a collateral assignment of life insurance

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What Is a Collateral Assignment of Life Insurance?

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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.

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What is collateral assignment of life insurance?

Collateral assignment of life insurance is a method of providing a lender with collateral when you apply for a loan. In this case, the collateral is your life insurance policy's face value, which could be used to pay back the amount you owe in case you die while in debt. Collateral assignment of life insurance is a common requirement for business loans, and lenders may require you to get a life insurance policy to be used for collateral assignment.

How does collateral assignment of life insurance work?

If you die before fully repaying your loan, collateral assignment will allow the lender, or "assignee," to be repaid for the outstanding loan amount using your death benefit. If you pay back your loan fully before passing away, or if only a portion of your death benefit is needed to pay off your loan, your beneficiaries can still file a claim for the policy's death benefit .

What steps are required to apply for collateral assignment of life insurance?

Depending on your lender and the loan type and amount you're applying for, collateral assignment of your existing life insurance or a new life insurance policy may be required. Collateral assignment requirements are particularly common with business loans. Here's how to apply for collateral assignment of life insurance:

Understand the requirements

Find out if your lender will accept collateral assignment of an existing whole or term life insurance policy . If so, confirm that your current policy's death benefit amount is sufficient collateral for the loan. If the lender requires that you get a new life insurance policy for the collateral assignment, you may need to shop around for life insurance with a death benefit amount that's sufficient loan collateral.

Apply for life insurance

If you're buying a new life insurance policy , you'll apply with the insurer. Once you're approved, double-check with your lender that the policy you've qualified for meets their loan requirements.

Complete the collateral assignment form

Once your first life insurance premium is paid, you can proceed with completing a collateral assignment form via your insurer. On the form, you'll need to provide your lender's contact information so they can be added as the death benefit collateral assignee until your loan is repaid. The form also requires signatures from both the assignor (you) and assignee (your lender).

Proceed with your loan application

Once your bank can confirm they're the collateral assignee for your life insurance policy, you can proceed with your loan application.

Don't cancel your life insurance policy during the course of your loan and make your insurance payments on time to avoid a life insurance policy lapse ; otherwise, you could violate your loan contract. Your lender may then have the right to raise your loan's interest rate or demand full repayment of your outstanding loan balance.

Will collateral assignment affect my beneficiaries?

With collateral assignment, you should still name beneficiaries as usual, but the total death benefit available to them will depend on when you pay off your loan. If you pay it off before you pass away, your death benefit won't be affected. However, if you pass away before paying off your loan, the total death benefit your beneficiaries can file a claim for will be reduced by the amount needed to fully pay back your lender.

Your lender will be an assignee rather than a beneficiary, and the assignee can only claim up to the amount required to settle your loan. Any amount remaining may be claimed by your beneficiaries, so be sure to update your beneficiaries as needed while your policy is active.

Other ways life insurance can help you with a loan

Collateral assignment might not be the only way to qualify for the loan you need. If you have a whole life or universal life policy, consider how much cash value it currently has. Instead of borrowing from a lender, you may be able to borrow from your policy's cash value via a life insurance loan . Note that there will be limits to how much you can borrow without putting your coverage in jeopardy, and any part of the loan not repaid by the time you pass away may be deducted from your death benefit.

You can also choose to cash out your life insurance policy. This would end your coverage, and taxes and fees will apply, but you could use the policy's value to eliminate your need for a loan or reduce the amount you need to borrow. Consult with a financial advisor to understand the implications of your particular situation.

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Collateral Assignment of Life Insurance

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Secured loans let you borrow money using one of your assets as collateral to get easier approval and better rates and terms. Life insurance may not be the first asset to come to mind when getting a secured loan, but you can use your policy as collateral through a process called collateral assignment of life insurance. This article will explain how collateral assignment of life insurance works and how to apply for it, then review some alternatives to using life insurance as collateral.

What is the collateral assignment of life insurance?

Collateral assignment of life insurance involves using your life insurance policy’s death benefit as loan collateral. 1 This means that if you can’t repay what you owe, the lender has the right to collect the collateral amount from your policy.

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How to apply for collateral assignment of life insurance

Here’s how to apply for collateral assignment of life insurance:

1. Know the requirements

Knowing life insurance collateral requirements is vital before applying for collateral assignment. Lenders generally require an active life insurance policy with cash value. This means that a term life insurance policy may not qualify. However, exact requirements vary by lender. If you need to get a new life insurance policy in order to get a collateral assignment, research and gather quotes from several insurance companies to choose the right option for you.

2. Fill out a life insurance application

Once you’ve found a policy that will meet a lender’s loan requirements, you can apply for life insurance . As mentioned, you will likely need life insurance with cash value. Check with the lender to see if the policy you’re approved for qualifies for a life insurance collateral assignment before signing the contract.

3. Fill out a collateral assignment form

Once you sign your life insurance contract and pay your first premiums, complete a collateral assignment form with your insurer. You’ll fill out your lender’s contact details so your insurer can designate them as a collateral assignee while your loan is outstanding.

4. Sign and submit the form

After completing the collateral assignment form, you and your lender must sign it. Your insurer may be able to provide electronic versions of the documents and e-signature capabilities to streamline the process.

5. Apply for a loan

Wait for your bank to confirm that your insurer has made them the collateral assignee. Then, apply for your chosen loan and fill out any relevant life insurance policy information on the application.

How collateral assignment of life insurance may affect your beneficiaries

Using your life insurance policy as collateral may impact your beneficiaries if you default on the loan or pass away with an outstanding balance. 2 Either event could reduce the death benefit payout your beneficiaries receive.

For example, if you take out a $50,000 loan using your $500,000 policy as collateral but pass away with a $40,000 loan balance, your lender can collect a portion of your death benefit. That can leave your beneficiaries with less money to cover expenses in your absence.

Alternatives to the collateral assignment of life insurance

Here are some alternatives to the collateral assignment of life insurance 2 :

Borrow from your life insurance policy

Permanent life insurance policies, such as whole life insurance , let you build cash value with each premium payment. Once your policy grows large enough, you can borrow against it. Policy loans offer favorable rates and no fixed repayment deadline. Accrued interest is added to your loan balance.

You can keep the loan outstanding as long as you want. However, your policy can lapse if the balance grows larger than your cash value.

Withdraw from your policy

You can withdraw money from your life insurance policy once you have accumulated enough cash value. However, this may reduce your death benefit. Withdrawing may also trigger tax consequences.

Surrender your policy

You can surrender life insurance if you no longer need your coverage. The insurer pays you the cash value minus surrender charges, letting you access your wealth. If you decide to go this route, your policy will be cancelled, and you’ll stop paying premiums.

Consider a different type of loan

You can get other loans, depending on your financial circumstances. For example, if you have significant equity in your home, you could get a home equity loan or line of credit. You could also apply for an unsecured personal loan to avoid risking your assets as collateral.

Is collateral assignment of life insurance right for me?

Collateral assignment of life insurance may make sense in a few situations:

• Business loans: If you’re a business owner and have a substantial death benefit, you could borrow against a large amount of it to fund your business.
• Medical expenses: The average cost of a hospital stay is 13,262. 3 If you have medical expenses insurance doesn’t cover, securing a loan with your life insurance could help you pay for them.
• Debt refinancing or consolidation: Borrowing against your death benefit could help you consolidate and refinance higher-interest debts, like personal loans and credit cards. This can save you money on interest and streamline your monthly payments.

Remember the risks of a life insurance collateral assignment before using it for these or other situations. If you’re not sure whether it’s the best choice for you, consider speaking with a financial advisor to explore your options.

Get a life insurance quote

Collateral assignment of life insurance can be a good option for borrowing a significant amount of money at favorable rates and terms. However, it’s important to remember that defaulting on the loan or passing away with an outstanding balance could reduce the death benefit payout your beneficiaries receive.

If you need a way to help protect your loved ones for your entire life and receive a significant asset you could borrow against, Aflac’s whole life insurance policies with cash value can be a great option. Start chatting with an agent today to learn more.

Still have questions?

Explore your life insurance options.

1 The Balance – What is a Collateral Assignment (of a Life Insurance Policy)? Updated November 10, 2021. https://www.thebalancemoney.com/what-is-collateral-assignment-5176411 . Accessed May 8, 2023.

2 Investopedia – What is a Collateral Assignment of Life Insurance? Updated April 30, 2023. https://www.investopedia.com/ask/answers/111714/what-collateral-assignment-life-insurance.asp . Accessed May 8, 2023.

3 Debt.org – Hospital and Surgery Costs. Updated March 30, 2023. https://www.debt.org/medical/hospital-surgery-costs/ . Accessed May 8, 2023.

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What is collateral assignment of life insurance?

Life insurance can act as collateral to secure a loan. The policy’s death benefit goes to pay the loan balance first, and remaining funds go to your beneficiaries.

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Updated June 16, 2023 | 3 min read

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Collateral assignment of life insurance is an agreement that gives a lender first claim to collect an outstanding loan balance from your life insurance death benefit . That allows your life insurance to serve as the collateral that many loans — especially small business loans or Small Business Administration (SBA) loans — require as part of giving you the money. 

In other words, your life insurance death benefit becomes the property that ensures that the lender can collect the loan value if you die before the loan is paid off. After the loan is repaid, any remaining death benefit funds go to your beneficiaries .

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How collateral assignment works

Collateral assignment, unlike credit life insurance , lets you name beneficiaries you choose instead of having the lender be the sole beneficiary. You can use either a term life or a permanent life insurance policy for collateral assignment.

If your current life insurance policy is worth more than the loan, you may be able to use it as collateral. In other cases, loan companies that take life insurance as collateral may require you to buy a new policy that covers at least the full amount due. 

Either way, the process of getting a policy is the same. You go through the application and underwriting process, and wait to receive your offer. Then, you complete paperwork to set up a collateral assignment. 

Once you’ve paid off the loan, you get a release from the lender. The collateral assignment condition on your policy ends, but the policy can stay active.

→ Learn more about how life insurance underwriting works

Whom to name as your beneficiary

When buying life insurance for collateral assignment, name the beneficiaries as you would for a personal policy (e.g., spouse, relative, trust for children). The lender is not your beneficiary; they are the assignee on the collateral assignment paperwork. You are the assignor .

A collateral assignment supersedes your beneficiaries’ rights to the death benefit. If you die, the life insurance company pays the lender, or assignee, the loan balance. As noted earlier, any remaining benefit goes to your beneficiaries.

Who owns the life insurance policy

You’re the policy owner and the payor — which means you’re responsible for the premium payments. Some lenders may require an escrow account for the life insurance premiums; others may require proof of payment or prepayment. 

If you’re using a permanent life insurance policy for the collateral assignment, a lender may have access to the cash value  if you default on the loan.

→ Learn more about cash value life insurance

When to fill out collateral assignment paperwork

You only complete a collateral assignment agreement once a life insurance policy is active. After you pay your first premium , and sign your policy papers, you can request a collateral assignment form from the life insurance company or your insurance broker.

You’ll need your loan officer’s name and number for the form, as well as your policy number, Social Security number, and other personal information. 

Once completed and signed by both the assignee and the assignor, you’ll file the collateral assignment form with the life insurance company and the lender according to whichever procedures they use for this process.

When collateral assignment ends

Collateral assignment ends only if you pay off your loan before you pass away. Your lender must agree that the terms of your loan have been met and send a release to your insurer to terminate the agreement.

If your policy lapses — or you choose to cancel it — that could violate your loan contract. The lender may even pay your premiums on your behalf to prevent a policy lapse. In that scenario, the lender adds the cost of any premiums they paid for your policy to your loan total.

Collateral assignment pros & cons

Collateral assignment of life insurance has clear pros and cons. Review the following list carefully to decide if it’s a good option for you.

Collateral assignment pros:

It enables people to secure business loans or similar needed funds.

It’s less risky for a family than using a home or other essential property as collateral.

Policyholders can choose beneficiaries to receive any remaining death benefit funds.

Downsides of collateral assignment:

The lender has first right to the death benefit, so your family may not get the benefit you intended.

Lapsing or canceling the policy could violate your business loan terms, causing problems with the lender.

You’re responsible for paying life insurance premiums.

Alternatives to collateral assignment

Other ways to use a life insurance policy for debt repayment include the following options.

Life insurance loan: If you own a permanent life insurance policy, a life insurance loan allows you to borrow directly from your policy’s cash value. Any unpaid balance, plus interest, is deducted from your death benefit.

Cash surrender: The cash surrender value is the cash value built up in the policy minus administrative fees. Surrendering your policy cancels your coverage, so you’d need another policy for continued financial protection. You could also face penalties if you cancel during your policy’s surrender period.

Term life insurance: You should always buy enough insurance to cover your debts . On average, term life is five to 15 times cheaper than whole life. Even if your lender doesn’t require collateral, your beneficiaries can use the death benefit to pay off your debts and keep the remainder.

For most people, term life is the most affordable and straightforward option to provide coverage for any outstanding loans when they die, with or without a collateral assignment attached.

If you need to use your life insurance policy for collateral assignment, the process is as simple as buying a policy and filling out the appropriate paperwork.

Frequently asked questions

A collateral assignment of life insurance directs your insurance provider to use your death benefit to pay off an existing loan if you die while in debt. After the lender is paid, any remaining funds go to your policy’s beneficiaries.

Your lender is the assignee of your collateral assignment agreement. You are the assignor of the agreement and the owner of your life insurance policy.

Collateral assignment can only be revoked if your lender confirms that your debt is paid and sends a release of collateral assignment to your insurer. The assignment cannot be changed if you change your mind or if your life insurance policy lapses.

Julia Kagan

Contributing Editor

Julia Kagan is a contributing editor at Policygenius, where she specializes in life insurance. Previously, Julia was the senior personal finance editor at Investopedia for nearly a decade, a vice president and editorial director at Consumer Reports, the editor of Psychology Today, and the vice president of content at Zagat Surveys.

Nupur Gambhir

Senior Editor & Licensed Life Insurance Expert

Nupur Gambhir is a licensed life, health, and disability insurance expert and a former senior editor at Policygenius. Her insurance expertise has been featured in Bloomberg News, Forbes Advisor, CNET, Fortune, Slate, Real Simple, Lifehacker, The Financial Gym, and the end-of-life planning service Cake.

Antonio Ruiz-Camacho

Associate Content Director

Antonio helps lead our life insurance and disability insurance editorial team at Policygenius. Previously, he was a senior director of content at Bankrate and CreditCards.com, as well as a principal writer covering personal finance at CNET.

Expert reviewer

Maria Filindras

Financial Advisor

Maria Filindras is a financial advisor, a licensed Life & Health insurance agent in California, and a member of the Financial Review Council at Policygenius.

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Collateral assignment of life insurance

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Using your life insurance policy as collateral is one way of securing a loan without the risk of using your home or car. Most loans are either secured or unsecured, and while an unsecured loan does not require collateral, they are not always the most affordable or available option to many loan seekers. Bankrate breaks down the collateral assignment of life insurance process along with alternative options to help you decide what type of loan may be best for you.

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Whole life insurance combines life insurance with an investment component.

• Coverage for life
• Tax-deferred savings benefit if premiums are paid
• 3 variations of permanent insurance: whole life, universal life and variable life include investment component

Term life insurance is precisely what the name implies: an insurance policy that is good for a specific term of time.

• Fixed premium over term
• No savings benefits
• Outliving policy or policy cancellation results in no money back

This advertising widget is powered by HomeInsurance.com, a licensed insurance producer (NPN: 8781838) and a corporate affiliate of Bankrate. HomeInsurance.com LLC services are only available in states where it is licensed and insurance coverage through HomeInsurance.com may not be available in all states. All insurance products are governed by the terms in the applicable insurance policy, and all related decisions (such as approval for coverage, premiums, commissions and fees) and policy obligations are the sole responsibility of the underwriting insurer. The information on this site does not modify any insurance policy terms in any way.

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?

There are several reasons why you might want to use life insurance as collateral for a loan. Among them:

• It can be affordable. Depending on your age, health, the type and value of policy, life insurance costs vary. However, life insurance premiums may be less than what you would pay for an unsecured loan with higher interest rates.
• You are not jeopardizing your personal property. By using life insurance as collateral, you might be able to take out a secured loan without putting your home or vehicle at risk. If you pass away before the loan is repaid, the lender will use funds available from your life insurance policy’s death benefit to pay off the loan.
• It may be attractive to lenders. Many financial institutions view life insurance as a good option for collateral, knowing that they will very likely have the money to pay off your loan in the event of your death.

Of course, there are also some situations in which a collateral assignment of life insurance is not the best option. Some people are unable to obtain affordable life insurance due to their age or health complications. It can also be difficult to use an existing life insurance policy as collateral for a loan; a lender may require you to take out a new policy, specifically for the purpose of the collateral assignment.

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

If you would like to take out a loan using life insurance as collateral, your first step should be to find a lender willing to issue this type of loan. After you confirm the lender’s requirements, you may be able to use your existing life insurance policy (if the lender will allow it) or you might need to purchase a new policy for a collateral assignment.

If you take out a new policy, the application process is the same as applying for any other type of life insurance and may require extensive underwriting, including a medical exam. After you have purchased the new policy, you will need to ask the insurance company for a collateral assignment form that you will need to complete, noting your lender as an assignee. Generally, a lender will not be listed as a beneficiary. The beneficiary(ies)will be the person you would like to receive any leftover benefits not claimed by the lender.

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

Both main types of life insurance, term life insurance and permanent life insurance , can be used to secure a loan. If you have a policy that falls into a subcategory of permanent life insurance, such as whole life, universal life, variable life or variable-universal life, these too are eligible to be used as collateral. However, each financial institution will likely have different requirements. Make sure to discuss these requirements with your lender before purchasing life insurance with the specific intention to use it as collateral. If more than one option is available, you may want to compare the cost of premiums for each type of policy.

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.

Cash value life insurance

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, related articles.

What is collateral insurance?

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Life insurance death benefits

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Ariel Tavor

Keith yagnik, ariel serber, michael kikoz.

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Guidelines for Collateral Assignment of Life Insurance

• By: Risk Management Team

Lions Financial provides comprehensive guidelines for the collateral assignment of life insurance. The collateral assignment involves using a life insurance policy as collateral for a loan or debt. Lions Financial assists individuals and businesses in understanding the process and implications of collateral assignment, ensuring they make informed decisions.

The guidelines cover important aspects such as determining the policy’s cash surrender value, establishing the assignment amount, and defining the rights and responsibilities of the assignee and assignor. Lions Financial also helps clients navigate legal and tax considerations related to collateral assignment.

Banks require insurance for collateral assignment so that they can always get any outstanding loan amount back if the loaner defaults or dies before being able to pay the loan back.

Collateral is pledged as security for repayment of a loan, to be forfeited in the event of a default. A collateral assignment of insurance is a conditional assignment appointing a lender as the primary beneficiary of a benefit to use as collateral for a loan. If the borrower is unable to pay, the lender can cash in the insurance policy and recover what is owed.

An Absolute assignment in insurance involves signing over your entire policy to another person or entity. The person who is selling or gifting the policy is known as the assignor, and the individual or individuals who receive it are the assignee. The assignee takes full ownership of the policy, being held liable for any premiums and also having the authority to change or designate new beneficiaries.

Collateral assignment of life insurance essentially works like a standard loan. The insurance policy is “collateral” for a loan, and the person or organization that pays out that loan is the temporary beneficiary of the policy’s death benefit until the loan is repaid. The entity taking over the policy does so on a conditional basis and, therefore, doesn’t have the authority to make changes to it, re-sell it or take any of its cash value. Instead, the assignee can only draw on the death benefit if the policyholder defaults.

On the other hand, Collateral Assignment enables policy holders to regain control of their own policy once a medical or other crisis has resolved. It is one of the 3 common ways to borrow from your life insurance policy and access the cash value. With a collateral assignment, you are able to eventually benefit again from the long-term advantages of a life insurance policy.

If one already has a life insurance policy with a face value greater than the loan amount, he can collaterally assign that policy by requesting the paperwork from the insurer. If one doesn’t have a life insurance policy or needs additional coverage, he will need to apply for life insurance and go through underwriting.

Whether one has a term life insurance policy or a whole life insurance policy, he will be the policy owner and responsible for the premium payments. The borrower must be the owner of the policy but not necessarily the insured, and the policy must remain current for the life of the loan with the owner continuing to pay all necessary premiums.

Any type of life insurance policy is acceptable for collateral assignment, provided the insurance company allows assignment for the policy. Some banks may require an escrow account for the life insurance premiums, others may require proof of premiums paid or prepaid.

If one has a whole life policy that he uses for collateral assignment, banks will have access to the cash value of the policy if he defaulted on the loan. If the loaner dies, the insurance company will use the death benefit to pay off any outstanding loan amount. The rest, if any, goes to the assigned beneficiaries.

Insurance companies must be notified of the collateral assignment of a policy. When one is applying for life insurance for the purpose of collateral assignment, he will name his beneficiaries as he would for a personal policy. The bank is not his beneficiary, but the assignee on the collateral assignment after the policy is in force. On the form, he will be the assignor.

There are several reasons to consider a collateral assignment of life insurance. The Collateral assignment guarantees the safety of the amount that was loaned out to the lender, especially under the listed terms and conditions that the lender will be paid in full; moreover, the remaining will be given to the listed beneficiaries in the case of death of the borrower.

• It safeguards the interests of the lender. A collateral assignment plays a critical role in securing a loan for the borrower. It is the insurance company’s obligation to safeguard the lender’s interest after collecting the collateral assignment form.
• A collateral assignment allows you to be more flexible with your capital assets.
• A collateral assignment allows the borrower to purchase insurance as a low-cost collateral to secure paying back a loan.

A collateral assignment has great advantages, but it has certain limitations as well. First of all, a collateral assignment has a limited death benefit. You should assign part of the death benefits as collateral instead of the total benefits which avoids the circumstances where the lender claims all the death benefits after you die.

• Difficulty in obtaining an affordable insurance policy with low premiums.
• Loss of policy control is another disadvantage of collateral assignment.
• Collateral assignment suffers from the limited use of cash value.

Any type of life insurance policy is acceptable for collateral assignment, provided the insurance company allows assignment for the policy.

Some examples of insurance policies you can use for collateral assignment are:

• Term Insurance

Term life insurance is used to offer coverage for a specific number of years. The proceeds of the policy are only paid out after the insurer dies, and it lacks equity and a surrender value. It falls under the category of the most affordable insurance plans which is why it is a top pick for most people.

You don’t need to buy a plan that exceeds or falls below your needs. Term life insurance enables you to purchase a plan tailored to your needs and since it is not permanent, you are going to pay low premiums.

• Universal Life Insurance or Whole Life Insurance

With universal life insurance, you will be able to design the insurance policy according to how you want it. The insurance proceeds are usually released when the insured party dies. It is great for individuals looking for a permanent insurance policy that never expires unless you are dead. In short, you will continue to receive coverage as long as the annual premiums are getting paid.

On the downside, universal life insurance policies tend to be expensive because they are meant to offer life term coverage.

On the bright side, the policies build cash value and the longer the premiums are paid,  the more value the plan will build. This cash value can be used on other investments or to pay off the outstanding premiums.

When applying for a collateral assignment of life insurance, you can use two ways to do so: through the bank or through your insurer. The two are explained further below;

• APPLYING THROUGH YOUR BANK

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

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

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

• APPLYING THROUGH YOUR INSURER

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

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

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

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

  There are several essential parts to be included in the collateral assignment forms.

1.  Policy Identification

This part focuses on the information of the insured, including policy numbers, owner’s first and last names, address, phone number, and email address.

2. Assignee information:

This part contains information about the assignee. The assignee could be an individual, corporate entity or trust. If the assignee is a Trust, he/she ought to list out all the names of currently serving trustees.

Moreover, this part should include the assignee’s full legal name, address, tax ID, email address, and phone number. 3. Terms and conditions: This section lists all the terms and conditions of the assignment. To be specific, this section covers in detail the rights, for instance, “the sole right to collect from the Insurer the net proceeds of the policy, the sole right to obtain one or more loans or advances on the Policy”, etc. Moreover, this section might also include IRS certification to certify the taxpayer identification number filed in the previous sections are authentic and correct.

4. Signatures: All owners and assignees are required to sign and date in this section after reviewing the previous terms and conditions. Moreover, beneficiaries are also required to sign this form. 5. Submission of the assignment form: After careful revision of terms and conditions of the assignment and signature, the assignment form should be submitted for processing. This part should list detailed instructions for sending back the assignment form. Moreover, this part should also provide the address, contact information, and the fax number of the company who issued the policy.

You apply for a life insurance policy and name your beneficiary (your spouse, children, whomever). Just as you normally would. After the policy goes into force, a collateral assignment form from the life insurance company will be sent for you to complete. When a life insurance company sets a collateral assignment of life insurance, this usually takes in the region of seven to ten days to be filed and acknowledged. However we may expedite this if the collateral assignment is required more urgently.  When taking out life insurance at the same time as assigning the collateral, the collateral assignment form must be submitted with the life insurance application. You get the collateral assignment form signed (some companies require a notarized signature). It will take a few days to a few weeks for the life insurance company to acknowledge the assignment. Once the loan has been paid in full, the assignment must be lifted from the policy by means of a release form sent by the lender to the insurance company. When it receives the release, the insurance company cancels the assignment and restores all rights in the policy to the owner. A collateral assignment allows the life insurance company to pay your SBA lender only what they are owed and the rest goes to your beneficiary. As you pay down the loan, the amount of coverage will be more than you need, and a collateral assignment form makes sure the lender is only paid what is needed. If you named the lender as the beneficiary, the lender would receive the entire death benefit even though you’ve paid down the balance. And if you did that, the life insurance company wouldn’t issue you the amount of coverage needed – they’ll typically only issue 80% of the loan amount. So, it’s imperative that you use a collateral assignment. The Collateral Assignment of Life Insurance is a way to secure funding for business or other ventures. It is important to understand the different types of assignments and how they work before choosing this option.  At Lions Financial, we offer a variety of services and resources to help businesses secure funding and protect their assets. 

To learn more about these services, sign up for our newsletters or make an appointment with a representative today!   Contact us at https://lions.financial/contact/   Learn more, visit:   What Are the Tax Considerations For Life Insurance Premiums Under Collateral Assignment For Business Bank Loans     Should You Consider An Asset-Based Loan For Your Business   Process For A Business To File a Life Insurance Claim   Life Insurance Requirements for SBA Loans    Life Insurance Requirements when getting an SBA Loan The sources we use for this information include: https://www.investopedia.com/terms/c/collateral.asp   https://www.investopedia.com/terms/l/lender.asp   https://www.investopedia.com/terms/b/beneficiary.asp  

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What Is Collateral Assignment of Life Insurance?

Table of contents, key takeaways.

• Collateral assignment allows you to use a life insurance policy as assurance for a loan. The lender gets first claim on the death benefit if you default.
• Permanent life insurance policies like whole life and universal life are commonly used since they don't expire. Term life may also be accepted.
• There is a formal collateral assignment process involving paperwork with the lender and insurer. Be sure to still name a primary beneficiary.
• Benefits include potentially improving loan eligibility and getting a lower interest rate. Drawbacks include reduced death benefits for beneficiaries.
• Alternatives like borrowing against cash value or taking an unsecured loan may be cheaper than paying for life insurance you don't need. Consider pros and cons.

If you'd like to borrow money through a loan, life insurance could help you qualify and get a lower interest rate. Through something called a collateral assignment of life insurance, you can set up an agreement where your policy pays the lender in case you can't.

Not every lender accepts this arrangement, and there are downsides, notably that your primary beneficiary is no longer first in line for the life insurance death benefit. However, in the right situation, it can be a useful financial strategy. Here's what to know about an assignment of life insurance and how to use it properly.

What Is Collateral?

Collateral is a valuable asset that can be used to secure a loan. When you borrow money, you legally agree to repay the lender, usually with scheduled payments and interest. But the lender is taking a risk that you won't pay them back.

When you put up collateral, the lender can legally take that asset if you don't pay back the debt. Real estate, vehicles, equipment and investment accounts are common examples of loan collateral.

What Is the Collateral Assignment of Life Insurance?

In a collateral assignment of life insurance, you use a life insurance policy to secure a loan. You first set up coverage as usual by applying for and buying some type of life insurance policy with a death benefit. If you already have a policy, you could use that too.

Then you fill out a collateral assignment form with the lender. This gives them the right to use the life insurance benefits to pay themselves back if you don't pay off their loan. This could happen if you default or if you happen to die before paying off the debt. With this assignment, you've agreed to use the life insurance death benefit to pay off the remaining loan balance first.

You'll still select a primary beneficiary , the person or entity you want to receive the insurance payout. But with a collateral assignment, if you die without paying off the loan, the life insurance death benefit pays off the debt first. Only if there's any remaining benefit amount does it go to your listed beneficiary. Once you pay off the debt, the assignment ends, and the life insurance would pay your beneficiary in full as usual.

Can You Use Any Type of Life Insurance?

It depends on what the lender is willing to accept. In theory, you could use any type of life insurance for this arrangement. However, some lenders may only accept permanent coverage, such as whole life or universal life . The reason is that permanent coverage doesn't expire as long as you or the lender make the premium payments. As a result, the lender can make sure they eventually collect the death benefit by making the premium payments themselves (they would add this cost to your outstanding debt). Another reason lenders may prefer permanent life insurance is because it can build cash value, a reserve of money while you're alive. This is another valuable asset the lender could take as repayment.

On the other hand, term life insurance  has a set expiration date. If you outlive the term, the coverage ends. While a lender could accept term life insurance as collateral, they take on the risk that you both fail to pay off the loan and outlive the term. In this case, the lender would lose their collateral and won't be certain to get their money back.

What Are Some Examples Using Life Insurance as Collateral?

Hypothetical scenarios may help better illustrate how life insurance can be used as collateral. Here are two examples to consider:

• Steve wants to take out a 15-year mortgage for $500,000. He currently does not have any life insurance. He agrees to buy a 15-year term policy  with a death benefit of $500,000 to use as a collateral assignment until he pays off the mortgage. He lists his daughter as the primary beneficiary. Ten years later, he passes away with $150,000 left on his mortgage. The term life insurance will first pay $150,000 to the lender to cover the outstanding debt. The remaining $350,000 will then go to his daughter.
• Kristi wants to take out a $100,000 personal loan to help start a business. She already owns a $300,000 whole life policy with $25,000 in cash value. She puts this policy up as collateral. Unfortunately, Kristi's business does not succeed, and she is unable to pay back any of the loan. The lender takes over the policy through the collateral assignment. They first take the $25,000 of cash value for repayment. Once Kristi passes away, the lender would use the death benefit to cover the remaining debt. Anything left would go to whoever Kristi listed as the beneficiary.

How Do You Set Up a Collateral Assignment?

While the exact process for setting up this arrangement will depend on your lender and insurer, there are a few common steps. Here are five actions you could take:

1. Review Your Lender's Requirements

You can ask your lender whether they allow a collateral assignment of life insurance. If so, check what they require for this arrangement. For example, do they allow all types of life insurance policies  or only certain ones, like whole life ? If you have an existing policy, would they accept it for the assignment? Or would you need to buy a new policy for this arrangement?

2. Set Up Your Life Insurance Coverage

If you already have life insurance and your insurer is willing to accept it, you could use it for the collateral assignment. If you don't have life insurance or your death benefit isn't large enough, you would need to purchase another policy. Be sure to ask your lender whether they only work with certain life insurance companies.

3. Fill Out the Collateral Assignment Forms

Contact your life insurance company for a collateral assignment form. This form lists information about your loan, such as the amount, the repayment schedule and the lender. Once you and your lender sign this form, your insurer can officially add the lender as the collateral assignee for your policy.

4. Finish Setting Up Your Loan

With your collateral assignment in place, you and the lender would then complete the loan application process. Once you get approved, they would send you the loan funds, secured using your life insurance.

5. Pay Off the Loan to End the Collateral Assignment

You would pay off your debt according to the lenders' payment schedule. Once you've made the final payment, you would contact your life insurance company to let them know. They would confirm with your lender and then end the collateral assignment. From that point on, the death benefit would go to your primary beneficiary, not to the lender.

What Are the Benefits of an Assignment?

• It can help your chances of qualifying for a loan. You aren't guaranteed to qualify for a loan. Having life insurance as collateral could make the difference for your approval. Collateral can make up for other issues, such as having a low credit score or small down payment.
• It can reduce your loan interest rate. When you put up collateral, you reduce the financial risk for the lender. This ensures they have another way to get their money back if you miss the loan payments. In exchange, they may offer you a lower interest rate. The numbers could potentially work out where the amount you save in interest is enough to cover your life insurance premiums or more.
• It can help protect your other assets. You could put up other assets for collateral, such as your home or car. But if you miss payments, the lender could take this property from you. While the same is true for life insurance, you might prefer this approach versus risking your home or your vehicle.

What Are the Possible Drawbacks?

• It reduces your life insurance benefits. When you have a collateral assignment of life insurance, the lender gets the first priority of collecting it. If your policy has cash value, the agreement might restrict your ability to take it out until you've paid off the debt. If you die without paying off your debt, the death benefit will first go to paying it off. Only if there's any benefit remaining will it go to your beneficiaries.
• It creates an extra insurance cost. To meet your collateral assignment agreement, you must have life insurance. The life insurance company will charge premiums. This is another cost on top of your loan payments.
• There is no guarantee of qualifying for life insurance. If you don't already have life insurance, you can try buying a policy for this arrangement. However, you are not guaranteed to qualify. You would need to undergo health underwriting and meet the provider's requirements. If you have health issues, it could drive up the insurance cost and make a collateral assignment not worth it. You could even be denied life insurance.

What Common Mistakes Should be Avoided When Assigning Collateral?

• Not checking with the lender's requirements first. Your lender might only accept certain types of life insurance policies or ones from specific companies. If you don't check before signing up, you might purchase a policy that the lender won't accept. Then you'd need to start the insurance application process over again before you can take out your loan.
• Naming the lender as the beneficiary. If you name the lender as your primary beneficiary, the lender is legally entitled to the full amount of your life insurance death benefit when you die. This is true even if the death benefit is larger than your unpaid loan balance. Make sure to go through the proper collateral assignment process so your life insurance only pays off your debt and nothing more. That way, any remaining benefit goes to whoever you've chosen as your beneficiary.
• Canceling your life insurance before paying off the debt. Your collateral assignment agreement requires you to keep your life insurance in place during the entire life of the loan. If you cancel the policy before then, the lender could increase your interest rate. They could also demand repayment of the entire loan at that moment since you breached the contract.
• Not having enough coverage for beneficiaries. A collateral assignment reduces the life insurance death benefit for your other beneficiaries, such as your spouse and children. Before using this agreement, make sure you have enough in either life insurance coverage or other assets to cover your final expenses and provide for family members depending on your income.

What Alternatives Could You Use for Your Loan?

• Use life insurance cash value. If your life insurance has cash value, would it be enough to cover your current financial needs? If so, you could withdraw the life insurance cash value. You could also borrow the money through a loan and then pay it back into your policy to use again in the future. However, both approaches will reduce the size of the death benefit for your beneficiary. You would also owe interest on a loan. If your withdrawal is more than what you paid in premiums, you'd owe income tax for taking out the gains. Compare these costs versus owing interest to a lender.
• Take out an unsecured loan. You could also see how much it would cost to borrow without putting up collateral. Just keep in mind the loan interest rate would be higher. You can then compare how much extra you would owe in interest versus the cost of paying life insurance. In some cases, it may be less expensive to borrow through an unsecured loan, especially if you don't need life insurance for other reasons.
• Use other assets. If you own a house, car or an investment account, you could put those up for collateral instead of life insurance. If you've paid off some of your mortgage, you could also borrow using a home equity line of credit. The drawback is that if you miss loan payments, you risk losing your home, car or any other asset you put up for collateral.
• Find a co-signer. If you are having trouble qualifying for a loan on your own, a co-signer could potentially help. This other person agrees to pay off the loan if you miss payments. This makes it safer for the lender. However, if you miss payments, you could hurt the credit score of the other person. They legally need to pay off the debt too.

Should You Consider a Collateral Assignment of Life Insurance?

A collateral assignment of life insurance can make sense if you already have life insurance or you are healthy enough to qualify for a new policy. It also could be worth using if you have addressed your life insurance needs already. Lastly, this arrangement can make sense if you don't want to risk your other assets or if you don't have any other assets for collateral.

If you don't have life insurance and don't think you could qualify for a new, affordable policy because of health issues, this approach might not be an option. If you have life insurance but don't want to risk not having enough coverage for your beneficiaries, this approach also might not be worth it.

To decide if this approach may be right for you, consider speaking with a financial professional . They can compare your other borrowing options and offer guidance based on your specific needs. If a collateral assignment is the best move, they can also help you with your insurance application.

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What Is a Collateral Assignment of Life Insurance?

Collateral assignment enables you to use your life insurance as collateral for a loan. This allows you to be approved for a loan if you don’t want to put your other assets at risk. Here is how collateral assignment loans work, as well as the pros and cons and alternatives to collateral assignment. For more help with loans or life insurance, consider working with a financial advisor .

When you apply for a loan, such as a business loan, the lender might require collateral before approving the loan. One way to provide collateral for the loan is to use your life insurance policy. If you die before fully repaying the loan, the policy’s death benefit will reimburse your lender first. Then, any remaining funds will go to your beneficiaries.

Not all lenders will allow you to use your life insurance as collateral, and if they do, they may require you to buy a new policy that can be used for collateral. The lender will be listed as an assignee on the collateral assignment form, which is different from indicating the lender as a beneficiary on the policy .

Lenders are often willing to accept this kind of arrangement because money is guaranteed if the borrower defaults or dies before the loan is repaid. To use your life insurance as collateral, you will have to apply for collateral on your new or existing policy.

How to Apply for Collateral Assignment

If your loan requires collateral, there are a few basic steps you must complete to use your life insurance as collateral. We’ll outline those steps here. Firstly, check to see if your existing policy allows collateral assignment and if the policy’s death benefit is sufficient to cover the collateral requirements of the loan. If your existing policy comes up short, you may need a new life insurance policy ; if so, make sure the new policy passes both checks.

Once you have your policy you can use for collateral, you must fill out a collateral assignment form. There, you will indicate your lender as the assignee for the death benefit. Both you and your lender will have to assign the form to provide your approval. At this point, your bank should be able to confirm the collateral assignment and you can apply for your new loan.

Collateral Assignment Benefits

If your credit isn’t the best, your lender might ask for collateral. Using your life insurance policy as collateral might be worth considering. Here are some possible reasons:

• No risking your personal assets : A lot of people’s most valuable assets are their houses and vehicles, which can make them work well as collateral. The problem is that the lender could seize them if you default or pass away before the loan is repaid.
• Cheap alternative to personal loans : Life insurance rates vary on many factors such as your age and health. However, if your policy has low premiums, it might be cheaper than taking on a personal loan.
• Gain access to the funding you need : If a lender asks for collateral, they just want something that can recoup the lost income from the loan. If your life insurance meets that requirement, your lender should be willing to accept it.

Collateral Benefit Downsides

There are, as with any financial choice, potential downsides as well:

• May reduce death benefit for beneficiaries : If you indicate your lender as assignee on the collateral assignment form, they will be paid before your beneficiaries, if necessary. If you have a whole life policy with a cash value , it may be sufficient to cover the cost of the loan. If not, your beneficiaries’ death benefit may be reduced.
• May require a new policy : Your insurer may not allow you to use your existing policy as collateral. If so, you may have to buy a new policy if you still want to go this route.

Possible Alternatives

There are alternatives to a collateral assignment of life insurance that you may want to consider. In addition to the downsides of this arrangement, you may want to reserve your life insurance for other purposes, such as debt repayment.

• Home equity line of credit : If you are a homeowner and have equity in it, you could consider borrowing against that equity. However, that exposes you to the risk of losing your home.
• Unsecured loan : Another alternative is an unsecured loan . However, if one lender required collateral, it likely means an unsecured loan would come with unfavorable terms, such as high rates . Thus, this option is best if you have good to excellent credit.
• Life insurance loan : As discussed earlier, some life insurance policies have a cash value. If you have built enough of a cash value in your policy, you can borrow against it. But any unpaid amount will be deducted from your death benefit – plus interest.
• Policy cash out : It is possible in some cases to cash out a life insurance policy, less certain fees. But this means your existing life insurance policy will be terminated, and you’ll have to find a new one.

The Bottom Line

Collateral assignment of life insurance allows you to use your life insurance policy as collateral when applying for loans. This is especially common when applying for business loans. However, your insurer must allow this arrangement, and the policy must be sufficient to cover the collateral requirements. Using your life insurance policy comes with certain benefits, such as not risking your personal assets. But it also has downsides, such as requiring a new policy in some cases. Consult a financial advisor before making any major financial decisions.

Tips for Buying Life Insurance

• Deciding how much life insurance to buy isn’t easy, especially with so much to take into consideration. SmartAsset’s life insurance calculator can help you estimate how much life insurance you need in your unique situation.
• A financial advisor can guide you through major financial decisions, like buying life insurance.  SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals,  get started now .

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Collateral Assignment of Life Insurance Policy

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