What is a Collateral Assignment of a Life Insurance Policy?

what is a collateral assignment? Collateral assignment refers to the contractual designation of a company or other entity as beneficiary of a life insurance policy. This arrangement is fairly common among business owners in search of additional funds or credit. Many lenders will consider the assignment of life insurance alongside other factors when evaluating creditworthiness for business financing applications.

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

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

What is a Collateral Assignment of a Life Insurance Policy?

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

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

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:

  1. The life insurance company must approve the assignment (most do).
  2. 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:

  1. Purchase life insurance – be sure to name primary and contingent beneficiaries.
  2. Assign life insurance as collateral – name your lender as a collateral assignee.
    • 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.

Securing a Loan Through Life Insurance

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

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

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Types of Life Insurance Policies that Work for Collateral Assignment

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

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

Collateral Assignment of a Life Insurance Policy – Where to Begin

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

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

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