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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Disclaimer : The comments, opinions, and analyses expressed at Everyday Life are for informational purposes only and should not be considered individual investment, legal or tax advice.
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What Is a Collateral Assignment of Life Insurance?
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A collateral assignment of life insurance is a conditional assignment appointing a lender as an assignee of a policy. Essentially, the lender has a claim to some or all of the death benefit until the loan is repaid. The death benefit is used as collateral for a loan.
The advantage to using a collateral assignee over naming the lender as a beneficiary is that you can specify that the lender is only entitled to a certain amount, namely the amount of the outstanding loan. That would allow your beneficiaries still be entitled to any remaining death benefit.
Lenders commonly require that life insurance serve as collateral for a business loan to guarantee repayment if the borrower dies or defaults. They may even require you to get a life insurance policy to be approved for a business loan.
Key Takeaways
- The borrower of a business loan using life insurance as collateral must be the policy owner, who may or may not be the insured.
- The collateral assignment helps you avoid naming a lender as a beneficiary.
- The collateral assignment may be against all or part of the policy's value.
- If any amount of the death benefit remains after the lender is paid, it is distributed to beneficiaries.
- Once the loan is fully repaid, the life insurance policy is no longer used as collateral.
How a Collateral Assignment of Life Insurance Works
Collateral assignments make sure the lender gets paid only what they are due. The borrower must be the owner of the policy, but they do not have to be the insured person. And the policy must remain current for the life of the loan, with the policy owner continuing to pay all premiums . You can use either term or whole life insurance policy as collateral, but the death benefit must meet the lender's terms.
A permanent life insurance policy with a cash value allows the lender access to the cash value to use as loan payment if the borrower defaults. Many lenders don't accept term life insurance policies as collateral because they do not accumulate cash value.
Alternately, the policy owner's access to the cash value is restricted to protect the collateral. If the loan is repaid before the borrower's death, the assignment is removed, and the lender is no longer the beneficiary of the death benefit.
Insurance companies must be notified of the collateral assignment of a policy. However, other than their obligation to meet the terms of the contract, they are not involved in the agreement.
Example of Collateral Assignment of Life Insurance
For example, say you have a business plan for a floral shop and need a $50,000 loan to get started. When you apply for the loan, the bank says you must have collateral in the form of a life insurance policy to back it up. You have a whole life insurance policy with a cash value of $65,000 and a death benefit of $300,000, which the bank accepts as collateral.
So, you then designate the bank as the policy's assignee until you repay the $50,000 loan. That way, the bank can ensure it will be repaid the funds it lent you, even if you died. In this case, because the cash value and death benefit is more than what you owe the lender, your beneficiaries would still inherit money.
Alternatives to Collateral Assignment of Life Insurance
Using a collateral assignment to secure a business loan can help you access the funds you need to start or grow your business. However, you would be at risk of losing your life insurance policy if you defaulted on the loan, meaning your beneficiaries may not receive the money you'd planned for them to inherit.
Consult with a financial advisor to discuss whether a collateral assignment or one of these alternatives may be most appropriate for your financial situation.
Life insurance loan (policy loan) : If you already have a life insurance policy with a cash value, you can likely borrow against it. Policy loans are not taxed and have less stringent requirements such as no credit or income checks. However, this option would not work if you do not already have a permanent life insurance policy because the cash value component takes time to build.
Surrendering your policy : You can also surrender your policy to access any cash value you've built up. However, your beneficiaries would no longer receive a death benefit.
Other loan types : Finally, you can apply for other loans, such as a personal loan, that do not require life insurance as collateral. You could use loans that rely on other types of collateral, such as a home equity loan that uses your home equity.
What Are the Benefits of Collateral Assignment of Life Insurance?
A collateral assignment of a life insurance policy may be required if you need a business loan. Lenders typically require life insurance as collateral for business loans because they guarantee repayment if the borrower dies. A policy with cash value can guarantee repayment if the borrower defaults.
What Kind of Life Insurance Can Be Used for Collateral?
You can typically use any type of life insurance policy as collateral for a business loan, depending on the lender's requirements. A permanent life insurance policy with a cash value allows the lender a source of funds to use if the borrower defaults. Some lenders may not accept term life insurance policies, which have no cash value. The lender will typically require the death benefit be a certain amount, depending on your loan size.
Is Collateral Assignment of Life Insurance Irrevocable?
A collateral assignment of life insurance is irrevocable. So, the policyholder may not use the cash value of a life insurance policy dedicated toward collateral for a loan until that loan has been repaid.
What is the Difference Between an Assignment and a Collateral Assignment?
With an absolute assignment , the entire ownership of the policy would be transferred to the assignee, or the lender. Then, the lender would be entitled to the full death benefit. With a collateral assignment, the lender is only entitled to the balance of the outstanding loan.
The Bottom Line
If you are applying for life insurance to secure your own business loan, remember you do not need to make the lender the beneficiary. Instead you can use a collateral assignment. Consult a financial advisor or insurance broker who can walk you through the process and explain its pros and cons as they apply to your situation.
Progressive. " Collateral Assignment of Life Insurance ."
Fidelity Life. " What Is a Collateral Assignment of a Life Insurance Policy? "
Kansas Legislative Research Department. " Collateral Assignment of Life Insurance Proceeds ."
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Policy and contract specific Customer Service and Support forms. Some of the forms clients search for on Equitable.com - Required Minimum Distribution (RMD), Assign a Beneficiary, etc. - are actually specific to an individual's policy or contract and require account holders to login to their account to access.
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Section 2 COLLATERAL ASSIGNMENT FOR VALUE RECEIVED the above contract(s) is hereby assigned, transferred and sent over to: ... American Bankers Association life insurance assignment form no. 10 to USFL for recording. (6) If, within nine months of an insured/annuitant's death, an assignee neglects or refuses to make a claim to the policy or ...
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With collateral assignment of life insurance, ownership of an asset transfers from the borrower to the lender. This transfer only remains in place until the loan is paid in full. In this situation, the transferred asset is your life insurance policy. The goal is only to satisfy your loan obligation. Once that debt is repaid, you'll end the ...
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.
Form Number Cover Marketing Material Name Available Languages Product; 2048: Application for conversion: single life term to joint life permanent File: FR: 2121: Assignment of life insurance policy as collateral File: FR: 2115: Attending physician's disability benefits statement File: FR: 1616 worksheet: 1616 Term Conversion Worksheet File
How a Collateral Assignment of Life Insurance Works . ... When you apply for the loan, the bank says you must have collateral in the form of a life insurance policy to back it up. You have a whole ...
3. Fill out a collateral assignment form. Once you sign your life insurance contract and pay your first premiums, complete a collateral assignment form with your insurer. You'll fill out your lender's contact details so your insurer can designate them as a collateral assignee while your loan is outstanding. 4.
800-783-4479. 513-870-2099. Premium Accounting. Premium payments, billing notice questions, bank draft account changes/updates. 877-564-0214. 513-870-2095. *Unless otherwise indicated, forms are applicable in all states except New York. Find the life insurance and annuity service forms you need to request changes.
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Collateral Assignment Form. Use this form to collaterally assign the policy(ies) referenced below. This form must be completed and signed by the Owner. MI Last Sufix. "Company" as referred to herein, is Massachusetts Mutual Life Insurance Company, and/or MML Bay State Life Insurance Com-pany and/or C.M. Life Insurance Company.
In a collateral assignment of life insurance, you use a life insurance policy to secure a loan. You first set up coverage as usual by applying for and buying some type of life insurance policy with a death benefit. If you already have a policy, you could use that too. Then you fill out a collateral assignment form with the lender.
An electronic copy or printout of their Equitable Life insurance policy. (The original policy is required in Quebec). An updated inforce illustration. Contact Customer Service at 1.800.668.4095 or email [email protected]. A letter of direction with instructions for the funds once the loan is approved.
1. This form is to be accomplished by the Policy Owner/Assignee in BLOCK LETTERS. 2. Please do not sign on a blank form. 3. Please put a shade in the circle to indicate your choice(s). Policy Details Full Name of Insured (Last Name, First Name, Middle Initial) Full Name of Assignee Full Name of Policy Owner (Last Name, First Name, Middle Initial)
agree and the Assignee by the acceptance of this assignment agrees to the conditions and provisions of this assignment. B. The rights transferred by this Assignment include, without limitation, the following specific rights. 1. The sole right to collect from United of Omaha the net proceeds of the Policy when it becomes a claim by death or ...
The sole right to collect from the Insurer the net proceeds of the Policy when it becomes a claim by death or maturity; The sole right to surrender the Policy and receive the surrender value thereof at any time provided by the terms of the Policy and at such other times as the Insurer may allow; The sole right to obtain one or more loans or ...
Collateral assignment or release of contract form (130725) Assign your annuity contract as collateral. Company complaint form (PS5192US) File a complaint in relation to a Life Insurance, Long-term Care, and/or Annuity policy or contract. New York residents (PS5192NY) Divorce distribution instructions form (1307192)
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The following tips can help you fill out Collateral Assignment Form - AXA - Axa Com quickly and easily: Open the template in the full-fledged online editor by clicking on Get form. Fill out the requested boxes which are colored in yellow. Click the arrow with the inscription Next to move from box to box. Go to the e-signature solution to e-sign ...
Important information. Use this form to assign or release your annuity contract as collateral. Please note the following: John Hancock will issue you an IRS Form 1099-R for each year your contract is collaterally assigned to report any taxable gains. A collateral assignment issued by John Hancock shall be made in duplicate and both copies will ...