loan collateral assignment

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.

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

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

Definition and Examples of Collateral Assignment

How collateral assignment works, alternatives to collateral assignment.

Kilito Chan / Getty Images

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

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

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

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

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

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

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

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

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

Types of Life Insurance Collateral

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

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

A Note on Annuities

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

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

The Process

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

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

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

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

Lenders Get Paid First

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

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

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

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

Key Takeaways

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

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

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

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

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What Is Collateral Assignment of Life Insurance?

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

Nathan Paulus

Director of Content Marketing, MoneyGeek

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

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Content Editor

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

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

Updated: June 5, 2024

• How It Works
• Overview of Application Process

Pros and Cons

• Impact on Beneficiaries
• Alternatives

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 they pay off the loan, the lender is prioritized to receive a portion of the death benefit equivalent to the outstanding loan balance. The remaining benefit then goes to the policy's beneficiaries. This agreement ensures that life insurance collateral assignment acts as a safety net for both the lender and the beneficiaries.

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

How Collateral Assignment of Life Insurance Works

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

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

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

Roles of the Policyholder, Lender and Insurance Provider

Role of the Policyholder

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

Role of the Lender

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

Role of the Insurance Provider

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

Applying for Collateral Assignment

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

Obtain a Collateral Assignment Form

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

Fill Out the Form Correctly

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

Sign the Paperwork

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

Submit the Completed Form

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

Await Approval or Rejection From the Insurance Company

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

Receive a Letter of Acknowledgment

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

Obtaining Required Documentation

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

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

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

Pros and Cons of Collateral Assignment

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

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

Impact of Collateral Assignment on Beneficiaries

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

Your Lender Will Be Paid First

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

Any Remaining Death Benefit Will Be Disbursed to Your Beneficiaries

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

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

Alternatives to Collateral Assignment

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

FAQ About Collateral Assignment

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

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

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

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

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

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

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

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

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

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

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

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

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

About Nathan Paulus

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

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

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What Is 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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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.

Source: Pexels

How Does Applying for Collateral Assignment Work?

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

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

There is an:

Application process.

Underwriting process.

Offer that you’ll receive.

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

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

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

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

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

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

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

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

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

What about Missed Payments and Cash Value Life Insurance?

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

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

Who Can You Add as a Collateral Assignee?

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

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

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

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

Common Collateral Assignees Include:

💵 Bank loans

💳 Credit cards

🏡 Mortgages

💼 Business loans

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

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

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

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

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

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

Tips to Make Sure Your Life Policy Is Paid Out Quickly

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

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

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

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

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

The Benefits of Using Collateral Assignment of Life Insurance

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

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

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

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

What Are Some Alternatives to Collateral Assignment?

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

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

What Is Term Life?

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

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

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

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

What Is Cash Value?

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

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

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

Our Verdict on Collateral Assignment

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

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

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

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

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

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

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

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

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

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

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

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

Where Can I Learn More about Life Insurance?

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

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

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

Collateral Assignment

Jump to section.

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

Key Purposes of a Collateral Assignment

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

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

Steps to Execute a Collateral Assignment

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

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

Key Terms for Collateral Assignments

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

Final Thoughts on Collateral Assignments

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

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ContractsCounsel is not a law firm, and this post should not be considered and does not contain legal advice. To ensure the information and advice in this post are correct, sufficient, and appropriate for your situation, please consult a licensed attorney. Also, using or accessing ContractsCounsel's site does not create an attorney-client relationship between you and ContractsCounsel.

Meet some of our Collateral Assignment Lawyers

I was born and raised in Wayne, New Jersey and attended Seton Hall University, graduating cum laude. I followed my family down to Florida to attend Ave Maria School of Law where I graduated cum laude. I was admitted to the Florida Bar in 2018. During law school, I participated in the Certified Legal Internship program with the State Attorney's Office of the 20th Judicial Circuit and litigated 5 jury trials, 1 non jury trial and argued various motions before the court under the supervision of an Assistant State Attorney. I was an Assistant States Attorney for Collier County from 2018 to 2020 before moving into private practice in the areas of real estate and first party property from 2020 to 2021. As of November 2021, I started my own law practice that focuses on business planning, real estate and estate planning.

Vicki graduated from Regent University School of Law in Virginia Beach, Virginia in 1996. She is a licensed attorney. She has been admitted to Wisconsin since 1998 and Pennsylvania since 1999.

I work with private tech companies on entity formation, corporate governance, and commercial agreements. I was an in-house counsel for a unicorn fintech startup and am currently associated with a startup boutique while operating my solo practice. I received my JD from Berkeley Law, and served in the US Navy for 5 years as a combat linguist. I am fluent in Korean.

Business, Real Estate, Tax, Estate Planning and Probate attorney with over 20 years experience in private practice in Colorado. Currently owner/operator of John M. Vaughan, Attorney at Law solo practitioner located in Boulder, CO. My practice focuses on transactional matters only.

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Collateral Assignment of Life Insurance: Everything You Need to Know

• August 4, 2024

Written by:

Bella Gonzalez

Reviewed by:.

Jake Tamarkin, MBA

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

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

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

Who can benefit from the collateral assignment of life insurance?

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

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

What types of life insurance can be used as collateral?

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

How to use life insurance as collateral for a loan?

1. Ensure the lender accepts life insurance as collateral.

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

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

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

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

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

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

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

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

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

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

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

Is the collateral assignment of the life insurance agreement permanent? 

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

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

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

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Collateral Assignment of Life Insurance

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

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

Table of Contents

What Is Collateral Assignment?

• Policy Options for Collateral Assignment

How to Use Life Insurance as Collateral for a Loan

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

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

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

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

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

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

Collateral vs Absolute Assignment of Life Insurance

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

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

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

Similarities between collateral and absolute assignment:

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

Differences between collateral and absolute assignment:

Collateral assignment:

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

Absolute assignment:

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

Life Insurance Assignee vs Beneficiary

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

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

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

Here’s why:

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

Life Insurance Policy Options for Collateral Assignment

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

Examples of when life insurance can be collaterally assigned include:

• Personal loans
• Business loans

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

Term Life Insurance

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

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

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

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

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

Permanent Life Insurance

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

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

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

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

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

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

See what you’d pay for life insurance

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

Collateral Assignment of a Life Insurance Policy You Already Own

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

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

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

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

Collateral Assignment of a New Life Insurance Policy

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

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

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

Life Insurance as Collateral: Pros and Cons

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

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

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

Alternatives to Collateral Assignment

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

Some examples include:

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

Compare Life Insurance Quotes and Apply Today

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

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

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

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Understanding Collateral Assignment of Life Insurance

Any time you apply for a loan, the lender considers the risk that you can’t pay it back. To help reduce this risk, the lender may require you to put up collateral, which is anything of value you pledge as security for repayment. If you fail to repay the loan, the lender receives that collateral.

In some cases, you might consider using your life insurance policy as collateral. Here’s what to know about this option.

What Is Collateral Assignment of Life Insurance?

Collateral assignment of life insurance occurs when you use your life insurance policy’s value as collateral to secure a loan. If you default on the loan or pass away before repaying the entire balance, the lender receives a payout from your policy.

Which Life Insurance Policies Can You Use as Collateral?

If you already have an existing policy, you may be able to use it as collateral. But some lenders may require you to get a new, separate policy.

Lenders typically have specific requirements your policy must meet, such as the type of insurance and coverage amount. Some lenders may allow you to use term life insurance , but most require a whole life policy that builds cash value . The cash value is important because you can access it while alive, providing security even if you don’t pass away. A term policy is only payable at your death.

Your policy’s face value typically must be at least as much as your loan balance, and you must maintain your policy until you fully repay the loan. Failure to maintain your policy violates your loan agreement. The lender may raise the interest rate for the remainder of your loan term or even “call” your loan, which requires you to repay any remaining balance at once.

How Does the Collateral Process Work?

Using life insurance as collateral is common in business lending. For example, suppose you want to start a business and need $65,000. If you don’t have sufficient assets or income to support the loan, the lender may require you to pledge a life insurance policy as collateral. In this scenario, assume you have a whole life policy with a current cash balance of $70,000 and a death benefit of $400,000.

If the lender accepts this policy, you’ll formally list the lender as a collateral assignee on your life insurance policy. Ask your insurer for the necessary form; the provider will ask for the lender’s information so it can contact the lender if a payment needs to be made. Once the appropriate paperwork is complete, you’ll finish the loan application with the lender using the life insurance as collateral.

Once the loan is funded, you continue paying your premium as normal.

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What’s the Difference between a Collateral Assignee and a Beneficiary?

Naming a lender as a collateral assignee isn’t the same as listing it as a beneficiary , so follow the correct process. A collateral assignment limits the payout to the unpaid loan balance and expires once the loan is repaid. Meanwhile, a beneficiary designation has no connection to the loan. A beneficiary receives the death benefit regardless of whether you have an outstanding loan balance when you die.

What Happens If You Default on the Loan?

If you default on your loan or pass away before you pay off your loan completely, a portion of your death benefit is used to pay off the remaining balance. This reduces the payout your beneficiaries receive. To offset this risk, you may want to consider getting an additional policy or temporarily increasing your death benefit.

Other Lending Options to Consider

Although collateral assignment of a life insurance policy can make the difference between qualifying for a loan or not, you can weigh other options too.

Borrowing from Your Life Insurance Policy’s Cash Value

If your policy has sufficient cash value, you could borrow directly from that amount and avoid needing a lender altogether.

Withdrawing from Your Policy’s Cash Value

You could withdraw your policy’s cash balance. If you only withdraw a portion of the cash balance, your policy remains in force. However, you could also surrender your policy and withdraw the entire cash balance. In this case, you typically no longer have insurance coverage, and you may owe taxes and penalties on a portion of the withdrawal.

Applying for Unsecured Loans

Not all loans require you to post collateral. You could take out an unsecured loan from your bank or credit union.

Your Life Insurance Can Work for You

While most people purchase life insurance to provide financial security for their loved ones after passing, policies can also be used for special purposes. Assigning life insurance as collateral for a loan is one way to make your policy work for you while you’re still living.

To learn more about using life insurance as collateral and explore the options available to you, reach out to an experienced financial professional, who can take a close look at your situation and offer personalized guidance.

Insurers and their representatives are not permitted by law to offer tax or legal advice. The general and educational information here supports the sales, marketing or service of insurance policies. Based upon individuals’ particular circumstances and objectives, they should seek specific advice from their own qualified and duly-licensed independent tax or legal advisors.

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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?

Published: October 14, 2023

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

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

Table of Contents

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

1. Access to Funds

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

2. Retention of Policy Benefits

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

3. Lower Interest Rates

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

4. Flexible Repayment Terms

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

5. Diverse Financial Uses

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

6. Potential Tax Advantages

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

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

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

1. Impact on Death Benefit

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

2. Default Risk

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

3. Policy Lapse

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

4. Limited Flexibility

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

5. Complex Documentation

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

6. Insurance Company Regulations

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

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

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

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

1. Assignment Limits

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

2. Policy Approval

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

3. Maintaining Policy In-Force

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

4. Replacement of Collateral

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

5. Removing the Collateral Assignment

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

6. Financial Institution Requirements

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

7. Legal and Financial Advice

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

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

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

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

1. Assess Your Financial Needs

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

2. Identify the Lender

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

3. Consult with professionals

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

4. Review Policy Terms

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

5. Draft the Collateral Assignment Agreement

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

6. Obtain Signatures and Consent

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

7. Submit Documentation

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

8. Stay Informed and Compliant

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

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

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

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

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

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

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

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

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

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

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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:

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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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Using Life Insurance For Collateral Assignment

Fact Checker - Licensed Life Insurance Agent

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

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

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

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

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

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

• What is Collateral Assignment of Life Insurance?

How Does Collateral Assignment of Life Insurance Work?

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

What is a Collateral Assignment of Life Insurance?

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

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

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

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

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

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

How to Apply For Collateral Assignment Of Life Insurance

Applying through your bank.

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

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

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

Applying Through Your Insurer

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

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

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

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

Collateral Assignment Of Life Insurance Requirements, Limitations, & Restrictions

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

1. Beneficiary and Policyowner Requirements

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

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

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

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

Term Life Insurance

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

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

Permanent Life Insurance

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

3. Lender Rights

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

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

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

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

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

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

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

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

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

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

Who Qualifies For Collateral Assignment Of Life Insurance?

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

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

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

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

Choosing A Beneficiary For Your Life Insurance Policy With Collateral Assignment

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

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

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

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

You do not want this to happen.

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

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

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

Best Life Insurance Companies For Collateral Assignment Of Life Insurance 

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

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

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

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

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

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

North American Company

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

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

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

Banner Life

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

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

Finding A Life Insurance Policy To Use For Collateral Assignment

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

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

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

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What Is a Personal Loan Agreement?

• What's in Personal Loan Agreements?

The Bottom Line

• Personal Loans

How to Write a Personal Loan Agreement

Step-by-step guide to creating a personal loan agreement

Ward Williams is an Editor focused on student loans and other financial products and services. He has five years of professional editing, proofreading, and writing experience. Ward regularly contributes to stories about government policy and company profiles. He received his B.A. in English from North Carolina State University and his M.S. in publishing from New York University.

Investopedia / Zoe Hansen

A personal loan agreement is usually a good idea whether you're lending money to family or friends or borrowing from them. It's a way for you to ensure that both parties understand the loan's terms.

Additionally, a personal loan agreement document can be enforced in court if something goes wrong, such as the borrower failing to make payments. Here's what you need to know about writing a personal loan agreement.

Key Takeaways

• A personal loan agreement document provides the borrower and lender with a way to review terms and expectations.
• Personal loan agreements are used when individuals loan money, not when banks loan money.
• Your personal loan agreement should include identifying information for all parties, clear terms (including the interest rate), and a repayment schedule.
• Personal loan agreements are enforceable by courts.

Personal loan agreements, sometimes called personal loan contracts, are designed as legally binding documents to outline the repayment terms of a loan, which helps the borrower and lender understand expectations .

A personal loan contract can also stipulate whether the arrangement includes collateral. While most personal loans are unsecured (i.e., there's no valuable asset used to secure the loan), it's possible for these arrangements to have some collateral . A secured personal loan contract should include the situations in which a lender could claim the valuable item used to offset the risk of making the loan.

Most personal loan agreement documents include information about the borrower and lender, loan amount, interest rate , fees, repayment terms and schedule, how disputes are settled, and what type of collateral (if applicable) will secure the loan.

Personal loan documents are considered enforceable in court, so a borrower who doesn't meet their obligations could have a judgment levied against them, such as a lien or wage garnishment .

What Should Be Included in a Personal Loan Agreement?

You typically utilize a prearranged contract when signing a personal loan contract with a traditional lender. If you're lending to or borrowing from friends and family, you might need to write your own personal loan agreement document.

If there's only a small amount involved, a simple promissory note might be sufficient. However, in some cases, you may need a more complicated contract. Here are some of the items that should be included when creating a personal loan contract:

• Identification : Those involved in the contract should share their full names and addresses. Driver's licenses and Social Security numbers (SSN) might also be used for further identity verification.
• Date : Dates for signatures, the time the agreement goes into effect, and other important dates should be identified in the personal loan agreement document.
• Loan amount : Include the total amount being borrowed. This is the principal of the loan.
• Collateral : If applicable, include what is being used to secure the loan, its value, and the conditions under which a lender can claim the property.
• Interest rate : The stated interest rate of the loan should be included, and designate whether it's a fixed rate or variable rate . Variable rates should include the provisions for determining a new rate and how often the rate changes. If you're charging any fees (such as origination fees ), you also need the annual percentage rate (APR) , which includes the interest value of the fees.
• Repayment schedule : Using the interest calculation, it's possible to work out a repayment schedule. Often repayment happens monthly, but your agreement can include other arrangements. Make sure the date of the last payment is clear.
• Penalties : Any personal loan contract should include penalties for late payments, in addition to the consequences of default.
• Jurisdiction : State where the agreement will be enforceable. Double-check state laws, as well as mediation requirements, when choosing a jurisdiction.
• Severability clause : This portion of the personal loan agreement is designed to ensure that most of the rest of the agreement remains intact, even if one part of the contract is found illegal or unenforceable.
• Entire agreement clause : Many contracts, including personal loan agreement documents, feature a section detailing that any other arrangements outside of what's documented in the contract aren't part of the agreement.
• Signatures : Finally, don't forget to have the borrower and lender each sign the document.

While not necessary, it might make sense to have others witness the signatures (and sign as well) or to get the services of a notary to officiate over the signing.

Other Clauses You May Find in Business or Bank Loans

While many personal loan documents are quite simple, some can become more complicated thanks to additional clauses that are often included in business or bank loans. Some items you might see include:

• Successors : This clause explains what happens if one of the parties passes away before the agreement is fulfilled.
• Legal expenses : This specifies who's responsible for paying different legal fees depending on the various outcomes of a dispute.
• Modification : You may want to include some steps the parties might take if they want to alter the agreement.
• Credit verification : Signing the agreement typically grants permission for the lender to request documentation designed to help verify your income. You might also see a clause granting the lender permission to review your credit history.

You can find personal loan agreement templates online, such as this one from the Law District:

Example of a Personal Loan Agreement

While you can write your own agreement from scratch, there are several templates that can make it easier to create a personal loan agreement document. Here are examples of how you might fill in template sections:

1. Parties : This Personal Loan Agreement (this "Agreement"), dated as of September 19, 2023 (the "Effective Date"), is by and between Jane Doe (the “Borrower”), with the mailing address of 123 Main Street, in the City of Anytown, in the State of Delaware, and John Doe (the “Lender”), with the mailing address of 123 Any Street, in the City of Everyplace, in the State of New Jersey.

2. Loan Amount : The sum loaned by the Lender to the Borrower will be: Ten Thousand Dollars ($10,000).

3. Payment : This Loan Agreement, which covers the entirety of the principal sum and any interest accrued, will be due and payable via the method specified below:

☐Single payment: The loan, any unpaid interest, and all other charges and fees are due either: On the demand of the lender / On or before ______/_____/20____

☐Weekly installments of __________ Dollars ($________) beginning on ____/_____/20___ and continuing every 7 days until the entire balance is paid in full.

X Monthly installments of one-hundred and eighty-eight Dollars ($188) beginning on 10/19/2023 and continuing every month until the entire balance is paid in full.

☐Quarterly installments of __________Dollars ($________) beginning on the ____ day of each quarter and continuing every quarter until the entire balance is paid in full.

☐Other:__________________________________

4. Interests : (Check one of the options below)

X This Loan Agreement bears interest at a rate of 4.95 percent (4.95%) compounded annually. This must be equal to or less than the maximum usury rate in the Borrower’s State.

☐ This Loan Agreement does NOT bear interest.

5. Late fee : (Check one of the options below)

☐ There is a late fee in this Loan Agreement. If the Borrower does not make a payment within_________ days of the contractual due date. Under this provision, the Borrower agrees to pay the Lender a late fee of ________% of the amount due at the time of the missed payment.

X There is NO late fee in this Loan Agreement.

6. Prepayment : (Check one of the options below)

X The Borrower of this Loan Agreement may pay back the loan in full or make additional payments at any time without incurring a penalty.

☐ The Borrower will incur a surcharge of ________% of the amount paid in surplus to the agreed payment schedule.

7. Income Verification :

The Lender reserves the right to require an income verification to the Borrower. This Verification may include, at least, the following:

• Earnings statement or W-2 form identifying employee and showing amount earned period of time covered by employment.

8. Events of Acceleration :

If any of the following events occur, this will constitute an “Event of Acceleration” under this Loan Agreement:

• The Borrower fails to pay any part of the principal or interest when it is due under the terms of this Loan Agreement; or
• The Borrower becomes insolvent or refuses to pay any debts when they become due.

9. Acceleration : If one of the Events of Acceleration above occurs, the Lender can, at their sole and exclusive option, declare this Loan Agreement immediately due and payable.

10. Remedies : The Lender has the right to remedy any breach of this Loan Agreement. Delays or omissions in exercising the rights granted under this Agreement by the lender do NOT constitute a waiver of these rights. Additionally, no omission, waiver, or delay may invalidate any of the stated terms, nor shall they restrict the Lender from enforcing this Agreement. The Lender’s rights and remedies shall be cumulative and can be pursued singly, successively, or together at their sole discretion.

11. Subordination : The Borrower’s obligations under this Loan Agreement supersede and subordinate all other indebtedness, if any, of the Borrower, to any unrelated third-party lender. 

12. Waivers : The Lender cannot be deemed to have waived any rights provided under this Loan Agreement unless they are provided in writing. This shall not, however, be construed as a future waiver of said rights or any other covered by these terms and conditions.

13. Legal Expenses : In the event any payment made under this Loan Agreement is not paid when due, the Borrower agrees to pay, in addition to the principal and interest owed, reasonable attorneys’ fees. The amount of these expenses shall NOT exceed the maximum usury rate in the State of New Jersey upon the outstanding balance owed by the Borrower under this Loan Agreement. This sum shall be added to any other reasonable expenses the Lender has incurred in exercising their rights and remedies upon default by the Borrower.

14. Governing Law : This Loan Agreement shall be governed by, and construed in accordance with, the laws of the State of New Jersey.

15. Successors : This Loan Agreement binds the Borrower and the Borrower’s successors, heirs, and assigns, however, the Lender may not assign any of their rights or delegate any of its obligations without the prior written consent of the holder of this Agreement.

16. Signatures : IN WITNESS WHEREOF, the Borrower has executed this Promissory Note as of the day and year first written above.

Lender’s Signature: Jane Doe Date: 9/19/2013

Print Name: Jane Doe

Borrower’s Signature: John Doe Date: 9/19/2013

Print Name: John Doe

The Securities and Exchange Commission (SEC) also has a template you can use to make a personal loan agreement.

Frequently Asked Questions (FAQs)

Does a personal loan agreement need to be notarized.

No, notarizing a personal loan agreement isn't usually required. However, it can help to have an "official" record of the contract to encourage both parties to take the terms seriously.

Can a Personal Loan Agreement Be Changed Over Time?

Yes, if all concerned parties are willing to change the agreement, it's possible to modify the original. However, there should be an agreed-upon process to follow.

If I'm Lending Money, How Much Interest Can I Charge on a Personal Loan?

In general, you should charge interest in line with the prevailing market. However, you are limited only by state laws (usually the borrower's). You can charge up to the amount allowed by state law.

How Is a Promissory Note Different From a Loan Agreement?

A promissory note is often considered a type of loan agreement. However, many promissory notes are much simpler than a full contract, simply stating the amount borrowed and when it should be repaid.

Anytime you borrow or loan money, consider having a loan agreement in place to protect both parties and to clarify terms, especially when lending money to family and friends . Writing a personal loan agreement document can provide all parties with information and it can reduce misunderstandings about the terms of the loan and its repayment.

Legal Information Institute. " Loan Agreements ."

Consumer Financial Protection Bureau. " What Is a Judgment? "

U.S. Securities and Exchange Commission. " Loan Agreement and Promissory Note (Example) ."

LawDistrict. " Personal Loan Agreement ."

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Actuality: Farm Loan Program Modifications and Home Collateral

Date :  Thu, 08/08/2024    Broadcast: 04

Remark :  Farm Service Agency Administrator Zach Ducheneaux notes a recently announced change in farm loan programs that would reduce the frequency of borrowers needing to put up their personal residence as collateral for a farm loan.

Duration :  00:00:33.358

Author :  RBAIN

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