collateral assignment of life insurance

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What Is a Collateral Assignment of Life Insurance?

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

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

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

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

Key Takeaways

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

How a Collateral Assignment of Life Insurance Works

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

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

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

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

Example of Collateral Assignment of Life Insurance

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

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

Alternatives to Collateral Assignment of Life Insurance

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

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

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

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

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

What Are the Benefits of Collateral Assignment of Life Insurance?

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

What Kind of Life Insurance Can Be Used for Collateral?

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

Is Collateral Assignment of Life Insurance Irrevocable?

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

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

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

The Bottom Line

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

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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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 insurance and how does it work?

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

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

Definition and Examples of Collateral Assignment

How collateral assignment works, alternatives to collateral assignment.

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

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

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

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

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

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

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

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

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

Types of Life Insurance Collateral

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

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

A Note on Annuities

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

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

The Process

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

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

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

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

Lenders Get Paid First

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

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

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

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

Key Takeaways

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

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

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

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

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.

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Home > Finance > What Is Collateral Assignment Of Life Insurance

What Is Collateral Assignment Of Life Insurance

Published: November 22, 2023

Discover the benefits of collateral assignment of life insurance and how it can impact your finance. Gain valuable insights into this powerful financial strategy.

(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, definition of collateral assignment of life insurance, how collateral assignment works, reasons for using collateral assignment of life insurance, benefits and drawbacks of collateral assignment of life insurance, comparison with other forms of collateral, examples of collateral assignment of life insurance, important considerations before using collateral assignment.

When it comes to securing a loan, financial institutions often require borrowers to provide collateral as a form of security. Collateral helps mitigate the lender’s risk by providing an asset that can be seized and sold in the event of default. While real estate and vehicles are common forms of collateral, there is another valuable asset that can be used – life insurance.

In the world of finance, the collateral assignment of life insurance has gained popularity as a means of securing loans. This unique strategy allows borrowers to use the cash value or death benefit of their life insurance policy as collateral. By assigning the policy to the lender, the borrower can provide an additional layer of security while retaining ownership and control of the policy.

In this article, we will delve into the concept of collateral assignment of life insurance, understanding how it works, the reasons for using it, the benefits and drawbacks, as well as important considerations to keep in mind.

Additionally, we will compare collateral assignment with other forms of collateral and provide real-life examples to illustrate its practical application in various scenarios.

Before we proceed, it’s important to note that the details of collateral assignment can vary depending on the jurisdiction and terms of the insurance policy. It’s crucial for borrowers and policyholders to consult with their financial advisors and insurance providers to ensure they fully understand the implications and requirements of utilizing collateral assignment of life insurance.

Collateral assignment of life insurance refers to the process of using a life insurance policy as collateral for a loan or other financial obligation. When a borrower assigns their life insurance policy as collateral, they transfer a portion or all of their rights and benefits from the policy to the lender. This arrangement provides the lender with a form of security in case the borrower defaults on the loan.

Under a collateral assignment, the policyholder retains ownership of the policy and continues to pay the premiums. The assignee, typically the lender, receives the right to the policy’s cash value or death benefit as a means of recovering the outstanding debt in the event of default.

To create a collateral assignment, a written agreement known as a collateral assignment agreement is usually required. This agreement outlines the specifics of the assignment, including the amount of coverage assigned, the rights of the assignee, and the conditions for release of the collateral upon repayment of the loan.

It’s important to note that the collateral assignment of life insurance does not cancel or terminate the policy. The policy remains in force, and the beneficiary designation typically remains unchanged. In the event of the policyholder’s death, the death benefit is paid out as specified in the original policy contract.

It’s also worth mentioning that there are two types of collateral assignments for life insurance: outright assignment and conditional assignment. An outright assignment transfers all the policy rights and benefits to the assignee for the duration of the loan, while a conditional assignment only grants the assignee access to the policy’s value or death benefit if certain conditions, such as default on the loan, occur.

Now that we have a clear understanding of collateral assignment of life insurance, let’s explore how this process works in practice.

The process of collateral assignment of life insurance involves several steps and considerations. Here’s how it generally works:

• Evaluation of Loan Eligibility: The borrower applies for a loan and undergoes the usual evaluation process. The lender assesses the borrower’s creditworthiness, income, and other factors to determine loan eligibility.
• Identification of Collateral Options: If the lender requires collateral to secure the loan, the borrower explores different options. Life insurance policies with cash value or death benefits can be considered as potential collateral.
• Insurance Policy Examination: The borrower reviews their life insurance policy to determine the available cash value and death benefit. This information helps both the borrower and the lender assess the suitability of collateral assignment.
• Collateral Assignment Agreement: Once both parties agree to move forward with collateral assignment, a collateral assignment agreement is drafted. This agreement outlines the details of the assignment, including the amount of coverage assigned, the rights and obligations of the parties involved, and the conditions for release of the collateral.
• Notification to the Insurance Company: The borrower notifies their insurance company about the collateral assignment. The insurance company updates their records to reflect the assignee’s rights to the policy’s cash value or death benefit, as stipulated in the collateral assignment agreement.
• Ongoing Premium Payments: The borrower continues to pay the premiums on the life insurance policy to keep it active. Failure to do so could lead to policy termination and potentially affect the collateral assignment.
• Loan Repayment: The borrower is responsible for repaying the loan according to the terms and conditions set by the lender. If the borrower defaults on the loan, the lender has the right to access the assigned cash value or death benefit to recover the outstanding debt.
• Release of Collateral: Once the loan is fully repaid, the lender releases the collateral back to the borrower. At this point, the borrower regains full control and ownership of the life insurance policy.

It’s important to note that the process may vary slightly depending on the specific requirements of the lender and the insurance company. Additionally, the terms of the collateral assignment agreement will play a crucial role in determining the rights and obligations of both parties involved.

Now that we understand how collateral assignment works, let’s explore the reasons why individuals opt for this strategy.

Collateral assignment of life insurance can be a valuable tool for borrowers and lenders alike. Here are some reasons why individuals choose to use this strategy:

• Access to Financing: Collateral assignment allows individuals who may not have traditional forms of collateral, such as real estate or valuable assets, to access financing. By utilizing the cash value or death benefit of their life insurance policy, borrowers can secure loans for various purposes, such as business expansion, education expenses, or medical bills.
• Lower Interest Rates: Lenders may offer lower interest rates for loans secured by collateral. The added security provided by the life insurance policy reduces the lender’s risk exposure, resulting in more favorable terms for the borrower.
• Easier Loan Approval: Collateral assignment can make loan approval easier for borrowers with less-than-perfect credit or limited income. The presence of collateral can mitigate some of the perceived risks for lenders, increasing the chances of loan approval.
• Retention of Policy Ownership and Control: Unlike other forms of collateral, such as selling an asset outright, collateral assignment of life insurance allows borrowers to retain ownership and control over their policy. They can continue to name beneficiaries, make changes to the policy, and access the policy’s cash value as needed, as long as the loan obligations are being met.
• Preservation of Policy Benefits: Assigning collateral does not cancel the life insurance policy. The original policy benefits, such as death benefit payouts, remain intact for the beneficiaries. This ensures that loved ones are financially protected in case of the policyholder’s untimely passing.
• Flexibility and Versatility: Collateral assignment can be used with various types of life insurance policies, including both permanent (whole life, universal life) and term life insurance. This provides borrowers with the flexibility to choose a policy that aligns with their financial goals and needs.

It’s important for borrowers to carefully evaluate their financial situation and assess whether collateral assignment is the right option for their needs. Taking into account the benefits and drawbacks of collateral assignment, as well as comparing it with alternative forms of collateral, can help borrowers make informed decisions.

Next, let’s explore the advantages and disadvantages of collateral assignment of life insurance.

Collateral assignment of life insurance offers several benefits and drawbacks for borrowers and lenders. Understanding these advantages and disadvantages can help individuals make informed decisions about utilizing this strategy. Let’s explore them:

• Improved Loan Terms: By offering collateral in the form of a life insurance policy, borrowers can often secure loans with better interest rates and terms compared to unsecured loans.
• Access to Higher Loan Amounts: Collateral assignment can help borrowers access higher loan amounts based on the value of their life insurance policy. This can be particularly beneficial for larger expenses or investments.
• Retain Policy Ownership: Collateral assignment allows borrowers to retain ownership and control of their life insurance policy. They can continue to make changes to the policy and access its benefits, such as cash value, while meeting loan obligations.
• Preservation of Policy Benefits: The life insurance policy’s original benefits, such as death benefit payouts, remain intact for the beneficiaries. This ensures that loved ones are financially protected, even if the policy is assigned as collateral.
• Flexibility and Versatility: Collateral assignment can be used with different types of life insurance policies, providing borrowers with flexibility in choosing a policy that suits their needs and financial goals.
• Reduced Cash Value and Benefit: Assigning collateral may restrict access to the policy’s cash value and limit the death benefit available to the policyholder during the loan term.
• Policy Termination Risk: If the borrower fails to meet the loan obligations or defaults, the policy may be terminated, leading to loss of coverage and potential financial consequences.
• Potential Loan Default Consequences: In the event of loan default, the lender can access the assigned cash value or death benefit, potentially impacting the financial protection for the borrower’s beneficiaries.
• Complexity and Administrative Requirements: Collateral assignment involves paperwork and administrative tasks, including drafting and executing a collateral assignment agreement, notifying the insurance company, and ensuring ongoing premium payments.
• Limitations on Policy Modifications: Depending on the terms of the collateral assignment agreement, borrowers may have restrictions on making changes to the policy, such as reducing coverage or surrendering the policy.

It’s essential for borrowers to carefully consider these benefits and drawbacks in the context of their specific financial situation and goals. Consulting with financial advisors and insurance professionals can provide valuable guidance to make an informed decision.

Next, let’s compare collateral assignment of life insurance with other forms of collateral to better understand its advantages and limitations.

Collateral assignment of life insurance offers distinct advantages and considerations compared to other forms of collateral. Let’s compare it to some common forms of collateral:

Real Estate:

Real estate is a traditional form of collateral widely used in lending. While real estate offers the potential for long-term appreciation, it can be financially burdensome due to property taxes, maintenance costs, and market fluctuations. Moreover, using real estate as collateral may involve complex legal processes and lengthy evaluation periods. In contrast, collateral assignment of life insurance provides a quicker and more straightforward solution, especially for those without real estate assets.

Vehicles are another common form of collateral. While they are easily identifiable and possess monetary value, vehicles depreciate over time. Additionally, vehicles require ongoing maintenance and are subject to wear and tear. Unlike vehicles, a life insurance policy’s value is not dependent on physical assets, making it an attractive option for those who do not own valuable vehicles or wish to preserve their vehicle’s daily utility.

Securities:

Securities, such as stocks or bonds, can be used as collateral. However, they are subject to market volatility, and their value can fluctuate considerably. Additionally, using securities as collateral may require transferring ownership or creating a margin account, which can involve additional fees and restrictions. Collateral assignment of life insurance offers stability, as the policy’s cash value remains relatively secure, regardless of market conditions.

Savings Accounts:

Savings accounts or certificates of deposit (CDs) can be used as collateral, providing a low-risk option for lenders. However, tying up savings in collateral may limit accessibility to those funds and reduce financial flexibility. Collateral assignment of life insurance can offer an alternative solution, allowing borrowers to access funds while keeping their savings intact.

It’s important to note that the suitability of collateral assignment versus other forms of collateral may depend on an individual’s unique circumstances and preferences. Assessing the advantages, drawbacks, and requirements of different collateral options is crucial in determining the best choice for a particular situation.

Next, let’s explore some practical examples of collateral assignment of life insurance to illustrate its application in real-life scenarios.

Collateral assignment of life insurance can be used in various real-life situations to secure loans and meet financial obligations. Here are a few examples:

1. Small Business Loan: A small business owner requires capital to expand their operations. Instead of offering personal assets or seeking a business loan without collateral, they choose to assign the cash value of their life insurance policy as collateral. This allows them to access favorable loan terms and maintain ownership of their life insurance policy while growing their business.

2. Education Financing: A parent wants to fund their child’s college education but does not have sufficient savings or assets to provide as collateral. By assigning the death benefit of their life insurance policy as collateral, the parent can secure a loan to cover tuition and other educational expenses. This approach allows them to borrow at lower interest rates and preserve their other assets for future needs.

3. Medical Expenses: A borrower faces unexpected medical expenses that are not fully covered by insurance. They assign the cash value of their life insurance policy as collateral to secure a loan and cover the medical bills. This enables them to get the necessary treatment without depleting their savings or incurring high-interest debt.

4. Estate Planning: An individual wants to ensure their loved ones are adequately provided for in case of their untimely passing. They assign the death benefit of their life insurance policy as collateral to secure a loan and establish an estate plan. This allows them to create a tax-efficient strategy while providing immediate financial support to their beneficiaries.

5. Debt Consolidation: A borrower has multiple outstanding debts with high-interest rates. They decide to assign the cash value of their life insurance policy as collateral to secure a consolidation loan. This allows them to combine their debts into a single loan with more favorable terms, such as lower interest rates and manageable monthly payments.

These examples demonstrate the versatility and practicality of collateral assignment of life insurance in various financial scenarios. It provides a viable option for individuals and businesses to access funds, manage expenses, and meet financial goals while leveraging the financial protection provided by their life insurance policies.

Before pursuing collateral assignment, it’s crucial to thoroughly understand the terms and conditions of the loan and collateral assignment agreement. Seeking guidance from financial advisors and insurance professionals can help borrowers make informed decisions and ensure the best outcome for their specific circumstances.

In the next section, we will explore important considerations that individuals should keep in mind before using collateral assignment of life insurance.

Before deciding to use collateral assignment of life insurance, it is essential to consider the following factors:

Loan Terms and Repayment:

Thoroughly review the terms and conditions of the loan, including the interest rate, repayment period, and any associated fees. Determine if the loan terms align with your financial capabilities and goals. It’s crucial to have a clear understanding of the repayment schedule and ensure it is manageable within your budget.

Impact on Policy Benefits:

Understand how assigning collateral will affect your life insurance policy. Evaluate the potential impact on the policy’s cash value, death benefit, and other policy features. Determine if the reduction in benefits is acceptable in relation to the loan amount and the financial protection provided to your beneficiaries.

Insurance Policy Review:

Review your life insurance policy in detail to understand its provisions, restrictions, and rights. Familiarize yourself with the policy’s cash value accumulation, surrender charges, and any other contractual obligations. Ensure that the policy is eligible for collateral assignment and that you comply with all requirements set by the insurance company.

Risk of Policy Termination:

Be aware that failing to meet loan obligations can result in policy termination, potentially leaving you without coverage and potential financial consequences. Consider your ability to meet the loan payments and have a contingency plan in case of unforeseen circumstances to mitigate this risk.

Professional Guidance:

Seek advice from financial advisors and insurance professionals who can provide insight into the pros and cons of collateral assignment of life insurance. They can help you evaluate your specific needs, assess the impact on your financial situation, and explore alternative options that may better suit your circumstances.

Legal and Tax Implications:

Understand the legal and tax implications associated with collateral assignment based on your jurisdiction. Consult with legal and tax professionals to ensure compliance with applicable laws and regulations. Be aware of any potential tax consequences, such as potential taxable events or changes in the insurance policy’s tax status.

By carefully considering these factors, you can make an informed decision about whether collateral assignment of life insurance is the right strategy for your financial needs. It’s important to conduct thorough research, weigh the benefits and drawbacks, and consult with professionals to ensure you are making the best choice for your individual circumstances.

In the concluding section, we will summarize the key points and emphasize the significance of due diligence when utilizing collateral assignment of life insurance.

Collateral assignment of life insurance can be a valuable tool for borrowers and lenders seeking to secure loans and meet financial obligations. By leveraging the cash value or death benefit of a life insurance policy, individuals can access financing with favorable terms and retain ownership and control over their policy.

However, utilizing collateral assignment requires careful consideration and due diligence. It is essential to assess the benefits and drawbacks, compare it with alternative forms of collateral, and evaluate its impact on policy benefits and repayment obligations. Seeking guidance from financial advisors and insurance professionals is crucial to ensure informed decision-making and a thorough understanding of the process and implications.

Understanding the terms and conditions of the loan, the collateral assignment agreement, and the policy itself is paramount. Regular reviews of the insurance policy and ongoing premium payments are necessary to maintain coverage and prevent policy termination. Additionally, individuals should stay aware of legal, tax, and compliance requirements associated with collateral assignment based on their jurisdiction.

By responsibly utilizing collateral assignment, individuals can access financing for various purposes while protecting their loved ones through the preservation of policy benefits. This strategy offers flexibility and versatility, allowing borrowers to meet their financial goals without sacrificing ownership and control of their life insurance policies.

Ultimately, the decision to use collateral assignment of life insurance should align with individual financial goals and risk tolerance. With careful planning, proper guidance, and a thorough understanding of the process, collateral assignment can be a valuable tool in managing finances and achieving financial objectives.

It’s important to always consult with professionals and conduct thorough research before proceeding with collateral assignment of life insurance to ensure the best outcome for your specific circumstances.

How Is Collateral Assignment Used In A Life Insurance Contract?

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

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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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Who Should Use Life Insurance as Collateral

You can use life insurance as collateral for a loan, which can offer many benefits but also comes with risks. Whether this is a wise financial strategy for you will depend on your needs, circumstances and goals.

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Updated: April 9, 2024

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• How Collateral Assignment Works
• Pros and Cons
• Eligible Life Insurance Types
• Using Life Insurance as Collateral
• Other Ways to Use Life Insurance
• Alternatives to Life Insurance
• When to Use It

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• Life Insurance Collateral Assignment [Pros and Cons]

If you’re considering leveraging your assets to secure a loan, your life insurance policy might hold untapped potential as collateral. This strategic move can offer you a pathway to obtain the financing you need without risking your home or other valuable assets. It’s a method that not only provides lenders with the assurance of repayment but also preserves the integrity of your personal estate. As you navigate this option, it’s crucial to weigh the benefits against the potential impacts on your policy’s intended beneficiaries and ensure the approach aligns with your broader financial objectives.

Collateral Assignment of Life Insurance

Table of contents, key takeaways, what is a collateral assignment of life insurance, pros and cons of assigning life insurance benefits, understanding collateral, how the life insurance collateral assignment process works, what types of life insurance can be assigned as collateral, examples of life insurance as collateral, setting up a collateral assignment, common mistakes to avoid in a collateral assignment, evaluating the suitability of a collateral assignment of life insurance, life insurance for collateral assignment faqs.

• Is a Life Insurance Collateral Assignment Right for You?
• Strategic Financing : Utilizing your life insurance policy as collateral for a loan can be a strategic way to secure necessary financing without jeopardizing other personal assets, offering a safer alternative to traditional collateral like homes or cars.
• Loan Qualification and Terms : This approach can facilitate easier loan qualification and potentially more favorable loan terms due to the added security it provides to lenders, often resulting in lower interest rates.
• Impact on Beneficiaries : While using life insurance as collateral can protect other assets, it’s important to consider the potential reduction in the death benefit available to your beneficiaries, which could impact their financial security.
• Policy Eligibility and Process : Both term and permanent policies are eligible for collateral assignment, but the process involves specific steps, including policy application, collateral assignment form completion, and adherence to lender requirements.
• Seek Professional Advice : Given the complexities involved in using life insurance as collateral, obtaining personalized advice from a life insurance professional is crucial to navigate the process effectively and ensure alignment with your financial goals.

A collateral assignment of life insurance is a conditional assignment that appoints a lender as an assignee of the policy. Similar to using other types of collateral for a loan – such as a property or a vehicle – if the loan is not repaid, the lender has a claim to some or all of the life insurance policy’s death benefit, and in some instances, the policy’s cash value.

With a collateral assignment of life insurance the lender is not a policy beneficiary. Therefore, having the lender be named as a collateral assignee instead, you can specify that the lender is entitled only to a portion of the death benefit (i.e., the amount of the unpaid balance on the loan). The remainder of the death benefit would then go to our named beneficiary.

Schedule a consultation with our Collateral Assignment expert

There are advantages and potential drawbacks when using life insurance as collateral for a loan.

On the plus side, having collateral gives a lender more security that you will repay the loan, making it easier to qualify. Likewise, this repayment security can result in a lower interest rate and payment for the borrower.

In addition, using the death benefit on a life insurance policy as loan collateral can keep other assets – such as the borrower’s home, car, and savings – protected from loss if the loan defaults. And, you can still have named beneficiary(ies) on the policy who receive the remainder of the death benefit proceeds.

There are, however, some potential disadvantages of using a life insurance collateral assignment, too. For instance, with the lender as an assignee, it can reduce the amount of proceeds left for survivors – which could put loved ones into financial hardship to come up with more funds to replace income or pay off other debts of the insured.

If the borrower does not yet have life insurance – but plans to obtain it as collateral – the policy’s premium cost can raise the borrower’s out-of-pocket expenses. Further, if the borrower has specific health issues, they may not qualify for coverage (or if they do qualify, it could be at a higher premium rate).

In addition, if the life insurance policy lapses for any reason, it could violate the terms of the loan, as there would no longer be any collateral causing problems with the lender.

Pros and Cons of Using a Life Insurance Collateral Assignment

Collateral is the item pledged as security for the repayment of a loan. If the borrower defaults on loan payments, the lender will receive the collateral.

Having collateral can help to secure a loan because the lender knows that, even if the borrower stops making payments (either due to death or other circumstances), they will receive something of value in return.

Because collateral can make a loan more secure for a lender, the borrower may also receive a lower interest rate than they would with an unsecured loan (i.e., a loan that does not have collateral).

Collateral for loans can also include items such as:

• – Property (such as with a home mortgage or home equity line of credit)
• – Vehicles
• – Investments, like stocks, bonds, and CDs 
• – Savings/cash/money markets
• – Business equipment
• – Collectibles (i.e., art, jewelry, etc.)
• – Precious metals 

If you plan to use a life insurance collateral assignment strategy when applying for a loan, you should go through the following steps in order:

• Understand the requirements . First, you should know the type of policy a lender will accept as collateral – or even if a lender will accept life insurance. If you need to purchase a new policy, obtain several quotes from highly-rated life insurers before you commit to one. 
• Apply for a policy if you do not already have one . Next, fill out the application for life insurance coverage. You may have to undergo life insurance underwriting before the company approves you for a new policy, which could require undergoing a medical examination and answering in-depth health-related questions. 
• Fill out a collateral assignment form . This form will include listing the lender’s information and naming them as assignees on the policy’s death benefit. A Medallion Signature Guarantees may be required.
• Obtain approval from your lender that the insurance company has made them the collateral assignee . Only after you receive this approval should you apply for your loan. You can then add any necessary information about the life insurance policy on the loan application.
• End the collateral assignment . Once your loan has been repaid, let the life insurance company know so they can confirm with the lender and get rid of the collateral assignment.

A lender will generally require that the policy’s death benefit be at least as much as the loan balance amount. That way, the death benefit will reimburse the lender if you pass away before repaying the loan.

If you take out a new life insurance policy, the application process is the same as applying for one without a collateral assignment. However, you must complete a collateral assignment form with the insurance company that lists the lender as an assignee.

We recommend that you walk through this process with a life insurance professional who is familiar with how a collateral assignment works and who can answer any of the questions or concerns that you may have.

A borrower may use term and permanent life insurance for a collateral assignment. But, because each financial institution has different requirements, it is crucial to check and see which one(s) are eligible for your particular transaction. If both term and permanent life insurance policies are acceptable, compare the cost and benefits of each before moving forward.

For example, because the coverage on a term life insurance policy only lasts for a pre-set period (such as 10 or 20 years), a lender may prefer that the borrower have permanent life insurance coverage for the borrower’s lifetime.

Also, a permanent life insurance policy may allow the lender access to the funds in the cash value to make loan payments if the borrower defaults. In this case, the lender may restrict the policyholder’s access to the cash value to protect the lender’s collateral, and this is why many lenders prefer permanent insurance over term life insurance for collateral assignments.

Some examples of cash value life insurance policies include:

• A whole life insurance policy
• A guaranteed universal life insurance policy
• An indexed universal life insurance policy
• A variable universal life insurance policy

Which cash value life insurance policy is best for a collateral assignment?

You should consider which life insurance policy will provide the most stability, as well as any additional features and benefits that would make it more advantageous.

If you simply need a permanent life insurance policy with a death benefit but don’t need cash value, then a guaranteed universal life insurance policy is a great choice.

However, if you need cash value but value stability and predictability, then a whole life insurance policy may be the better option.

Indexed universal life insurance provides some peace of mind since it provides a floor to protect the policy’s cash value, in contrast to a variable universal life policy where you have the potential for higher returns but with a greater risk of loss due to a down market.

Life insurance can be used as collateral for SBA and small business loans for business related expenses such as upgrading equipment, purchasing inventory, or hiring additional employees. If the borrower could not repay the loan, then the lender would be able to take over the policy and take whatever available cash value is in the policy. If more debt is still due, the lender can collect out of the death benefit upon the borrower passing, with any remaining death benefit going to the beneficiary.

Mortgage loan

Another example of using life insurance as collateral is for a mortgage. Rather than take out credit life insurance which would name the lender as the beneficiary, a collateral assignment would first pay the lender for the remaining loan balance, with the remaining death benefit proceeds going to the policy’s beneficiary.

For example, if John needed collateral to get a $500,000 30 year mortgage, he could use his $1,000,000 life insurance policy’s death benefit. As times goes by the mortgage balance would go down, so he would only owe the lender the amount left on the mortgage, with the remaining death benefit going to his beneficiary (his spouse). If he passed away in year 20 with $150,000 still left on the mortgage, the insurance company would pay the lender $150,000, with the remaining $850,000 death benefit going to his spouse.

An in force life insurance policy is required to complete a collateral assignment form. If you are purchasing a new policy, you may request a collateral assignment form after signing the policy application and paying the first premium.

A life insurance collateral assignment form includes the following:

• – Your personal information (name, date of birth, contact details
• – Name and contact information of the lender
• – Life insurance policy number
• – Your Social Security number 

Even though the policyholder must notify the insurance company about the collateral assignment on a policy, other than their obligation to meet the terms of the contract, the insurer is not actively involved in the loan agreement.

After paying off the loan balance, you will receive a written release once the lender agrees that you have met all loan terms. If so, the lender sends the release to the insurance company.

The collateral assignment on the life insurance policy will end at that time. If you keep the policy in force, you can keep the current beneficiary as the sole recipient of the death benefit proceeds, and you could add additional beneficiaries to the policy.

Some of the most common mistakes to avoid with a collateral assignment of life insurance can include:

• – Ignoring the lender’s requirements
• – Adding incorrect beneficiary designation(s)
• – Cancelling the life insurance policy prematurely
• – Leaving insufficient coverage for beneficiaries

Any of these scenarios could jeopardize the loan and cause issues with the lender. Likewise, it could also put your beneficiary(ies) in a financial bind.

Alternative Loan Options

Although life insurance can provide viable collateral for a personal or business loan, it may not always be the best option – especially if a borrower cannot qualify for coverage or pay the added cost of the premium.

So, some potential alternatives to a collateral assignment of life insurance could include one or more of the following:

• borrowing against your cash value for a tax-free loan
• – Opting for an unsecured loan from another source, such as a bank or credit card
• – Utilizing other assets that may be sold or borrowed against and used as collateral for a loan
• – Taking out a home equity loan or line of credit 
• – Seeking a co-signer – particularly if that individual has strong credit and could increase the chances of loan qualification and possibly even a lower interest rate 

While not all situations are suitable for this strategy, some conditions that may favor a collateral assignment include:

• – A policy with a significant build-up of cash value 
• – Other financial resources for beneficiaries (at least until repayment of the loan)

Even with the many advantages of a life insurance collateral assignment, they aren’t ideal in every situation. Some scenarios where a collateral assignment may not be ideal are:

• – If the policyholder will have difficulty keeping the policy in force 
• – If the insured is unable to qualify for a policy due to health or other issues 

Because there is no one-size-fits-all strategy when using life insurance as collateral for loans, you should first discuss your objectives with a life insurance expert who is well-versed in how a collateral assignment works and where they may (or may not) be the right solution.

Is collateral assignment life insurance the same as credit life insurance?

No, life insurance collateral assignment differs from credit life insurance, as the latter requires that you name the lender as the sole beneficiary of the death benefit, whereas with collateral assignment the lender only gets reimbursed for the total amount owed on the loan with the remainder going to your beneficiary.

What if the policy is considered a modified endowment contract?

If your policy is classified as a modified endowment contract and you’ve used it as collateral, all accumulated earnings within the policy must be reported as your income through an IRS Form 1099-R. It’s advisable to seek guidance from your tax advisor prior to proceeding with the collateral assignment.

How to Determine if Life Insurance Collateral Assignment is Right for You

If you need a personal or business loan, offering collateral to the lender could help you to qualify more readily – and possibly even obtain a lower interest rate on borrowed funds. But even so, many factors are involved when assigning life insurance benefits – and if you or the lender set up the assignment incorrectly, it could result in unfavorable financial consequences in both the short and long term.

So, you must obtain personalized financial advice from a life insurance specialist who can guide you through the process and ensure that you are on the right track. At Insurance and Estates, our primary focus is helping our clients use life insurance for various needs.

Due to our familiarity with different life insurance carriers, we can assist you with finding the best policy for your specific objectives. If you have any questions about using life insurance to secure a loan – or if you’re ready to begin setting up a life insurance collateral assignment – contact Insurance and Estates today.

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Collateral Assignment for Life Insurance: A Comprehensive Guide

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

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

Table of Contents

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

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

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

When Is Collateral Assignment Used?

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

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

How Life Insurance Collateral Works

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

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

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

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

Term vs. Permanent Life Policies

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

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

Current vs. New Policies

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

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

Assignees vs. Beneficiaries

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

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

Should You Consider Using Your Life Insurance as Collateral?

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

Pros  

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

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

Cons  

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

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

Alternatives to Collateral Assignment

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

Utilize a Life Insurance Cash Value Loan  

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

Cash Surrender

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

Take Out a Home Equity Loan

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

Take Out an Unsecured Loan

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

Take Out a Term Life Insurance Policy  

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

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

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

Collateral Assignment of Life Insurance: Everything You Need to Know

• August 8, 2023

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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Almost there couple of quick questions, share this infographic, best life insurance companies that allow assignment of collateral (2022), life insurance companies that allow the assignment of collateral are fairly common. a collateral assignment will make the lender the immediate beneficiary of your policy. if you pay off your loan before you die, you can dismiss your collateral assignment and make sure your beneficiaries receive the full death benefit., it’s all about you. we want to help you make the right coverage choices..

Advertiser Disclosure: We strive to help you make confident insurance decisions. Comparison shopping should be easy. We are not affiliated with any one insurance provider and cannot guarantee quotes from any single provider. Our insurance industry partnerships don’t influence our content. Our opinions are our own. To compare quotes from many different insurance companies please enter your ZIP code on this page to use the free quote tool. The more quotes you compare, the more chances to save.

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What You Should Know

• A collateral assignment allows you to pay off a loan with your life insurance death benefit
• Lenders may or may not accept a collateral assignment depending on the type of policy you have
• If you pay off your loan before you die, you can remove the collateral assignment in order for your beneficiaries to receive the full death benefit of your life insurance policy

If you need to take out a loan, or if you have taken out a loan, and you need collateral, you may be curious to learn about life insurance companies that allow the assignment of collateral.

Plenty of life insurance companies allow you to use a collateral assignment with your policy.

Essentially, a collateral assignment on your life insurance policy allows you to name a lender as your beneficiary. When you die, if your loan has not been paid off, the lender will receive the full payment of the loan from your death benefit.

If any amount remains from your death benefit, your beneficiaries will receive the money.

There are alternatives to using your life insurance policy as collateral, such as a collateral assignment with your mortgage. You can see a collateral assignment of a life insurance sample by doing a bit of research online.

When you look for a collateral assignment example, you can see how the process works and whether the loan you have or a future loan you may need will require that you use your life insurance policy as collateral.

As you shop around for life insurance companies that allow the assignment of collateral, be sure to use online quote tools to compare multiple companies at once and see how much you could save on your policy.

You may want to consult a life insurance guide to make sure you know the ins and outs of different policies and how much you might expect to pay for life insurance.

In fact, you can use our free quote tool above to find and compare rates from top life insurance companies in your state.

Which life insurance companies allow collateral assignments?

While there are some life insurance companies that don't allow collateral assignments, there are plenty of companies that do. Depending on where you live, you likely have a lot of options if you want to use a collateral assignment with your life insurance policy.

Some of the top life insurance companies that may allow you to use a collateral assignment include:

• Northwestern Mutual
• Banner Life
• Pacific Life
• Guardian Life
• New York Life
• John Hancock
• Mutual of Omaha

In order to know for sure whether a life insurance company will allow for a collateral assignment of your policy, you may need to speak to a representative. You can do this as you shop around for life insurance policies online.

What is considered the collateral on a life insurance policy loan?

A collateral assignment on a life insurance policy allows for you to use the death benefit of a life insurance policy to pay off a loan.

In order to use a collateral assignment on your life insurance, you will need to use the following process:

• Apply for a life insurance policy and name your beneficiaries.
• Complete a collateral assignment of life insurance form naming your lender.
• Wait for the life insurance company to acknowledge the collateral assignment.
• If the loan is paid in full, the lender must send a form to that effect to ensure your beneficiaries receive the full benefit of your policy.

In order for you to create a collateral assignment on your life insurance policy, you must find a company that allows it, and you also need to make sure you have a lender that accepts life insurance as collateral.

How is a collateral assignment used in a life insurance contract?

If you have a collateral assignment in effect, your lender will get the death benefit of your life insurance policy if you pass away before paying off your loan.

If your death benefit exceeds the amount of your loan, your beneficiaries will receive the remainder. Most of the time, lenders won't accept a collateral assignment on a term life insurance policy because it may expire before the loan is paid.

With a whole or permanent life insurance policy, a lender would be more likely to accept a collateral assignment as a potential payment.

Once you pay off your loan, you can dissolve your collateral assignment. But you will need the lender to agree and submit a form that states you've paid your loan and that the collateral assignment should no longer be in place.

Should I use a collateral assignment on my life insurance policy?

You could potentially benefit from a collateral assignment if you need a particular type of loan. People who need a small business loan or a Small Business Administration (SBA) loan often consider using a collateral assignment.

If you don't need a loan, or you have a loan you will easily be able to pay off, a collateral assignment on your life insurance policy will not be necessary.

As you search for life insurance companies that allow you to use a collateral assignment, be sure to get quotes from different companies and see how much a policy might cost.

The price for a life insurance policy will vary based on your age, your gender, and the type of life insurance policy you want. You may want to look for a digital life insurance company that offers online quotes .

When you shop, be sure to use our free quote tool below to find the best rates based on your unique needs.

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What Is Split-Dollar Life Insurance?

Split-dollar life insurance refers to a permanent life insurance policy held by two parties, usually an employer and employee, who split the premiums and the proceeds of the policy.

Table of Contents

What Is a Split-Dollar Life Insurance Policy?

How does split-dollar life insurance work.

• How Much Does It Cost?

Key Takeaways:

• With a split-dollar life insurance policy, two parties split the cost of the premiums and share the policy benefits.
• Employers may use a split-dollar life insurance policy to attract and retain employees.
• Individuals with high-value estates can purchase a split-dollar life insurance policy to help reduce estate taxes for their beneficiaries.

A split-dollar life insurance policy is a policy wherein two parties share the premium costs as well as the policy benefits. Most often, a split-dollar insurance policy is held between an employer and an employee. Employers sometimes purchase these policies as part of a benefits package to attract and retain high-value employees.

However, they also could provide valuable funds in the event the employee dies. For instance, the funds could add much-needed capital to business operations if a CEO dies, leading to a decrease in stock prices. At the same time, the employee’s portion of the death benefit could aid their family following the loss of their income.

Not as common following a 2003 IRS ruling that said only privately owned companies can loan money to their executives, a split-dollar life insurance policy works in two different ways with regard to the purchase, premiums, any cash value, and the beneficiaries.

Collateral Assignment/Loan Regime

With a collateral assignment/loan regime, the employee owns the policy. This is also sometimes referred to as a leveraged split-dollar plan. The employer loans the premium amount to the employee to pay the premiums. Depending on the terms of the loan, the employee has to pay on taxable income derived from the premium loan. If the employee departs the company or the work agreement expires, the employee repays the loan for the premium costs and owns the policy in its entirety. If the employee dies, the employer receives the loan balance from the death benefit with the remaining going to the beneficiary.

Not all companies can participate in this type of split-dollar life insurance structure as the Sarbanes-Oxley Act made it illegal for a public company to loan money to its executives.

Endorsement Agreement

With an endorsement agreement, the employer owns the policy and the employee chooses the beneficiary. The employer pays the premiums, which are considered taxable income for the employee as is any of the employee’s interest in the policy’s cash value. If the employee leaves the company, the employer can transfer the policy to them or give them the option to purchase it. In the event of the employee’s death, the employer receives either the amount equal to the premiums paid or the policy’s cash value, whichever is greater. The employee’s beneficiary receives the remaining balance of the death benefit.

How Much Does a Split-Dollar Life Insurance Policy Insurance Cost?

As with all insurance policies, there are several factors that determine the cost of a split-dollar life insurance policy. These include:

• Type and amount of coverage. The more purchased, the higher the premiums are.
• The health, age, and gender of the insured . In general, if you are relatively young and healthy you will pay less for the same amount of coverage than someone older and with health issues. Women also typically pay less for life insurance than men.
• Amount of any deferred compensation the employer includes with the policy . 
• The cash value potential of the policy . If the policy allows you to add the cash value to the death benefit, the premiums will be higher than if the cash value is separate from the death benefit.

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How Do I Buy Split-Dollar Life Insurance?

When purchasing a split-dollar life insurance policy through an agreement between an employer and employee, both parties need to agree on the type of policy they want. Next, they need to agree on the terms, such as who will own the policy, how long the agreement will last, and who the beneficiaries are. These terms need to be outlined in a written document and signed by both parties.

The employer and employee will complete and sign an application for the life insurance policy. If necessary, the employee will undergo a medical exam. Once the insurance policy application is approved, both parties follow the agreement for payment and management of the split-dollar life insurance policy.

Individuals also have the option to purchase a split-dollar life insurance policy as part of their estate planning. Wealthy individuals can purchase a private split-dollar life insurance policy with the benefits going into a tax-advantaged trust known as an irrevocable life insurance trust (ILIT). Because an ILIT is not considered part of the estate, taxes will not have to be paid on the funds.

When considering a split-dollar life insurance policy, it’s important to speak to a financial advisor or estate planner to determine if it’s the right choice for your financial future.

Between employers and employees, there are three ways for a split-dollar life insurance agreement to end. The first is if the employee leaves the company, the employer could terminate the agreement. The second is if there is a specified termination date in the agreement. The third is if the employee dies, and the death benefit is disbursed as agreed.

Whether employee-owned or employer-owned, the employee can name the beneficiary of the life insurance policy under a split-dollar life insurance agreement. However, the beneficiaries likely will not receive the entire death benefit of the policy. Under a collateral agreement, the death benefit is first used to repay the loan to the employer for the premiums, with the remaining balance going to the beneficiaries. Under an endorsement agreement, the death benefit is first used to repay the policy premiums or cash value, whichever is greater, to the employer. The remaining balance goes to the beneficiary or beneficiaries.

Both the employer and employee can benefit from a split-dollar life insurance agreement. Employer benefits could include:

• Protecting the company’s finances in the event it loses a high-value employee
• Attracting and retaining quality employees
• Low costs to purchase and maintain 
• Can recoup investment when agreement ends
• Flexibility in plan design to meet employer needs

Potential employee benefits include:

• Employer pays for life insurance premiums
• Employer may pay income tax expenses through a bonus 
• Could receive tax-free income through withdrawals and loans of cash value
• Beneficiaries won’t pay taxes on the death benefit 
• Flexibility in the plan design to tailor to employee needs

The policyholder of a split-dollar insurance agreement depends on the type of agreement made between the employer and the employee. For a collateral agreement, the employee is the policyholder of the agreement. For an endorsement agreement, the employer is the policyholder.

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Lawyers argue over who gets life insurance proceeds of dead Lincoln businessman

Aaron marshbanks left more than $34 million in unpaid loans in largest bank fraud in state history, by: paul hammel - april 19, 2024 12:36 pm.

The County-City Building in Lincoln serves as the home to courtrooms in Lancaster County. (Paul Hammel/Nebraska Examiner)

LINCOLN — Who deserves $3.6 million in life insurance proceeds: the family of a Lincoln businessman implicated in a multimillion-dollar fraudulent loan scheme, or the financial institutions ripped off by Aaron Marshbanks?

That question was argued Friday in court as the effort continues to resolve more than $34 million in claims against the Marshbanks estate made by banks, savings and loans and credit unions that loaned him money.

The collateral claimed by Marshbanks and his financial adviser in obtaining the loans was fictitious, and legal claims poured in to recover unpaid loans after Marshbanks was found dead inside his car in a downtown Lincoln parking garage in November 2022.

The official cause of death was a drug overdose , though Lincoln police said that a suspected suicide note was found.

Estate settlement moving slowly

Since then, the FBI and the Nebraska Department of Banking and Finance have investigated whether charges should be filed against any associates of Marshbanks, and the settlement of his estate has been slowly moving through the Lancaster County Court.

About $9.7 million in assets have been found so far to partially pay off the $34 million in approved claims still outstanding against the estate.

On Friday, arguments were submitted over who deserves to benefit from six life insurance policies, worth a total of $3.6 million, that Marshbanks took out in the years before he died.

In 2021, according to court records, Marshbanks named a family trust as the beneficiary of the policies.

Trust says creditors are paid first

Amy Jorgensen, an Omaha lawyer representing a special administrator appointed to round up assets and pay off creditors, said the trust clearly states that the trustee shall “pay the allowed claims” of the estate — the banks — prior to paying the beneficiaries, who in this case are Marshbanks’ wife and his four children.

However, the lawyer representing Jennifer Marshbanks, the widow, argued Friday that the trust was set up to benefit the family and that state law makes life insurance proceeds exempt from paying off creditors unless there was an explicit waiver of that exemption.

It is “discretionary” and not “mandatory” that the insurance proceeds can be used to pay creditors, said attorney William Lindsay of Omaha.

Because there was no “written assignment” allowing the use of the life insurance proceeds to pay creditors, the proceeds should go the family, he said, “the primary beneficiaries of the trust.”

Lancaster County Judge Holly Parsley took the case under advisement. It was unclear when she might rule.

Dozens of loans, dozens of LLCs

Investigators have said Marshbanks took out dozens of loans of up to $2 million and more from financial institutions in Nebraska, Iowa, Wyoming and Louisiana.

He invested in residential properties, primarily, renovating them and then renting them, under dozens of limited liability corporations he formed with names like 1 Chronicles 29:11 LLC which refers to a Bible verse, and Heavy Ventures LLC, which was set up by a Wyoming lawyer who specializes in cryptocurrency.

Millions of dollars in claims against the estate have been settled in cases where properties were put up as collateral.

A multimillion-dollar luxury home and “barndominium” complex Marshbanks was building east of Lincoln was purchased back by the bank that loaned him the money for it. It was sold, at a loss, to investors.

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Paul Hammel

Senior Reporter Paul Hammel covered the Nebraska state government and the state for decades. Previously with the Omaha World-Herald, Lincoln Journal Star and Omaha Sun, he is a member of the Omaha Press Club's Hall of Fame. He grows hops, brews homemade beer, plays bass guitar and basically loves traveling and writing about the state. A native of Ralston, Nebraska, he is vice president of the John G. Neihardt Foundation.

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