirements for the assignment.
• Submit a Formal Request: The policyholder will need to submit a formal request to the insurance provider, outlining the details of the collateral assignment. This may include the amount or percentage of the death benefit to be assigned, along with any other necessary information requested by the insurance provider.
• Insurance Provider Evaluation: The insurance provider will evaluate the collateral assignment request, considering factors such as the policy’s terms and conditions, the policy’s cash value, and the potential impact on the policyholder’s coverage and beneficiaries.
• Approval and Documentation: If the insurance provider approves the collateral assignment, they will provide the necessary documentation for the assignment to be executed. This may include an assignment form or agreement, which outlines the details of the assignment and any specific conditions or restrictions.
• Review and Sign: Both the policyholder and the lender or creditor should carefully review the assigned documentation. Once satisfied, they will sign the necessary paperwork to formalize the collateral assignment.
• Communicate with All Parties: It is essential for the policyholder to maintain open lines of communication with both the lender or creditor and the insurance provider to ensure the collateral assignment remains in effect and any updates or changes are properly documented.

Following these steps will help ensure a smooth and efficient process for setting up a collateral assignment. It is crucial to adhere to the guidelines provided by the insurance provider and seek professional advice to navigate any complexities or legal considerations.

Now that we have covered the process of setting up a collateral assignment, let’s move on to the next section, where we will explore examples of situations where collateral assignments are commonly used.

Collateral assignments in a life insurance contract can be utilized in various situations where accessing funds or securing a financial obligation is necessary. Let’s explore some common examples of when collateral assignments are used:

• Borrowing Against Cash Value: Policyholders who have built up significant cash value in their life insurance policy may choose to use a collateral assignment to borrow against that cash value. By assigning a portion of the death benefit as collateral, they can secure a loan from a lender without depleting their cash reserves or disrupting their long-term financial plans.
• Business Financing: Entrepreneurs or business owners may leverage their life insurance policies as collateral to secure loans for business financing purposes. This could involve obtaining capital to fund business expansions, acquire assets, or navigate temporary cash flow challenges.
• Legal Obligations: In certain legal situations, collateral assignments can be used to satisfy obligations or judgments. For example, a court may require a policyholder to assign a portion of their life insurance policy to fulfill a settlement or pay restitution.
• Partnership Agreements: Collateral assignments can play a role in business partnerships, providing assurance to partners or investors. In case one partner passes away, the assigned portion of the death benefit can be used to buy out their stake in the business or fulfill any financial commitments outlined in the partnership agreement.
• Estate Planning: Policyholders may choose to create a collateral assignment as part of their estate planning strategy. By assigning a portion of the death benefit as collateral, they can secure funding for potential estate taxes or other financial obligations that may arise upon their passing.

These are just a few examples of situations where collateral assignments can be beneficial. The flexibility and security provided by collateral assignments make them a valuable tool in managing various financial scenarios.

It is important for policyholders to assess their specific needs, consult with professionals, and consider the potential implications and risks associated with collateral assignments before making any decisions.

Now, let’s move on to the final section of this article, where we will conclude our discussion on collateral assignments in life insurance contracts.

Collateral assignments in a life insurance contract provide policyholders with a unique ability to leverage the value of their policy for various financial needs. By assigning a portion or the entirety of the death benefit as collateral, policyholders can access funds, secure loans, fulfill obligations, and provide reassurance to lenders or creditors.

Throughout this article, we have explored the definition of a collateral assignment, how it works, the parties involved, benefits, risks, types, and the process of setting up such an assignment. We’ve also looked at examples of situations where collateral assignments are commonly used.

It is important for policyholders to carefully consider their specific circumstances and consult with financial and legal professionals before pursuing a collateral assignment. Evaluating the potential impact on beneficiaries, understanding the risks and limitations, and exploring alternative options are crucial steps in making an informed decision.

Collateral assignments can provide financial flexibility, lower interest rates, and more favorable loan terms, while still allowing policyholders to retain control over their life insurance policy and preserve some level of coverage for their beneficiaries.

As with any financial decision, it is essential to conduct thorough research, seek expert advice, and fully understand the terms and conditions associated with a collateral assignment. This ensures that the policyholder’s financial goals are met while mitigating potential risks and drawbacks.

In conclusion, collateral assignments in life insurance contracts serve as a valuable tool for policyholders and lenders alike, striking a balance between accessing funds and maintaining financial security. When utilized wisely and with a clear understanding of the implications, collateral assignments can be a beneficial strategy in navigating various financial scenarios.

Remember, each situation is unique, and it is crucial to tailor the use of collateral assignments to fit individual needs and objectives. By doing so, policyholders can unlock the value of their life insurance policies while protecting their financial interests for the future.

How Is Collateral Assignment Used In A Life Insurance Contract?

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Collateral Assignment Of Lease

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What is a collateral assignment of lease.

A collateral assignment of lease is a legal contract that transfers the rights to rental payments from the asset's owner to a lender to secure funding. In this contract, the lease’s rentals are like a loan from the funder to the lessor and the lease acts as security. Collateral assignment of lease agreements are often used in commercial real estate. In addition to the actual contract, the agreement is often accompanied by a promissory note and a security agreement. Throughout the duration of a collateral assignment of lease agreement, the lessor retains ownership of the leased asset.

Common Sections in Collateral Assignment Of Leases

Below is a list of common sections included in Collateral Assignment Of Leases. These sections are linked to the below sample agreement for you to explore.

Collateral Assignment Of Lease Sample

Reference : Security Exchange Commission - Edgar Database, EX-10.4 5 dex104.htm COLLATERAL ASSIGNMENT OF LEASES AND RENTS FOR THE LA CIENEGA-LA PROPERTY , Viewed November 9, 2021, View Source on SEC .

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Guidelines for Collateral Assignment of Life Insurance

• By: Risk Management Team

Lions Financial provides comprehensive guidelines for the collateral assignment of life insurance. The collateral assignment involves using a life insurance policy as collateral for a loan or debt. Lions Financial assists individuals and businesses in understanding the process and implications of collateral assignment, ensuring they make informed decisions.

The guidelines cover important aspects such as determining the policy’s cash surrender value, establishing the assignment amount, and defining the rights and responsibilities of the assignee and assignor. Lions Financial also helps clients navigate legal and tax considerations related to collateral assignment.

Banks require insurance for collateral assignment so that they can always get any outstanding loan amount back if the loaner defaults or dies before being able to pay the loan back.

Collateral is pledged as security for repayment of a loan, to be forfeited in the event of a default. A collateral assignment of insurance is a conditional assignment appointing a lender as the primary beneficiary of a benefit to use as collateral for a loan. If the borrower is unable to pay, the lender can cash in the insurance policy and recover what is owed.

An Absolute assignment in insurance involves signing over your entire policy to another person or entity. The person who is selling or gifting the policy is known as the assignor, and the individual or individuals who receive it are the assignee. The assignee takes full ownership of the policy, being held liable for any premiums and also having the authority to change or designate new beneficiaries.

Collateral assignment of life insurance essentially works like a standard loan. The insurance policy is “collateral” for a loan, and the person or organization that pays out that loan is the temporary beneficiary of the policy’s death benefit until the loan is repaid. The entity taking over the policy does so on a conditional basis and, therefore, doesn’t have the authority to make changes to it, re-sell it or take any of its cash value. Instead, the assignee can only draw on the death benefit if the policyholder defaults.

On the other hand, Collateral Assignment enables policy holders to regain control of their own policy once a medical or other crisis has resolved. It is one of the 3 common ways to borrow from your life insurance policy and access the cash value. With a collateral assignment, you are able to eventually benefit again from the long-term advantages of a life insurance policy.

If one already has a life insurance policy with a face value greater than the loan amount, he can collaterally assign that policy by requesting the paperwork from the insurer. If one doesn’t have a life insurance policy or needs additional coverage, he will need to apply for life insurance and go through underwriting.

Whether one has a term life insurance policy or a whole life insurance policy, he will be the policy owner and responsible for the premium payments. The borrower must be the owner of the policy but not necessarily the insured, and the policy must remain current for the life of the loan with the owner continuing to pay all necessary premiums.

Any type of life insurance policy is acceptable for collateral assignment, provided the insurance company allows assignment for the policy. Some banks may require an escrow account for the life insurance premiums, others may require proof of premiums paid or prepaid.

If one has a whole life policy that he uses for collateral assignment, banks will have access to the cash value of the policy if he defaulted on the loan. If the loaner dies, the insurance company will use the death benefit to pay off any outstanding loan amount. The rest, if any, goes to the assigned beneficiaries.

Insurance companies must be notified of the collateral assignment of a policy. When one is applying for life insurance for the purpose of collateral assignment, he will name his beneficiaries as he would for a personal policy. The bank is not his beneficiary, but the assignee on the collateral assignment after the policy is in force. On the form, he will be the assignor.

There are several reasons to consider a collateral assignment of life insurance. The Collateral assignment guarantees the safety of the amount that was loaned out to the lender, especially under the listed terms and conditions that the lender will be paid in full; moreover, the remaining will be given to the listed beneficiaries in the case of death of the borrower.

• It safeguards the interests of the lender. A collateral assignment plays a critical role in securing a loan for the borrower. It is the insurance company’s obligation to safeguard the lender’s interest after collecting the collateral assignment form.
• A collateral assignment allows you to be more flexible with your capital assets.
• A collateral assignment allows the borrower to purchase insurance as a low-cost collateral to secure paying back a loan.

A collateral assignment has great advantages, but it has certain limitations as well. First of all, a collateral assignment has a limited death benefit. You should assign part of the death benefits as collateral instead of the total benefits which avoids the circumstances where the lender claims all the death benefits after you die.

• Difficulty in obtaining an affordable insurance policy with low premiums.
• Loss of policy control is another disadvantage of collateral assignment.
• Collateral assignment suffers from the limited use of cash value.

Any type of life insurance policy is acceptable for collateral assignment, provided the insurance company allows assignment for the policy.

Some examples of insurance policies you can use for collateral assignment are:

• Term Insurance

Term life insurance is used to offer coverage for a specific number of years. The proceeds of the policy are only paid out after the insurer dies, and it lacks equity and a surrender value. It falls under the category of the most affordable insurance plans which is why it is a top pick for most people.

You don’t need to buy a plan that exceeds or falls below your needs. Term life insurance enables you to purchase a plan tailored to your needs and since it is not permanent, you are going to pay low premiums.

• Universal Life Insurance or Whole Life Insurance

With universal life insurance, you will be able to design the insurance policy according to how you want it. The insurance proceeds are usually released when the insured party dies. It is great for individuals looking for a permanent insurance policy that never expires unless you are dead. In short, you will continue to receive coverage as long as the annual premiums are getting paid.

On the downside, universal life insurance policies tend to be expensive because they are meant to offer life term coverage.

On the bright side, the policies build cash value and the longer the premiums are paid,  the more value the plan will build. This cash value can be used on other investments or to pay off the outstanding premiums.

When applying for a collateral assignment of life insurance, you can use two ways to do so: through the bank or through your insurer. The two are explained further below;

• APPLYING THROUGH YOUR BANK

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

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

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

• APPLYING THROUGH YOUR INSURER

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

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

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

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

  There are several essential parts to be included in the collateral assignment forms.

1.  Policy Identification

This part focuses on the information of the insured, including policy numbers, owner’s first and last names, address, phone number, and email address.

2. Assignee information:

This part contains information about the assignee. The assignee could be an individual, corporate entity or trust. If the assignee is a Trust, he/she ought to list out all the names of currently serving trustees.

Moreover, this part should include the assignee’s full legal name, address, tax ID, email address, and phone number.

3. Terms and conditions:

This section lists all the terms and conditions of the assignment. To be specific, this section covers in detail the rights, for instance, “the sole right to collect from the Insurer the net proceeds of the policy, the sole right to obtain one or more loans or advances on the Policy”, etc. Moreover, this section might also include IRS certification to certify the taxpayer identification number filed in the previous sections are authentic and correct.

4. Signatures:

All owners and assignees are required to sign and date in this section after reviewing the previous terms and conditions. Moreover, beneficiaries are also required to sign this form.

5. Submission of the assignment form:

After careful revision of terms and conditions of the assignment and signature, the assignment form should be submitted for processing. This part should list detailed instructions for sending back the assignment form. Moreover, this part should also provide the address, contact information, and the fax number of the company who issued the policy.

You apply for a life insurance policy and name your beneficiary (your spouse, children, whomever). Just as you normally would.

After the policy goes into force, a collateral assignment form from the life insurance company will be sent for you to complete. When a life insurance company sets a collateral assignment of life insurance, this usually takes in the region of seven to ten days to be filed and acknowledged. However we may expedite this if the collateral assignment is required more urgently.

When taking out life insurance at the same time as assigning the collateral, the collateral assignment form must be submitted with the life insurance application.

You get the collateral assignment form signed (some companies require a notarized signature).

It will take a few days to a few weeks for the life insurance company to acknowledge the assignment.

Once the loan has been paid in full, the assignment must be lifted from the policy by means of a release form sent by the lender to the insurance company. When it receives the release, the insurance company cancels the assignment and restores all rights in the policy to the owner.

A collateral assignment allows the life insurance company to pay your SBA lender only what they are owed and the rest goes to your beneficiary. As you pay down the loan, the amount of coverage will be more than you need, and a collateral assignment form makes sure the lender is only paid what is needed.

If you named the lender as the beneficiary, the lender would receive the entire death benefit even though you’ve paid down the balance. And if you did that, the life insurance company wouldn’t issue you the amount of coverage needed – they’ll typically only issue 80% of the loan amount. So, it’s imperative that you use a collateral assignment.

The Collateral Assignment of Life Insurance is a way to secure funding for business or other ventures. It is important to understand the different types of assignments and how they work before choosing this option.

At Lions Financial, we offer a variety of services and resources to help businesses secure funding and protect their assets.

To learn more about these services, sign up for our newsletters or make an appointment with a representative today!

Contact us at https://lions.financial/contact/

Learn more, visit:

What Are the Tax Considerations For Life Insurance Premiums Under Collateral Assignment For Business Bank Loans

Should You Consider An Asset-Based Loan For Your Business

Process For A Business To File a Life Insurance Claim

Life Insurance Requirements for SBA Loans

Life Insurance Requirements when getting an SBA Loan

The sources we use for this information include:

https://www.investopedia.com/terms/c/collateral.asp

https://www.investopedia.com/terms/l/lender.asp

https://www.investopedia.com/terms/b/beneficiary.asp

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