What is a Collateral Assignment of a Life Insurance Policy?

A life insurance policy can actually help you get a loan, and lenders often accept life insurance as collateral because of guaranteed funds. This is to ensure that even if the worst was to come, they initially will be able to get their money back. More often than not, these loans are a small business loan or a Small Business Administration (SBA) loan, and a large percentage of lenders will require borrowers to use a life insurance policy as collateral for the loan. This is called a collateral assignment of a life insurance policy, and there is a process in which securing a loan through life insurance is conducted.

Securing a Loan Through Life Insurance

Getting approved for a loan is not always as easy as others seem to make it. When getting approved for a loan, there are a variety of factors that come into play. One of the primary concerns is how you are going to pay back the loan if you passed away. This is where your life insurance policy will become important and can help you in securing the loan. A life insurance policy will ensure lenders that you are going to pay back the loan, no matter what happens. Once a lender sees that you have a life insurance policy, then this increases your chances of receiving a loan.

You are easily able to assign your life insurance policy, which grants that there isn’t some kind of limitation within your contract that prevents it. You even have the ability to assign policies to multiple banks to potentially secure multiple loans. With an assignment, you can transfer rights to all or even a portion of the policy proceeds to an assignee. This will obviously need to be worked out with your lender and will need a written agreement.

Collateral Assignment

Collateral Assignment of a life insurance policy is usually conditional. Term policies secure loans in case of death and are actually required for various types of bank loans. When lenders are talking about collateral, they are referencing a cash value life insurance policy – which is a whole life or a universal life insurance policy. These forms of life insurance build up a cash value over time, but it does not apply to term policies.

Unlike absolute assignments, a collateral assignment is a much more limited type of transfer. Basically, if you were to pass away before your loan is paid back, then the lender will receive the amount owed through a portion of the death benefit. Any money or balance that is left over will ultimately go to other beneficiaries that are listed. Your policy also has to stay current, which means that you have to continue to pay all premiums for the lifetime of the loan.

Types of Life Insurance Policies that Work for Collateral Assignment

All types of life insurance policies can be acceptable for collateral assignment, only as long as an insurance company allows assignment for a particular policy.

• Term Life Insurance Policy – A rather inexpensive option, lenders only require the loan for a particular period of time that can coincide with the term of the loan. This can vary from five years, seven years, or even a 10-year policy can work. After the loan is paid off, you are able to cancel the policy or continue it, in which you still provide coverage and financial protection for your family.
• Permanent Life Insurance Policy – This form of a life insurance policy with a specific cash value will allow lenders access to the amount as repayment of the loan if the borrower were to default. The policy owner’s access to the cash value is then limited as a safeguard on the collateral. As mentioned previously, if the loan is paid off before the borrower was to pass away, then the assignment is removed and the lender has zero access to the death benefit any longer.

Collateral Assignment of a Life Insurance Policy – Where to Begin

Figuring out where to begin is actually a very easy process. All you have to do to start is secure your loan. Reach out to your bank and locate any requirements needed in order to secure a loan, and also find out what kind of loans they offer. Once this process is conducted, you will then locate the loan you want and fill out the forms needed in order to secure the loan.

Using life insurance as collateral to secure a loan is by far an extremely advantageous option in securing a loan and is a common practice that all insurance companies can handle. In order to receive more information about this, it is advised to reach out to your life insurance company and bank and discuss this in further detail.