How to Get Collateral Assignment of Life Insurance for a Loan

August 6, 2020
Jonathan Fritz
B.A. Risk Management
Life Insurance Agent

Did you know you can use your life insurance policy as collateral for securing a loan, just the same as you can with your house or car? Many lenders accept life insurance as a valid type of collateral, since life insurance policies guarantee payment if the borrower dies. Read on to find out about what type of life insurance policy you'll need to secure a collateral assignment and how to apply for life insurance for collateral assignment.

What Is Loan Collateral?

Collateral is a lending term for property or assets that borrowers offer as a means for lenders to secure a loan. This ensures that if a borrower stops making loan payments, a lender will still be able to recoup its losses by seizing the assigned asset. Collateral is secured via a claim called a lien, which guarantees that the asset will be available in the event of nonpayment.

Assets typically fall into two categories: hard assets and paper assets. Hard assets are major purchases, such as houses and cars, that can be resold for cash value, while paper assets include stocks, bonds, and other financial investments that can be converted into cash by a lender.

Requirements for Life Insurance Collateral Assignment

Believe it or not, a life insurance policy can be used as a paper asset form of collateral when securing an SBA loan. This is because the payout of funds is guaranteed if the borrower dies. In order to use a life insurance policy as collateral, the borrower of the loan must be the owner of the policy. However, they don't need to be the insured party on the loan. Any type of life insurance policy can be used for collateral assignment, including term life insurance policies.

The policy must be kept current throughout the term of the loan, with no lapse in payment at any point. Borrowers can assign all of part of the policy's value as collateral. If only part of the policy is assigned as collateral, and the borrower dies before full repayment, any remaining balance of the payout goes to any beneficiaries.

If you are in the process of getting a loan and just discovered that you need life insurance as part of the loan agreement, click here to get a quote or call 888-407-0714. We specialize in getting our customers coverage fast. We have experience processing hundreds of policies that are required for business loans. Avoid delays by working with the experts.

Loans that Require Life Insurance Collateral

Many lenders require that borrowers use life insurance coverage as collateral for loans, particularly small business loans secured through the Small Business Administration (SBA). In addition, some lenders may consider using your existing life insurance policy for collateral assignment, as long as the policy amount is greater than the desired loan amount. Check with your lender, since some lenders may want you to take out a brand-new policy meant for the specific purpose of collateral.

How Can You Apply for A Loan Using Life Insurance?

In order to apply for a loan using life insurance as collateral you'll first need to secure a loan in your name for your desired purpose. Check with your bank to see what their loan requirements are and what types of loans meet your individual needs. Then, you'll need a life insurance policy in your name.  You'll need to go through the standard application process and be approved for a policy from your company of choice.

Once you've secured both types of coverage, you'll want to apply for a collateral assignment of life insurance through both your life insurance company and your bank. You'll need to specify to your lender that you intend to use your life insurance policy as collateral for your loan. Then, all you'll need to do is wait for your loan to be finalized by your bank, and you'll be able to designate your policy as collateral.

What are The Types of Collateral Assignment?

There are two types of collateral assignment: absolute and conditional. Absolute assignment gives your lender total power over your insurance policy being used as collateral. By signing an absolute assignment, your lender will have the ability to make changes to your policy, add or remove beneficiaries, and oversee the payment of your premiums. On the other hand, conditional assignment allows you to retain primary control of your policy and only pay designated proceeds to your lender. Upon complete loan repayment, total control of your policy will be transferred back to you as the policyholder.

Are There Disadvantages to Collateral Assignment?

There can be some disadvantages to collateral assignment of life insurancr, depending on your circumstances. You may have difficulty securing an affordable life insurance policy at a low premium rate if your health is subpar. This can complicate the loan process if you're banking on using your policy as collateral. You might be uncomfortable with the loss of policy control, especially if your lender has an absolute assignment. Additionally, if you have a whole life insurance policy, you may not be able to use the cash value of your policy for other purposes.

Collateral Assignment versus Naming the Bank a Beneficiary

If you're looking to secure a collateral assignment, your bank might want you to assign them as the beneficiary of your life insurance policy. Be careful, as this will designate the remaining balance of your death benefit to your bank in the event of your death, even if you've already repaid your loan. For instance, if you took out a $100,000 loan and assigned your bank as your beneficiary, your bank would seize the remaining amount of your policy, even if your loan balance was only $10,000 at the time of your death.

The Bottom Line

Collateral assignment for life insurance can be a great option for borrowers looking to secure loans without common forms of collateral like houses, cars, or stocks and bonds. You'll want to make sure to read and discuss the terms of assignment with your lending company at every step along the way, to make sure you're getting the best agreement possible for you and your beneficiaries. If you're thinking about taking out a loan and need a life insurance policy as collateral assignment, be sure to check out our free life insurance cost tool for policy comparisons and quotes.