loan collateral assignment

Collateral assignment of life insurance

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Secured loans are often used by individuals needing financial resources for any reason, whether it’s to fund a business, remodel a home or pay medical bills. One asset that may be used for a secured loan is life insurance. Although there are pros and cons to this type of financial transaction, it can be an excellent way to access needed funding. Bankrate’s insurance editorial team discusses what a collateral assignment of life insurance is and when it might—or might not—be the best loan option for you.

What is collateral assignment of life insurance?

A collateral assignment of life insurance is a method of securing a loan by using a life insurance policy as collateral . If you pass away before the loan is repaid, the lender can collect the outstanding loan balance from the death benefit of your life insurance policy . Any remaining funds from the death benefit would then be disbursed to the policy’s designated beneficiary(ies).

Why use life insurance as collateral?

Collateral assignment of life insurance may be a useful option if you want to access funds without placing any of your assets, such as a car or house, at risk. If you already have a life insurance policy, it can be a simple process to assign it as collateral. You may even be able to use your policy as collateral for more than one loan, which is called cross-collateralization, if there is enough value in the policy.

Collateral assignment may also be a credible choice if your credit rating is not high, which can make it difficult to find attractive loan terms. Since your lender can rely on your policy’s death benefit to pay off the loan if necessary, they are more likely to give you favorable terms despite a low credit score.

Pros and cons of using life insurance as collateral

If you are considering collateral assignment, here are some pros and cons of this type of financial arrangement.

• It may be an affordable option, especially if your life insurance premiums are less than your payments would be for an unsecured loan with a higher interest rate.
• You will not need to place personal property, such as your home, as collateral, which you would need to do if you take out a secured loan. Instead, if you pass away before the loan is repaid, lenders will be paid from the policy’s death benefit. Any remaining payout goes to your named beneficiaries.
• You may find lenders who are eager to work with you since life insurance is generally considered a good choice for collateral.
• The amount that your beneficiaries would have received will be reduced if you pass away before the loan is paid off since the lender has first rights to death benefits.
• You may not be able to successfully purchase life insurance if you are older or in poor health.
• If you are using a permanent form of life insurance as collateral, there may be an impact on your ability to use the policy's cash value during the life of the loan. If the loan balance and interest payments exceed the cash value, it can erode the policy's value over time.

What types of life insurance can I use as collateral for a loan?

You may use either of the main types of life insurance— term and permanent —for collateral assignment. If you are using term life insurance, you will need a policy with a term length that is at least as long as the term of the loan. In other words, if you have 20 years to pay off the loan, the term insurance you need must have a term of at least 20 years.

Subcategories of permanent life insurance, such as whole life , universal life and variable life, may also be used. Depending on lender requirements, you may be able to use an existing policy or could purchase a new one for the loan. A permanent policy with cash value may be especially appealing to a lender, considering the added benefit of the cash reserves they could access if necessary.

How do I take out a loan using a collateral assignment of life insurance?

If you already have enough life insurance to use for collateral assignment, your next step is to find a lender who is willing to work with you. If you don’t yet have life insurance, or you don’t have enough, consider the amount of coverage you need and apply for a policy . You may need to undergo a medical exam and fill out an application .

Once your policy has been approved, ask your insurance company or agent for a collateral assignment form, which you will complete and submit with your loan application papers. The form names your lender as an assignee of the policy—meaning that they have a stake in its benefits for as long as the loan exists. You will also name beneficiaries or a single beneficiary, who will receive whatever is left over from the death benefits after the loan is repaid.

Note that you will need to stay current on your life insurance premium payments while the collateral assignment is active. This will be stated in the loan agreement, and failure to do so could have serious repercussions.

Alternatives to life insurance as collateral

If you are considering a collateral assignment of life insurance, there are a few alternative funding options that might be worth exploring. Since many factors determine each option, working with a financial advisor may be the best way to find the ideal solution for your situation.

Unsecured loan

Depending on your situation, an unsecured loan may be more affordable than a secured loan with life insurance as collateral. This is more likely to be the case if you have good enough credit to qualify for a low-interest rate without having to offer any type of collateral. There are many different types of unsecured loans, including credit cards and personal loans.

Secured loan

In addition to life insurance, there are other items you can use as collateral for a secured loan . Your home, a car or a boat, for example, could be used if you have enough equity in them. Typically, secured loans are easier to qualify for than unsecured, since they are not as risky for the lender, and you are likely to find a lower interest rate than you would with an unsecured loan. The flip side, of course, is that if you default on the loan, the lender can take the asset that you used to secure it and sell it to recoup their losses.

Life insurance loan

Some permanent life insurance policies accumulate cash value over time that you can use in different ways. If you have such a policy, you may be able to partially withdraw the cash value or take a loan against your cash value. However, there are implications to using the cash value in your life insurance policy, so be sure to discuss this solution with a life insurance agent or your financial advisor before making a decision.

Home equity line of credit (HELOC)

A home equity line of credit (HELOC) is a more flexible way to access funds than a standard secured loan. While HELOCs carry the downside of risking your home as collateral, you retain more control over the amount you borrow. Instead of receiving one lump sum, you will have access to a line of credit that you can withdraw from as needed. You will only have to pay interest on the actual amount borrowed.

Frequently asked questions

What is the best life insurance company, what type of loans are collateral assignments usually associated with, what are other common forms of collateral, what are the two types of life insurance assignments, related articles.

What is an irrevocable beneficiary?

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• Definitions

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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Collateral Assignment of Life Insurance: Everything You Need to Know

• August 4, 2024

Written by:

Bella Gonzalez

Reviewed by:.

Jake Tamarkin, MBA

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

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

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

Who can benefit from the collateral assignment of life insurance?

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

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

What types of life insurance can be used as collateral?

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

How to use life insurance as collateral for a loan?

1. Ensure the lender accepts life insurance as collateral.

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

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

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

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

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

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

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

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

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

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

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

Is the collateral assignment of the life insurance agreement permanent? 

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

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

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

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Disclaimer : The comments, opinions, and analyses expressed at Everyday Life are for informational purposes only and should not be considered individual investment, legal or tax advice.

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What Is 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.

Life Insurance Collateral Assignment [Pros and Cons]

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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.

Consult with an 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:

• – 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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What Is A Collateral Assignment Of Life Insurance?

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A collateral assignment is sometimes a necessity if you’re applying for larger financing amounts such as a mortgage or business loan.

But what is a collateral assignment and how do you go about getting it on your life insurance policy? 

In this article, we’ll cover what collateral assignment is, how you can add it to your life insurance, and what alternatives there are out there. 

What Is Collateral Assignment? 

A collateral assignment is a process by which a person uses their life insurance policy as collateral for a secured loan.

In simple terms, collateral assignment is reassigning priorities for who gets paid the death benefit of your life insurance policy.

What Is a death benefit?

A death benefit or face value of a life insurance contract is the amount of money that your beneficiaries will receive from your policy when you die.

Once you apply for collateral assignment and it’s approved, your specified debtor (the loan provider) will be paid first and then your beneficiaries will receive what is left over in your life insurance policy.

This is different from using your cash value to loan money as you are taking out a loan from another financial institution and using your policy as a guarantee that you’ll cover any debt when you die. 

For example, let’s say you want to take out a secured loan from your local bank and want to use your life insurance policy as a collateral assignment.

In this situation, you’d still have to pay back any debt you have with interest during the loan period. 

However, the life insurance policy would be used if the borrower dies and there was an outstanding loan balance remaining. 

Secured Loans vs. Unsecured Loans

Secured loans are debts that are backed by assets that a lender can claim if the debt isn’t repaid. These types of loans often offer better interest rates and more generous payment terms.

Unsecured loans are debts that don’t have collateral. These types of loans are more expensive to repay and considered riskier than secured loans.

Source: Pexels

How Does Applying for Collateral Assignment Work?

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

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

There is an:

Application process.

Underwriting process.

Offer that you’ll receive.

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

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

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

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

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

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

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

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

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

What about Missed Payments and Cash Value Life Insurance?

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

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

Who Can You Add as a Collateral Assignee?

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

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

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

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

Common Collateral Assignees Include:

💵 Bank loans

💳 Credit cards

🏡 Mortgages

💼 Business loans

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

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

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

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

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

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

Tips to Make Sure Your Life Policy Is Paid Out Quickly

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

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

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

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

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

The Benefits of Using Collateral Assignment of Life Insurance

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

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

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

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

What Are Some Alternatives to Collateral Assignment?

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

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

What Is Term Life?

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

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

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

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

What Is Cash Value?

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

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

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

Our Verdict on Collateral Assignment

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

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

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

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

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

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

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

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

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

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

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

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

Where Can I Learn More about Life Insurance?

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

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

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

Collateral Assignment

Jump to section.

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

Key Purposes of a Collateral Assignment

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

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

Steps to Execute a Collateral Assignment

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

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

Benjamin W.

Key Terms for Collateral Assignments

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

Final Thoughts on Collateral Assignments

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

If you want free pricing proposals from vetted lawyers that are 60% less than typical law firms, click here to get started. By comparing multiple proposals for free, you can save the time and stress of finding a quality lawyer for your business needs.

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

Meet some of our Collateral Assignment Lawyers

Emmanuel K.

I am a corporate Attorney licensed in the state of Georgia and Ghana. My professional career started in 2016 as a litigator in a private law firm in Ghana. Subsequently in 2018, I moved in house to work for the University of Ghana and this is where my corporate transactional work experience began. Since coming to the US in 2019, I have gained significant transactional experience through internships at Verizon and Tricentis (a software testing company) during law school at UGA. Since graduating from UGA law school, I have worked as a corporate transactional attorney of an AmLaw 200 firm. In that role, I helped foreign companies entering the US market to establish a presence and comply with applicable corporate laws while doing business. I also assisted customers and service providers in the software and technology industry by reviewing SaaS and similar contracts. Also, I helped energy utilities in the renewable energy space navigate regulatory and policy issues and establish contractual business relationships through contract reviews.

Merry Kogut is a licensed attorney based in Washington State who has been a legal expert on JustAnswer since 2008 specializing in employment law, consumer protection and discrimination issues. She has been an attorney handling WA State phone consultations for Arag Legal Insurance since April, 2023. She has also been an attorney in private practice since 1986, and was in-house legal counsel for multiple WA State government agencies. She brings nearly 50 years combined legal and professional writing experience. Earlier in her career, Merry served as a law clerk for the Washington State Court of Appeals, and as a discrimination specialist, investigator and legislative liaison. She also helped establish the “Legal Writing Institute,” a national association of legal writing instructors and administrators. Merry earned her law degree from the Seattle University (formerly University of Puget Sound) School of Law.

Helping small business owners meet their legal needs.

Mr. McElvenny has extensive experience handling and developing strategy for complex commercial and real estate cases. He’s drafted hundreds of complaints ranging from simple breaches of contract to complex commercial claims including breach of fiduciary duty, constructive trusts and misappropriation of trade secrets. He has an excellent record in trial, arbitration and mediation. He also has significant experience in motion practice in both state and federal court. Through his work in corporate law, Mr. McElvenny has developed considerable experience with Limited Liability Company member disputes and general corporate governance. He’s drafted a number of industry-specific documents such as Operating Agreements (for Limited Liability Companies), commercial leases, settlement agreements and employment contracts. Mr. McElvenny has also represented criminal defendants in felony matters and assisted in the defense of civil matters arising from alleged SEC violations. He has represented individuals appearing before the Illinois Department of Professional Regulation as a result of SEC proceedings. After graduating with a B.A. in Philosophy, Mr. McElvenny proceeded from Loyola University-Chicago to DePaul University College of Law, receiving his JD from that institution in 2002. In 2010, he earned his Master’s of Science in Accounting from Loyola University-Chicago’s Graduate School of Business. Mr. McElvenny was selected to Illinois’ Super Lawyers Rising Stars in 2010, 2012 and 2013.

Marykaren R.

I provide legal advice and guidance on complex privacy laws and regulations including: Privacy Policies, incident response & state data breach notification laws, privacy risk and risk assessments, PIAs/DPIAs, contracts, and policies and procedures to help build consumer trust and ensure compliance. I am successful by encouraging collaboration with stakeholders to ensure a successful and sustainable program.

Led by Tamla N. Lloyd, Esquire, our firm prioritizes a client-centered approach and aim to provide comprehensive, personalized services to help clients achieve their legal goals.

Born and raised in St. Louis, MO. Bachelors Degree from the University of Iowa. Masters Degree from the University of Melbourne. J.D. from the University of Kansas. Licensed to practice law in Missouri and Kansas. Tennessee currently pending.

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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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Melissa Wylie

Content and SEO Manager

Melissa Wylie is the Content and SEO Manager at MoneyGeek, with nearly a decade of editorial experience and six years of work in financial content focused on small businesses. She previously held SEO positions at Bankrate and LendingTree, with bylines on ValuePenguin and MagnifyMoney. Wylie has a journalism degree from the University of North Texas. Her strong foundation in journalism helps her craft content that simplifies complex financial topics to help everyone feel confident when making decisions with their money.

Victoria Copans

Victoria Copans is a professional writer, editor and translator. She previously worked as the managing editor for online events industry publication XLIVE. As a self-described budgeting nerd, she was drawn to the personal finance space to help share important and useful information that people may not otherwise have access to. In her free time, she loves to travel, learn languages and explore the beautiful nature in her home of Vermont.

Updated: July 23, 2024

Advertising & Editorial Disclosure

• 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

Policyholders can use life insurance as collateral when taking out a loan, allowing you to access funds by assigning a portion or all of your policy's death benefit to a lender as collateral. You may use the cash value component if you have a permanent policy.

Although the collateral assignment of life insurance can provide financial flexibility among other benefits, it requires careful consideration of all variables, such as the type of life insurance policy, terms and individual financial needs. Comparing it to alternative options can also help you decide if you should use life insurance as collateral for a loan.

How Collateral Assignment of Life Insurance Works

• Advantages and Drawbacks of Using Life Insurance as Loan Collateral

Life Insurance Types That Can Act as Collateral

How to use life insurance as loan collateral, alternatives to life insurance as collateral, when to use life insurance as collateral, faq about collateral assignment of life insurance, key takeaways.

Collateral assignment of life insurance involves using a life policy as security for a loan, ensuring that the lender will be repaid if the borrower defaults.

Although you can use term life insurance as collateral in some cases, permanent life insurance policies like whole and universal life can act as collateral more effectively as they build cash value.

Utilizing life insurance as collateral may be a good choice for individuals who need access to funds but want to keep assets private. Collateral assignment of life insurance may also offer potential tax benefits and lower interest rates.

Collateral assignment of life insurance is a legal agreement where the policyholder assigns a portion or all of the policy's death benefit or cash value to a lender as collateral for a loan. This arrangement provides the lender with security, knowing that if the borrower defaults, the lender can claim the amount due from the death benefit.

The amount you can borrow under a collateral assignment life insurance agreement generally depends on negotiations between you and the lender, factoring in the policy’s death benefit amount, its duration and your creditworthiness. Banks and other lenders that accept life insurance as collateral consider these elements to determine loan eligibility and terms.

Understanding the definition of collateral assignment and the role of a collateral assignee is pivotal in navigating this financial strategy. The assignment of a life insurance policy as collateral underlines the borrower's responsibility to keep the policy in good standing.

Collateral Assignee Definition

A collateral assignee in life insurance refers to the lender or financial institution that holds the rights to a portion or the entire death benefit of a policy as security under a collateral assignment life insurance agreement. This entity can claim the assigned benefits if the borrower defaults.

Collateral Beneficiary Definition

A collateral beneficiary is an entity designated to receive specific benefits from a life insurance policy under a collateral assignment. Unlike the primary beneficiary, who is entitled to the remainder of the death benefit post-loan settlement, the collateral beneficiary directly benefits from the insurance arrangement related to the terms of a loan or financial obligation secured by the policy. In the context of collateral assignment of life insurance, the collateral assignee effectively acts as a collateral beneficiary.

Absolute Assignment vs. Collateral Assignment

There are two assignment options related to life insurance policies: absolute and collateral.

Absolute assignment refers to the complete transfer of all rights, ownership and control of a life insurance policy from the current policy owner (assignor) to a new owner (assignee). This transfer is permanent and irrevocable. After the assignment, the original owner has no further rights or control over the policy. The new owner can change beneficiaries, borrow against the policy or even surrender the policy for its cash value. Absolute assignments may be useful in estate planning, business agreements or fulfilling contractual obligations.

Collateral assignment , on the other hand, is a temporary and often revocable arrangement. The policyholder retains ownership and control over the policy but agrees that the lender has a claim to a part of the death benefit if the loan is not repaid. Unlike absolute assignment, the policyholder continues to have rights over the policy in collateral assignments, subject to the terms of the loan agreement.

Tax Implications of Using Life Insurance as Collateral

Loans secured through collateral assignment of life insurance are generally not considered taxable income, as you are borrowing against your own asset. However, there are situations where tax liabilities may apply:

Failure to Repay the Loan : If you fail to repay the loan and the policy lapses, the outstanding loan amount could be considered income, subject to regular income tax.

Exceeding Cash Value : If the amount you borrowed exceeds the policy's cash value, the excess could be considered a distribution and might be taxable.

Surrendering the Policy : If you surrender the policy with an outstanding loan, the total amount borrowed minus premiums paid could be considered taxable income.

Death of the Policyholder : If the policyholder dies with an outstanding loan, the death benefit paid to beneficiaries may be reduced by the loan amount. The reduced amount is generally not taxable, but the loan interest might be.

Understanding the tax implications of assigning a life insurance policy as collateral helps ensure informed financial decisions.

Pros and Cons of Using Life Insurance as Loan Collateral

Using life insurance as collateral for a loan is a strategy that can provide financial leverage in various situations, but it's not without its risks. Below, we highlight some of the advantages and drawbacks of this approach.

Advantages of Using Life Insurance as Collateral:

Access to Funds Without Selling Assets : By using life insurance as collateral, you can access funds without having to sell or liquidate other assets. This allows you to retain your investments and other valuable possessions while obtaining the necessary capital.

Potential Tax Benefits : Depending on individual circumstances, loans against life insurance may offer a tax advantage since the borrowed amount is generally not considered taxable income.

Maintaining Life Insurance Coverage : Collateral assignment of life insurance allows you to keep the coverage. The death benefit remains intact (minus the loan amount if not repaid), providing continued protection for your beneficiaries.

Lower Interest Rates : Loans secured with life insurance as collateral may offer lower interest rates compared to unsecured loans. The collateral provides security for the lender, often resulting in more favorable loan terms.

Easier Access : Since the life insurance policy secures the loan, lenders may not require a credit check or a lengthy approval process. This can make accessing funds quicker and more accessible, especially for those with less-than-perfect credit.

Customizable Repayment Terms : Typically, borrowers can customize the repayment terms for loans using life insurance as collateral to fit their financial situation. Whether you need short-term financing or a longer repayment period, you may find options that align with your needs.

Potential for Continued Growth : If you have a whole or universal life insurance policy, the cash value may continue to grow even when you use it as collateral. This growth can offset interest costs and contribute to the policy's overall value.

Drawbacks of Using Life Insurance as Collateral:

Impact on Beneficiaries : Collateral assignment of life insurance may reduce the death benefit available to beneficiaries. If the loan remains unpaid at the time of the policyholder's death, the lender will receive the outstanding amount, and only the remaining benefit will go to the beneficiaries.

Unexpected Tax Liabilities : Mismanagement of collateral loans on life insurance, such as failure to repay or allowing the life insurance policy to lapse with an outstanding loan, may lead to unexpected tax liabilities. For example, if the policy lapses with an outstanding loan, the total amount you borrowed minus the premiums you paid may be considered taxable income.

Risk of Policy Lapse : If the loan interest accumulates and is not paid, it could reduce the cash value and eventually lead to a policy lapse. Losing life insurance coverage could have significant consequences, especially if obtaining a new policy is difficult or more expensive due to age or health conditions.

Possible Restrictions on Policy Changes : Some collateral assignments may include terms restricting the policyholder's ability to make certain changes to the policy without the lender's consent. This could limit flexibility in managing the policy according to changing needs or circumstances.

Interest Accumulation : Interest on the loan will typically accumulate, and if not managed properly, it can become a significant financial burden. Understanding the interest rate and having a clear plan for managing the interest will help you avoid unexpected financial strain.

Reduced Investment Growth : For policies with a cash value component, borrowing against the policy may reduce the cash value's growth potential. This could impact the policy's investment performance and reduce its overall benefits over the long term.

Understanding these potential pitfalls and benefits can help you make an informed financial decision when considering your options for collateral.

Before using life insurance as collateral for a loan, you should know which types of policies are suitable for this purpose. Generally, you can use the following types of life insurance as collateral:

Whole Life Insurance : This provides permanent coverage, meaning it lasts for the insured's entire life as long as you pay premiums. One of the key features of whole life insurance is the cash value component, which grows over time on a tax-deferred basis. This cash value can be used as collateral for a loan, providing a source of funds you can access without surrendering the policy.

Universal Life Insurance : This permanent life insurance offers more flexibility in premiums and benefits. Like whole life insurance, universal life also builds cash value that you can use as collateral. However, universal life policies often include variable interest rates on the cash value, which may lead to fluctuations in the amount available for borrowing.

Term Life Insurance : Unlike whole and universal life insurance, term life insurance doesn't build cash value. It provides coverage for a specific term, such as 10, 20 or 30 years. While it's generally not used for borrowing against the cash value, you can still use term life insurance in collateral assignment in some cases. The lender may agree to accept the death benefit as collateral, and the loan amount would be based on the death benefit's value and the lender's willingness to lend against it. Specific terms depend on negotiations with the lender.

Identifying the right type of life insurance to use involves understanding the nuances of each policy type, including their capacity to serve as insurance collateral.

Using life insurance as collateral for a loan involves coordinating with the insurer and the lender. Here's a comprehensive guide to the process:

Contact Your Insurer

The first step in the collateral assignment of life insurance is to contact your insurance company to discuss the possibility of using your policy as collateral. They will provide the necessary paperwork and guide you through the requirements. This step may include supplying details about the policy, the intended lender and the loan amount. Ensure that your policy qualifies for collateral assignment and follow the insurer's specific procedures.

Find a Lender

Not all lenders are willing to accept life insurance collateral assignments, so you need to find a suitable lender. Discuss your intentions with potential lenders, understand their requirements and ensure they are comfortable with the collateral assignment process. This step may involve negotiating the loan terms, including interest rates and repayment schedules.

Know the Loan Terms and Compare With Other Options

Understand the loan terms, including the interest rate, repayment schedule and any conditions related to the collateral assignment. Consider comparing these terms with other loan options to ensure that using life insurance as collateral is the best choice for your situation.

Complete the Collateral Assignment Form

Once you've agreed to the terms with the lender, you'll need to complete a collateral assignment of life insurance form. This legal document outlines the specifics of the agreement. Both the policyholder and the lender must sign this form.

Submit the Form to the Insurer

After completing and signing the collateral assignment form, submit it to the insurance company for processing. The insurer will review the form, ensure you meet all requirements and then formally record the collateral assignment. This step makes the agreement legally binding.

Monitor the Loan and Policy

Keep track of loan payments, interest accumulation and any changes in the policy's cash value or death benefit. Regular monitoring helps ensure that the loan and the policy remain in good standing.

Repay the Loan

Repaying the loan according to the agreed-upon schedule will maintain the coverage. Remember that failure to repay the loan could lead to reduced death benefits or tax implications.

What to Expect in a Collateral Assignment of Life Insurance Form

A collateral assignment of life insurance form is a key document containing the following important details about using your life insurance as collateral for a loan.

Policy Identification : This section includes specific policy details, such as the policy number, the insured's name and the coverage amount.

Collateral Assignee Information : This part provides comprehensive information about the lender, including name, address and contact details.

Terms and Conditions of the Assignment : This outlines the specifics of the agreement, such as the loan amount, interest rate and any special conditions or requirements.

Signatures of Owners and Assignees : Signatures from both the policyholder and the lender are necessary for legal validation, confirming agreement to the terms.

Familiarizing yourself with these documents is a key step to preparing for the process of collateral assignment.

Other Ways to Use Life Insurance for a Loan

If using life insurance as collateral for a loan is not for you, you may explore other ways to access funds with your policy.

Life Insurance Loan (Policy Loan) : A policy loan allows you to borrow directly against the cash value of a permanent life insurance policy, such as whole or universal life. This loan doesn't require a credit check, and the interest rates are often competitive. The loan amount is limited to the policy's cash value minus any existing loans or withdrawals. While this option provides quick access to funds, failure to repay the loan can reduce the death benefit and lead to tax implications.

Surrendering Your Policy : Surrendering a life insurance policy means giving up the policy in exchange for its cash surrender value . This option provides a lump sum that you can use as needed but also means losing the death benefit and any future growth potential. Surrender charges may apply, especially if the policy is surrendered in the early years.

Consider your options for accessing funds through your insurance policy and determine if other avenues better suit your circumstances.

While using life insurance as collateral can be viable, other financial solutions may be a better fit. Here's a closer look at some alternatives:

HELOC (Home Equity Line of Credit) : A HELOC allows you to borrow against the equity in your home. It offers a revolving line of credit with variable interest rates, allowing you to borrow as needed. However, it puts your home at risk if you fail to repay.

Home Equity Loan : A home equity loan allows you to borrow against your home's value and typically comes with fixed interest rates. It provides a lump sum suitable for large, one-time expenses.

Unsecured Loan : An unsecured personal loan doesn't require collateral, making it a less risky option for your assets. Interest rates may be higher, and credit requirements more stringent, but it doesn't directly impact your life insurance or other valuable assets.

Annuity as Collateral : An annuity is a financial product that provides regular income payments and is often used in retirement planning. If you have an annuity, you may be able to use it as collateral for a loan. This option can provide access to funds without affecting life insurance benefits, but understanding the terms and potential implications is crucial.

Laying out all your options for accessing necessary funds will assist you in making a more informed financial decision, allowing you to weigh the advantages and risks of different scenarios.

Life insurance as collateral for a loan may be a good choice if you have a whole or universal life insurance policy with sufficient cash value, need access to funds without selling other assets and are comfortable with the potential risks and terms of the loan. It may provide financial flexibility, potential tax benefits and lower interest rates than unsecured loans.

On the other hand, collateral assignment of life insurance may not be the best choice if you have a term life insurance policy without cash value or are concerned about the impact on beneficiaries if the potential risks and complexities outweigh the benefits for your specific situation. Alternative options like a HELOC, home equity loan or unsecured personal loan might be more suitable depending on your needs and risk tolerance.

Careful consideration and comparison of alternative options will help you determine if a collateral assignment of life insurance is right for you. You may also consult with financial advisors, tax professionals or legal experts for guidance and to understand the specific implications of using this financial strategy for your situation.

Navigating the specifics of collateral assignment of life insurance can raise several questions. This section aims to clarify common inquiries, ensuring you understand how this financial strategy can impact your loan and insurance policy.

A collateral assignment is a legal agreement in which a life insurance policy's benefits are assigned to a lender as insurance collateral for a loan.

The collateral assignee is the lender in a collateral assignment agreement. It holds a secured interest in the death benefit of a life insurance policy until the loan is fully repaid.

The collateral in a life insurance policy loan typically refers to the cash value. This value secures the loan and ensures the lender can reclaim their funds if the borrower defaults.

Collateral assignments are typically associated with loans where borrowers want to secure financing without selling assets. They use the value of their life insurance policy as security for the loan.

In a life insurance contract , a collateral assignment ensures that the lender receives payment from the death benefit if the borrower fails to repay the loan without transferring full ownership of the policy to the lender.

Collateral assignments are temporary and allow the borrower to retain ownership and control over the policy, whereas absolute assignments permanently transfer all rights, ownership and control to another party.

If a bank loan application requires collateral, the policy owner can opt for a collateral assignment of life insurance, assigning their policy as security to meet the bank's requirements. This is subject to approval by lenders that accept life insurance as collateral.

Only the policy owner, who holds the rights to the life insurance policy, is authorized to assign it as collateral. This process involves filling out a collateral assignment of life insurance form and providing a copy of the insurance policy on collateral to the collateral assignee.

Many financial institutions and banks that accept collateral assignments provide loans that allow the use of life insurance. These lenders assess the policy’s value and terms before approving the loan.

Yes, whole life insurance is commonly used as collateral due to its inherent cash value accumulation. Collateral loans on life insurance like these can provide a solid basis for securing a loan.

Typically, annuities can be used as collateral for loans. However, this depends on the terms of the annuity and the lender's willingness to accept it as security. Like life insurance, the annuity must have a sufficient value to cover the loan.

About Melissa Wylie

Melissa Wylie is the Content and SEO Manager at MoneyGeek, with nearly a decade of editorial experience and six years of work in financial content focused on small businesses. She previously held SEO positions at Bankrate and LendingTree, with bylines on ValuePenguin and MagnifyMoney.

Wylie has a journalism degree from the University of North Texas. Her strong foundation in journalism helps her craft content that simplifies complex financial topics to help everyone feel confident when making decisions with their money.

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What is a Collateral Assignment of Mortgage and How Do You Handle It?

Imagine you're ready to insure the sale of a property, from Vincent L. Gambini to Mona Lisa Vito. Everything seems straightforward – there's a mortgage to be satisfied, but that's standard procedure. However, the title commitment mentions an additional requirement: a "Collateral Assignment of Mortgage" involving Wahzoo City Bank and Brooklyn Bank.

What's a Collateral Assignment? Think of it as a loan within a loan. Wahzoo City Bank didn't simply sell the Gambini mortgage, they used it as collateral to secure their own loan from Brooklyn Bank. So, Brooklyn Bank has a stake in the transaction.

Why Does This Matter? Is a simple mortgage satisfaction enough? No, you need both. The Collateral Assignment of Mortgage served as security for a loan from Brooklyn Bank to Wahzoo City Bank. Simply satisfying the Gambini mortgage doesn't clear Brooklyn Bank's interest. They need to be satisfied too, either through:

• Satisfaction of the Collateral Assignment: Brooklyn Bank acknowledges they no longer have a claim on the mortgage.
• A Reassignment: Brooklyn Bank assigns their interest in the Gambini mortgage back to Wahzoo City Bank.

Watch Out for Hidden Assignments The document might not be titled "Collateral Assignment" – it could just be an "Assignment of Mortgage." Don't be fooled. Carefully review the document's content. Was it an absolute transfer of the underlying loan, or was it used as collateral to the assignor? Remember, a little extra vigilance can save you a big headache down the road.

Whether you’re dealing with a complex commercial transaction or a property sale with collateral assignment, it’s crucial to have a dependable underwriter to help you navigate the complexities that arise in real estate transactions. If you encounter a situation like this, or anything else seems unclear in the title search, don’t hesitate to contact your underwriter or Stewart agency representative. We’re here to support you and ensure a smooth closing for you and your clients.

For more information, reach out to your local Stewart representative or visit virtualunderwriter.com for up-to-date information on the latest in underwriting.

If you are a Stewart Trusted Provider, feel free to contact your Stewart underwriting counsel with questions.

Interested in more? Check out these articles. General Requirements to Insure a Leasehold Estate Navigating Title Insurance for Submerged Lands and Shorelines Wire Fraud 101: What is Wire Fraud and How Can You Help Prevent It? Protect Sellers From Loan Modification Claims

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How to handle the accounting for collateral assignment split-dollar life insurance plans.

By Marc Giampaola , Director, Assurance Services & Michael Parillo , Senior Manager, Managed Services & Consulting

Split-dollar life insurance is an arrangement between two parties to share the costs and benefits of a permanent insurance policy. Often these arrangements are between an employer (the “company”) and an employee (the “executive”), involving a whole life or indexed universal life (“IUL”) policy. Companies generally use the policies as a Supplemental Executive Retirement Plan (“SERP”), which are considered non-qualified benefit plans.

The two most common types of split-dollar life insurance arrangements are endorsement and collateral assignment, which are defined based on which party controls the policy. Within these agreements, there are multiple documents executed, most commonly:

• Life insurance policy – Issued by the insurance company to the policy owner on the life of the insured.
• Split-dollar agreement – Agreement between employer and employee providing details of the agreement.
• Promissory note – A loan issued by the company to the employee for the cost of the policy.

Endorsement split-dollar life insurance is an employer-owned policy that endorses some or all of the death benefits to the employee’s beneficiary. The employer owns and controls the policy and, therefore, makes all policy decisions (i.e., surrender). A separate agreement is entered into between the employer and employee to define the split of costs and benefits between the two parties.

Collateral assignment split-dollar life insurance policies are owned by the employee with some benefits assigned to the employer. The employee owns and controls the policy while the employer makes the premium payments. Premiums are loans to the employee. Some level of interest on the amount borrowed must be paid. The employer is ultimately reimbursed for the premiums paid and related interest from the death benefit or the cash surrender proceeds.

There are different types of collateral assignment arrangements based on the structuring of the note within the agreement. They are as follows:

• Non-recourse arrangements rely solely on the underlying insurance policy for all repayment of principal and interest to the employer. The employee, or the employee’s estate, is not responsible for funding any shortfall by the policy to return the premium and related interest; however, any shortfall could be taxable to the employee as forgiveness of debt income.
• Limited recourse arrangements rely primarily on the underlying insurance policy for all repayment of principal and interest owed to the employer. However, if there is a shortfall, the employee or the employee’s estate may be called upon to make up the deficiency. These arrangements generally have terms requiring the employer to seek payment from the life insurance company first; the employee is secondarily liable.
• Full-recourse arrangements are similar to limited-recourse arrangements, with the difference that the employer can seek repayment of the principal and interest from the employee directly if there is a shortfall, without first pursuing any recovery from the life insurer. The employee has substantially the same net liability for any shortfall but would have the burden of satisfying the shortfall and then pursuing recovery from the policy.
• Providing cash to the insurance company and establishing a premium deposit account;
• Establishing a deposit account at a bank or credit union under the employee’s name; or
• Purchasing a single premium immediate annuity (SPIA).

The method of funding has no impact on the accounting, as there is a single loan made to the employee.

Most commonly, companies utilize collateral assignment split-dollar life insurance set up under non-recourse or limited-recourse arrangements. As such, the focus of the accounting section will be on these types of arrangements.

RELEVANT GUIDANCE

• ASC 310: Receivables (“ASC 310”)
• ASC 325: Investments – other (“ASC 325”)
• Loans and investments, November 2020 Edition (“PwC Loans Guide”)

ACCOUNTING FOR SPLIT-DOLLAR ARRANGEMENTS

The accounting for split-dollar arrangements is generally the same regardless of the structure of the agreement. Additionally, whether the promissory note is non-recourse or limited-recourse has no effect on the journal entries recorded over the life of the arrangement.

Recording the Loan at Issuance

In executing the transaction, the employer provides funding for the premium payments of the life insurance policy in exchange for a promissory note from the employee. The transaction meets the definition of a loan as defined by ASC 310-10, which states:

A contractual right to receive money on demand or on fixed or determinable dates that is recognized as an asset in the creditor’s statement of financial position. Examples include but are not limited to accounts receivable (with terms exceeding one year) and notes receivable.

Upon issuance of the loan, the employer provides cash through one of the funding methods described above and establishes a loan receivable from the executive. As an example, assume the defined loan amount is $3.0 million. The value of the loan is measured at issuance equal to the cash outlay by the Company. ASC 310-10-30-2 states:

As indicated in paragraph 835-30-25-4, when a note is received solely for cash and no other right or privilege is exchanged, it is presumed to have a present value at issuance measured by the cash proceeds exchanged.

In these arrangements, the company does not provide any other right or privilege. The promissory note is received in exchange for the cash needed to fund the premiums of the policy. As such, the value of the loan is equal to the cash paid.

The journal entry to record the example transaction is:

Recording the Interest Accrual

Once the loan is established, it begins earning interest based on the note rate, typically the long-term Applicable Federal Rate for the month and year the agreement becomes effective. Interest compounds annually. In the example transaction, assume an annual interest rate of 2.50%. Each month the company earns interest on the outstanding loan balance, and a journal entry is recorded to accrue interest on the loan. Interest is paid from the death benefit and, therefore, increases the receivable from the executive in each accounting period. The entry below represents the monthly accrual of interest:

(calculated as $3,000,000 loan * 2.5% interest / 12 months)

Recording the Settlement of the Loan

The loan is settled upon death or surrender of the policy. The company is entitled to the value of the original loan and accrued interest from inception. The cash owed to the company is paid from the death benefit or surrender value, with the remainder being paid to the employee (surrender) or the employee’s estate (death). Based on the example, assuming settlement and surrender of the insurance policy 24 months post entering into the policy (i.e., $150,000 interest earned), the entries to record the receipt of cash and settlement of the receivables are as follows:

Other Considerations for Subsequent Measurement

Collectability.

At each period-end, the company needs to analyze the value of the outstanding loan for changes in the valuation. Generally, these loans are considered not held for sale and, therefore, are reported at outstanding principal adjusted for any charge-offs, allowance for loan losses, deferred fees, and unamortized premiums or discounts based on ASC 310-10-35-47, which states:

Loans and trade receivables that management has the intent and ability to hold for the foreseeable future or until maturity or payoff shall be reported in the balance sheet at outstanding principal adjusted for any chargeoffs, the allowance for loan losses (or the allowance for doubtful accounts), any deferred fees or costs on originated loans, and any unamortized premiums or discounts on purchased loans.

Additionally, the company should analyze at each period-end any probable collection issues and the need for an allowance that would reduce the asset balance.

Value of the Loan

With an insurance policy securing the loan, further consideration is needed to determine the value of the loan. For endorsement arrangements, the employer owns the policy and, therefore, owns the surrender decision. The company values the loan at the lesser of the premiums paid or cash surrender value of the policy as of the period end date. This amount can generally be obtained from the statement provided by the insurance company.

For collateral assignment arrangements, the employee owns the policy, so the company does not control the surrender decision. However, the company does maintain the right to collect on the loan under the collateral assignment. Therefore, the company may need to consider the cash surrender value of the policy when determining the value of the loan. ASC 325-30-35-1 states:

An asset representing an investment in a life insurance contract shall be measured subsequently at the amount that could be realized under the insurance contract as of the date of the statement of financial position…

Depending on the type of note used in the agreement–non-recourse or limited-recourse– when determining the carrying value of the loan at each period-end.

Limited-Recourse

For limited-recourse, the loan is secured by the cash surrender value of the insurance policy, but the company also has the option to seek repayment from the employee if the cash surrender value is less than the outstanding loan amount. Since the loan is secured by both the policy and by the employee, the cash surrender value is not the only consideration when determining the value of the outstanding loan. As such, the value of the outstanding loan does not need to be adjusted if the cash surrender value is less than the outstanding loan, and there is no further consideration needed at period-end for these types of arrangements.

Non-recourse

For non-recourse notes, the loan is secured solely by the cash surrender value of the policy and, therefore, potential for a loss related to the loan exists if the cash surrender value is less than the loaned amount. The cash surrender value is the realizable amount of a life insurance contract at any given date. The accounting guidance does not allow a life insurance asset to exceed cash surrender value less an allowance for credit losses. The company is entitled to the premiums paid plus interest earned under these arrangements. The carrying value of the portion of the loan for which premiums were paid would need to consider the cash surrender value. This portion of the loan would be valued by the company as the lesser of the cash surrender value and the cumulative premiums paid by the reporting entity.

This is based on the premise that surrender is not within the control of the company and it is uncertain whether the company will be reimbursed for cumulative premiums paid upon death or surrender. Any premiums paid in excess of this amount should be recorded as an expense.

As an example, if the outstanding loan related to a non-recourse policy was $3,000,000 and the cash surrender value of the policy was $2,500,000, the company would need to reduce the carrying value of the loan to the cash surrender value and recognize a loss related to the loan. The entry below represents how the company would record the adjustment:

While the general accounting for these arrangements is similar, specific details and terms within all documents included in the agreement need to be evaluated when determining the appropriate accounting, and companies should consult their accountant with any questions. Additionally, there are potential individual income tax implications for the executive related to these arrangements that should be considered.

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Collateral assignment of life insurance (explained), most people overlook using term life insurance as collateral for a business loan to start a business. a collateral assignment of life insurance can help get you the nod of approval and keep you moving forward in starting your business., ready to compare quick life insurance quotes.

Your life insurance quotes are always free.

Written by:

Luke Fitzpatrick

Insurance Writer

Luke Fitzpatrick covers blockchain trends on Forbes. He has been published in Yahoo! News, Influencive and Tech In Asia. He is a guest lecturer at the University of Sydney, lecturing in Cross-Cultural Management and the Pre-MBA Program.

Reviewed by:

Tracey L. Wells

Licensed Insurance Agent & Agency Owner

Tracey L. Wells is a licensed insurance agent and Farmers insurance agency owner with 23 years of experience. He is proud to be a local Farmers agent serving Grayson, Georgia and surrounding areas. With experience as both an underwriter and agent, he provides his customers with insight that others agents may not have. His agency offers all lines of insurance including home, life, auto, RV, busi...

UPDATED: Jul 30, 2024

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Starting and growing any type of business requires some degree of capital—for real estate, inventory, office equipment, the list goes on and on. Not too many business owners have enough in their bank accounts to cover those expenses. However, using term life insurance as collateral can have some pitfalls.

The fact that you can use some types of term life insurance for business loan collateral is often overlooked. This article will help you think through whether using term life insurance as collateral for a loan is the best source of funding for your venture.

Unfortunately, qualifying for a loan doesn’t always come easy. Banks are hesitant to make loans to new and unproven businesses unless they can ensure their investment is protected. And, in most cases, loans to new businesses must have some type of collateral to ensure their loan will be paid back.

Of course, business owners usually consider life insurance to protect their businesses. Having life insurance to reduce business risk can protect your business if anything were to happen to key personnel. But, many business owners don’t realize their existing life insurance policies can be a source of collateral.

If you buy life insurance for business loan collateral, it can help get you the nod of approval from lenders by giving them some assurance you won’t default on your payments.

Don’t have life insurance yet? Use our free quote tool and get an optimized and affordable life insurance quote in seconds and then read on to see how you can use your life insurance to get a business loan. Read More: How Life Insurance Works

How Life Insurance is Used for Business Loans: Collateral Assignment

When you take out a loan, the bank that provides the loan creates a repayment plan that can be spread out over a number of years. For the bank to make an investment in a new business, they will want to review your business plan and ensure that your business will make enough money to meet the repayment plan.

But what happens if a new business owner passes away before the loan is repaid? To protect the bank, prior to granting a loan, the bank may require that you assign as collateral the payout of a life insurance policy.

For term life insurance the bank will align the term of the policy with the term of the loan repayment. For instance, let’s say that you take out a $500,000/ 5-year loan to fund your business. The bank may require that you either purchase a new term policy or use an existing term policy for at least 5-years with a payout of at least $500,000.

It is important to understand that you are not putting the bank down as a beneficiary, but that you are assigning a payout to the bank if something were to happen. So, let’s say that you paid down $250,000. If you pass away before the remainder is paid, the $250,000 of the insurance payout will go to pay off the loan, and $250,000 will go to your beneficiary.

If you pursue this type of life insurance, you’ll need to sign a loan collateral assignment form to assign the bank as the recipient of the policy’s death benefit as long as the loan is in effect.

Usually, the bank will work with the insurance company to coordinate the execution of the form.

What types of life insurance policies work for a collateral assignment?

Both permanent and term life insurance policy types can be used for collateral assignment of a business loan. However, as a business owner, it will be much cheaper to pay term life insurance rates for business loan collateral than those for a permanent life insurance policy .

Of course, you might have an existing permanent life insurance policy in place. With a permanent insurance policy, you may also have built up considerable cash value. Using a policy with cash value can make it easier for a bank to make a loan decision.

How to Apply for Life Insurance for Collateral Assignment

When you apply for a business loan, a bank may have certain requirements before approving your loan. One of the requirements might be that you have a life insurance policy in place to collateralize the loan.

If you have an existing policy, the bank will work with your insurance company to complete the collateral assignment paperwork. If you don’t have a policy in place, the bank will work with your insurance company to write a term life policy for the number of years that it will take to repay the loan.

You will still need to go through the formal application process for your life insurance policy, as well as complete a medical exam. If you are denied approval for your policy, you will also be denied the loan.

Because of this, it can save you time by having a policy in place before you apply for a loan.

Absolute and Conditional Assignment

When you apply for a loan, your bank will determine whether you should assign a life insurance policy with an absolute assignment or conditional assignment. In most cases, the type of assignment depends on whether the policy was written in order to get the loan, or whether you had a policy in place already that you would use to collateralize the loan.

If you already have a loan, you will want to conditionally assign the loan to the bank for repayment during the term of the loan. After the loan is repaid, the bank will no longer have a claim for the benefit.

However, if you took out a loan for the specific purpose of collateralizing your loan, you will likely be required to absolutely assign the loan to the bank.

Never Assign Your Bank as the Beneficiary

Remember, the bank is not a beneficiary of the policy, so do not assign them as a beneficiary. They will have a claim to the payout proceeds of the policy in the event of the death of the policyholder prior to the full loan repayment.

The last thing you want is for the bank to have a rightful claim as a beneficiary of the policy. This is because when a beneficiary is paid out, they are entitled to a percentage of the policy.  For a collateral loan assignment, you want the bank only to hold entitlement to the amount of the loan that is outstanding.

So, if a policyholder pays off more of the loan but dies during the term, the policyholder’s family will want to make sure the bank only gets the amount to pay off the remainder of the loan.

A Few Tips to Help You Get the Right Policy

• Inform your agent or broker upfront that you need the policy as loan collateral. That way, they’ll know to prepare for the extra paperwork involved.
• Take out a term life policy that’s long enough to cover the loan repayment period. For example, if you’re getting a 20-year business mortgage loan, you will need a 20-year term life insurance policy.
• Don’t drag your feet! Because most lenders won’t finalize a loan until you’re able to show “proof of policy,” don’t wait until the last minute to talk with a life insurance agent if you don’t already have a policy. On average, it takes four weeks for policy approval. If you have medical conditions, the review process could take longer. Your bank may not want to wait that long.

Note that you can expedite the process of securing life insurance if you opt to apply for a no medical exam term life insurance policy. By going that route, you won’t have to take the paramedical examination otherwise required (if you do have to take the examination, understand what to expect from a life insurance medical exam here). These types of policies generally receive approval within 24 to 48 hours. The drawback is that they cost a bit more because the insurer is assuming more risk.

When to fill out collateral assignment paperwork?

If you are looking to secure funding by using life insurance for a SBA loan, you will need a policy in place first. The bank will want to make sure that you are in good health and can qualify for a policy.

Once you have a policy in place, the bank will review the rest of your loan application. If they choose to provide you a loan, the bank will then work with your insurance company to produce the assignment paperwork.

So, until you know that your loan will be approved, and your policy is in place, you don’t need to worry about assigning the policy.

When does a collateral assignment end?

A collateral assignment will end when the loan is repaid. It’s as simple as that. However, the amount that the bank can claim reduces as you repay your loan.

So, if you took out a loan of $500,000 for a 10-year period, in the last year, the bank wouldn’t be able to claim $500,000 against the policy, but instead would discount the claim for the amount of principal that was repaid against the loan.

Pros & Cons of Collateral Assignments

Collateral assignment to secure a business loan does have benefits and disadvantages. Pros:

• Term life insurance used to secure the loan is inexpensive. And as you pay off the loan, your family has an additional source of security.
• Using the insurance policy as a way to collateralize your loan allows you to free up other assets and cash flows to run your business.
• If you have a permanent insurance policy, your access to use the cash value in the plan will be limited until the loan is repaid.
• Until you repay the loan, you may need additional life insurance to secure your family in addition to the policy used to secure your business.

In the end, however, most banks will require you to secure your loan with a policy. Keeping in good health and securing a policy while you are young will help you qualify for the lowest rates. Check out the rates below to get an idea of how much you might pay for a simple term life policy.

One last benefit is that your premium payments are an expense to the business and are tax-deductible.

Alternatives to Collateral Assignment

In some cases, you won’t have much of a choice but to take out an insurance policy to secure your loan. The bank will insist upon it.

However, you won’t have to if you use some other collateral for the loan. This could be real estate that you own, financial securities like stock and bonds, or simply a cash account with the amount available.

However, in each of these instances, you will lose flexibility in managing these assets since you will have to hold on to them for the life of the loan.  Also, you will need to manage the value of these assets. If they decrease in value, the bank may insist that you come up with additional capital.

If you are struggling to find a bank to provide you with capital, you can reach out to the U.S. Small Business Administration for helpful guidance on funding options.

Using Life Insurance for Business Loan Collateral: The Bottom Line

If you have dreams for your business, and you need funding to help them come true, keep the option of a term life policy as loan collateral in mind as you talk with lenders.

Because of its affordability and flexibility, term life insurance can give the bank the assurance it requires without putting undue strain on your business budget.

The first step is to have a great policy in place at the best price. Start shopping right now by using our free quote generator . Get a custom term life insurance quote for business loan collateral in seconds and save time with the loan process later.

Collateral Assignment of Life Insurance: When Your Bank Wants Your Life Insurance

When your bank wants your life insurance, it’s because it will act as collateral for a loan. Not many people know that banks can ask for life insurance, among other documents, as collateral on a loan. Collateral assignment of life insurance is a sensible form of protection for the bank and is not a new practice at all. Refer to our guide to learn more about banks and collateral assignments of insurance.

Loan application… check. New business plan… check. Updated financial reports verified by your CPA … check. You’ve collected and submitted all the documents and requirements your bank has asked for and now it’s time to collect the cash and get to work. Or, so you think.

Today’s tight lending environment has seen a new trend emerge in business lending. Many banks now require life insurance coverage on borrowers, and possibly on guarantors as well. It’s a sensible form of collateral and protection for the bank and is not a new practice at all. In fact, it used to be common for lenders to require life insurance coverage on borrowers. However, it was also a huge hassle for the borrower. After all, years ago you couldn’t just run out and buy life insurance in a day.

But you can now.

Simplified Issue Term Life Insurance

Enter Simplified Issue Term Life Insurance, also known as No-Medical Exam term life insurance. It’s exactly what the name says it is and it comes in various forms, as life insurance companies scramble to get new products to the market. And the reason is obvious. Life insurance shoppers are buying it. Lots of it.

Simplified Issue Term offers the following benefits:

• No Medical Exam. Standard term life insurance requires a brief paramedical exam . While this is usually not a big deal to most people, it can be for people that are in a hurry or have a needle phobia.
• No Paper Application. The application is typically completed online or by telephone, with either an electronic or voice signature at the end.
• Reduced Wait Time. The entire process, from application to approval to payment, can be completed in as little as 15 minutes! Some applications can take a bit longer, up to 7-10 days. Compare that to regular term life insurance which has an average process time of 3-4 weeks.

Too Good to be True?

So what’s the catch? There isn’t one, but there can be some disadvantages, depending on your circumstances:

• Limited Coverage Amount. The highest amount currently available with any one life insurance company is $500,000. However, it is possible to ‘stack’ policies by purchasing from two or more companies. You just need to make sure you disclose all of your pending applications to each insurer.
• Cost. While not always more expensive, it is in many cases. This is the tradeoff for getting a limited medical review by the life insurance company.
• You May Not Qualify. The medical and background questions you must answer may disqualify you for simplified issue term. This does not necessarily mean you will be declined entirely. Based on your answers, you may be required to apply for regular term life insurance.

So, now you have a brand new term life insurance policy, and you’re ready to hand it over to your loan officer. All finished, right? Not yet. You will also need to complete the assignment paperwork to make the lender a beneficiary on your policy. This assignment establishes the lender as policy beneficiary for an amount equal to the payoff of the loan. Any additional proceeds from the policy after the lender has been paid will be paid to the beneficiary(s) of your choice.

If you are in the market for a business or personal loan , be sure to ask the lender if a life insurance policy as collateral will be necessary. The best thing you can do is shop for a policy early, just in case you can’t qualify for a simplified issue term life policy and you need to go the traditional route.

Case Studies: Using Term Life Insurance as Collateral for Business Loans

Case Study 1: The Start-Up Funding Boost

John, a budding entrepreneur, has a great business idea but lacks the necessary capital to bring it to life. He approaches a bank for a business loan but faces difficulty in securing approval due to the high risk associated with start-ups. However, John owns a term life insurance policy with a substantial death benefit.

By assigning the policy as collateral, John provides the bank with an added layer of security. In the event of his untimely demise, the bank will receive the payout amount to repay the outstanding loan balance. This reassures the lender and increases John’s chances of obtaining the necessary funding to kick-start his business.

Case Study 2: Expansion and Growth

Sarah owns a successful small business and is looking to expand her operations. She plans to apply for a business loan to finance the expansion, but the bank requires collateral to mitigate the risk. Sarah already holds a term life insurance policy and realizes she can leverage it as collateral.

By assigning her policy to the bank, Sarah demonstrates her commitment to repaying the loan. This collateral provides the bank with a safety net in case of unforeseen circumstances. It enhances Sarah’s credibility as a borrower and increases the likelihood of loan approval, enabling her to fuel the growth of her business.

Case Study 3: Mitigating Risk for Established Businesses

Michael runs a thriving business and wants to secure a loan for new equipment to improve efficiency. While his business is well-established, he understands that lenders prefer additional assurance before granting loans. Michael explores the option of using his existing term life insurance policy as collateral.

By assigning his policy to the bank, Michael showcases his commitment to meeting financial obligations. The collateral assignment ensures that the lender has recourse in the event of his unexpected demise, reducing the risk associated with the loan.

This gives the bank greater confidence in Michael’s ability to repay the loan and increases the likelihood of loan approval.

Using Life Insurance as Collateral for Loans: A Comprehensive Guide

When seeking a business loan for an insurance agency, the assignment of a life insurance policy can be an effective strategy. By utilizing the assignment of a life insurance policy as collateral, borrowers can secure favorable loan terms and provide lenders with assurance in the event of unforeseen circumstances.

This process involves designating the lender as the beneficiary of the policy’s death benefit, ensuring that the loan is repaid if the policyholder passes away.

Understanding Collateral Assignments

When seeking a loan, particularly a business loan, lenders may require collateral to secure the loan. Life insurance policies, especially whole life insurance, can serve as effective collateral. This section will explore the key concepts and processes involved.

Lenders that Accept Life Insurance as Collateral

• Lenders Offering Collateral Assignment Loans : Many banks and financial institutions accept life insurance policies as collateral. These lenders recognize the value and stability of whole life insurance policies.
• Banks that Accept Collateral Assignments : Specific banks are known for accepting collateral assignments of life insurance policies, making it easier for borrowers to secure loans.

Absolute Assignment vs. Collateral Assignment

• Absolute Assignment of Life Insurance : In this type of assignment, the policyholder transfers all ownership rights of the life insurance policy to another party.
• Collateral Assignment of a Life Insurance Policy : Here, the policyholder retains ownership of the policy but assigns the death benefit to a lender as collateral for a loan. This is typically used for securing business loans or personal loans.

Assigning a Life Insurance Policy

Assigning a life insurance policy involves several steps and considerations. Here’s a breakdown of the process:

Steps to Assign a Life Insurance Policy

• Review the Policy : Ensure the policy allows for collateral assignments.
• Contact the Insurer : Notify your insurance company of your intention to assign the policy.
• Fill Out the Assignment Form : Complete the necessary forms provided by the insurer.
• Submit the Form : Send the completed form to the insurer for processing.
• Inform the Lender : Provide the lender with the necessary documentation to prove the assignment.

Using Whole Life Insurance as Collateral

Whole life insurance policies are particularly suitable for collateral assignments due to their cash value and guaranteed death benefit.

Bank Loan Using Whole Life Insurance as Collateral

• Securing a Bank Loan : Many banks offer loans secured by the cash value of a whole life insurance policy. This type of loan can provide significant funds for business or personal use.

Business Loans and Life Insurance

Businesses often use life insurance policies as collateral to secure loans. This practice ensures the lender is protected in case of the borrower’s untimely death.

Business Loan Insurance

• Life Insurance for a Business Loan : Life insurance policies can be used to cover the amount of the business loan, providing security for both the lender and the borrower.
• Business Loan with Collateral : Using collateral, such as life insurance, can help secure better loan terms and higher loan amounts.

Types of Business Loans

There are various types of business loans that can be secured using life insurance as collateral.

Business Loan Quotes and Collateral Business Loans

• Business Loan Quotes : Obtain quotes from different lenders to find the best terms for your business loan.
• Business Loans with Collateral : Explore loans that require collateral to secure better interest rates and terms.

Role of Collateral Assignee and Beneficiary

Understanding the roles of the collateral assignee and beneficiary is crucial in the assignment process.

Collateral Assignee

• Collateral Assignee : The lender or entity to whom the life insurance policy is assigned as collateral.

Collateral Beneficiary

• Collateral Beneficiary : The entity that will receive the death benefit of the life insurance policy if the borrower defaults on the loan.

Sample Documents and Forms

Providing sample documents can help understand the practical aspects of assigning a life insurance policy.

Sample Collateral Assignment of Life Insurance

• Sample Collateral Assignment of Life Insurance : Review a sample document to understand the typical language and requirements involved in the assignment process.

Using life insurance as collateral for loans can be a strategic financial move. By understanding the different types of assignments, the role of various stakeholders, and the steps involved, borrowers can effectively leverage their life insurance policies to secure the necessary funding for their business or personal needs.

Understanding Collateral for a Business Loan

When seeking financing for your business, providing collateral can be a crucial part of securing a loan. Collateral is an asset that a borrower offers to a lender to secure a loan, which the lender can seize if the borrower defaults.

Common Types of Collateral

• Real Estate : Using your home as collateral for a business loan is a common practice. This can include commercial property, personal residences, or land.
• Equipment and Inventory : Business assets such as machinery, vehicles, or inventory can be used as collateral.
• Accounts Receivable : Future payments owed to the business can also serve as collateral.

Using Life Insurance as Collateral

Life insurance policies can also be used as collateral for loans, offering unique benefits and flexibility.

Life Insurance Collateral Assignment

• Life Insurance Collateral Assignment : This involves assigning a portion of your life insurance policy’s death benefit to the lender. If you default on the loan, the lender receives the assigned portion of the policy payout.
• Loan on a Life Insurance Policy : Some policies allow you to borrow against the cash value of your life insurance, providing a source of funds without external borrowing.

Specific Scenarios

Small business loans.

• Life Insurance for SBA Loans : The Small Business Administration (SBA) often requires life insurance as collateral for certain types of loans. This ensures the loan is repaid if the business owner passes away.
• Term Life Insurance for an SBA Loan : Term life insurance policies are commonly used to meet SBA loan requirements due to their affordability and simplicity.

Insurance Collateral Funding

• Collateral Loan Insurance : This is a specialized insurance product that protects the lender in case the borrower defaults on a loan secured by collateral.
• Insurance Collateral Funding : This involves using the value of insurance policies to secure funding, providing a unique and flexible financing option.

Practical Steps

• Evaluate Your Assets : Determine which assets you can use as collateral. This could include real estate, equipment, or insurance policies.
• Obtain a Copy of Your Insurance Policy for Collateral : Ensure you have the necessary documentation to prove ownership and value.
• Contact Loan Companies That Accept Life Insurance as Collateral : Research lenders that specialize in collateral loans on life insurance to find the best terms.

Authorized Assignments and Requirements

• Authorized to Assign a Life Insurance Policy as Collateral for a Loan : Ensure your policy allows for collateral assignment. Not all life insurance policies include this feature.
• SBA Loan Life Insurance Requirements : Understand the specific requirements for using life insurance as collateral for an SBA loan, including policy amounts and terms.

Special Considerations for Insurance Agents

• Loan for an Insurance Agent : Insurance agents can also leverage their policies for business financing. Policies with significant cash value or death benefits can be valuable assets for securing loans.

Using collateral to secure a business loan can significantly enhance your borrowing potential. Life insurance policies, in particular, offer a versatile and often underutilized source of collateral. By understanding the various options and requirements, including collateral loan insurance, you can better navigate the financing landscape and secure the necessary funds to grow your business.

Using Life Insurance as Collateral for a Loan

When securing a small business loan, collateral is often required to protect the lender. One unique option is using life insurance as collateral for a loan. This involves a collateral assignment, where a portion of the policy’s death benefit is assigned to the lender. It is essential to obtain a copy of an insurance policy for collateral purposes, ensuring the policy terms support collateral assignment.

Key Points:

• Insurance Collateral : Life insurance policies can serve as effective collateral, providing security for the loan.
• Small Business Loan Collateral : Using a life insurance policy as collateral can help meet the requirements for small business loans.
• Process : Ensure your policy allows for collateral assignment and provide the necessary documentation to the lender.

Frequently Asked Questions

What types of collateral are needed for a business loan.

Common types of collateral for a business loan include real estate, equipment, inventory, accounts receivable, and cash savings. Some lenders may also accept personal assets, like vehicles or investments, as collateral to secure the loan.

What are collateral assignments normally associated with?

Collateral assignments are typically associated with securing loans or debts. They involve using an asset, such as a life insurance policy, as security for the repayment of a loan. If the borrower fails to repay the loan, the lender can claim the asset.

What can be used as collateral for a business loan?

Collateral for a business loan can include real estate, equipment, inventory, accounts receivable, or personal assets such as savings or investments. The type of collateral required depends on the lender and the size of the loan.

What is collateral assignment?

Collateral assignment is the process of pledging an asset, such as a life insurance policy, as security for a loan or obligation. The asset is assigned to the lender, giving them a claim to it in case the borrower defaults on the loan.

What is an assignee in life insurance?

An assignee in life insurance is the person or entity to whom a policyholder transfers rights or interests in the policy. This often occurs in a collateral assignment, where the assignee (typically a lender) has a claim to the policy benefits if the policyholder fails to meet their obligations.

What is collateral assignment of life insurance?

Collateral assignment of life insurance involves designating the life insurance policy as collateral for a loan. The lender is given a claim on the policy’s cash value or death benefit if the borrower defaults on the loan.

What is considered collateral on a life insurance policy?

On a life insurance policy, collateral typically includes the policy’s cash value or death benefit. In a collateral assignment, the lender has a claim to these amounts if the borrower defaults.

Which lenders offer collateral assignment loans?

Banks, credit unions, and other financial institutions offer collateral assignment loans. These lenders accept various forms of collateral, including life insurance policies, to secure loans.

How much collateral is needed for a business loan?

The amount of collateral needed for a business loan varies based on the lender’s requirements, the size of the loan, and the risk involved. Generally, lenders may require collateral that is worth a certain percentage of the loan amount.

How to perfect an assignment of a life insurance policy?

To perfect an assignment of a life insurance policy, the policyholder must complete an assignment form provided by the insurance company, submit it for approval, and ensure the lender is formally recognized as the assignee. It is also crucial to notify the insurer of the assignment.

Do you need collateral for a business loan?

Yes, many business loans require collateral to secure the loan. Collateral provides the lender with a guarantee that they can recover their funds if the borrower defaults.

Can life insurance be used as collateral for a loan?

Yes, life insurance can be used as collateral for a loan. The policy’s cash value or death benefit can be pledged to secure the loan, with the lender having a claim on these funds if the borrower fails to repay.

Can you use life insurance as collateral for a mortgage?

Yes, life insurance can be used as collateral for a mortgage. The lender may accept the policy’s cash value or death benefit as security for the mortgage loan.

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

In a life insurance contract, a collateral assignment is used to pledge the policy as security for a loan. The lender becomes the assignee, meaning they have a claim on the policy’s benefits if the borrower defaults on the loan. This assignment is typically documented and recognized by the insurance company.

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