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What Is a Collateral Assignment of Life Insurance?

is collateral assignment of life insurance irrevocable

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

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

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

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

Key Takeaways

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

How a Collateral Assignment of Life Insurance Works

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

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

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

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

Example of Collateral Assignment of Life Insurance

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

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

Alternatives to Collateral Assignment of Life Insurance

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

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

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

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

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

What Are the Benefits of Collateral Assignment of Life Insurance?

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

What Kind of Life Insurance Can Be Used for Collateral?

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

Is Collateral Assignment of Life Insurance Irrevocable?

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

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

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

The Bottom Line

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

Progressive. " Collateral Assignment of Life Insurance ."

Fidelity Life. " What Is a Collateral Assignment of a Life Insurance Policy? "

Kansas Legislative Research Department. " Collateral Assignment of Life Insurance Proceeds ."

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

What is collateral assignment of life insurance?

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

Why use life insurance as collateral?

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

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

Pros and cons of using life insurance as collateral

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

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

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

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

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

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

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

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

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

Alternatives to life insurance as collateral

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

Unsecured loan

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

Secured loan

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

Life insurance loan

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

Home equity line of credit (HELOC)

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

Frequently asked questions

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

What is collateral insurance and how does it work?

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What Is Collateral Assignment of Life Insurance?

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Updated: December 14, 2023

How It Works
Overview of Application Process
Pros and Cons
Impact on Beneficiaries
Alternatives

How Collateral Assignment of Life Insurance Works

The collateral assignment allows you to use your life insurance policy as security for a loan. The process involves legally designating your policy as collateral, which means if you pass away before fully repaying the loan, the lender can claim the death benefit to cover the remaining balance. You start by choosing either a term policy or whole life insurance and then complete a collateral assignment agreement. This agreement is legally binding and sets the terms for the lender to access the death benefit .

For your beneficiaries, this arrangement means the death benefit they receive could be reduced. If you die with an outstanding loan balance, the lender is paid first from the policy's proceeds. Any remaining amount goes to your beneficiaries only after the loan is settled.

For example, a policyholder with a $500,000 policy was assigned as collateral for a $200,000 loan. If the policyholder dies before settling the loan, the lender will receive $200,000 from the policy's death benefit. Meanwhile, the remaining $300,000 gets disbursed to the policy's beneficiaries.

Applying for Collateral Assignment

Applying for collateral assignment is a process moderated by your life insurance company designed to secure loans using your life insurance policy as collateral. It involves a series of steps:

Obtain a Collateral Assignment Form

Request a collateral assignment form from your life insurance provider. This form is crucial for designating the lender as a beneficiary for the loan amount. Ensure you obtain the correct form, as forms vary based on policy type and insurer.

Fill Out the Form Correctly

Complete the form with accurate details, including policy number, loan amount and lender information. Pay close attention to all sections to avoid errors that could delay or invalidate the assignment. Incomplete or incorrect information can lead to processing delays or rejection.

Signed by Both Policyholder and Lender

Ensure both the policyholder and lender sign the form, confirming the agreement. This dual signature legally binds both parties to the terms of the collateral assignment. Any discrepancy in signatures may question the form's validity.

Submit Completed Form

Submit the signed form back to the insurance company for processing. Consider using a traceable delivery method for submission to confirm receipt. Delays in submission can impact the timeline of the loan approval process.

Await Approval or Rejection From Insurance Company

Wait for the insurer to review and approve or reject the collateral assignment. The insurer may request additional information or clarification, which can extend the approval timeline.

Receive a Letter of Acknowledgment

You and your lender will receive a letter of acknowledgment from the insurer if your collateral assignment application is approved.

Obtaining Required Documentation

The required documentation for collateral assignment of life insurance is straightforward. Typically, you'll need to provide two main types of documents:

Collateral Assignment Form: This form is critical because it officially transfers a portion of your life insurance policy benefits to the lender as collateral. It demonstrates to the lender that you have taken the requisite steps to secure your loan against your life insurance policy.
Original Life Insurance Policy and Proof of Loan: Lenders may require your original life insurance policy to ensure it is valid and enforceable. Proof of the loan agreement or obligation, such as a mortgage note or other loan document, is also commonly required. This establishes the legitimacy of your loan and substantiates the collateral assignment.

Pros and Cons of Collateral Assignment

Utilizing a life insurance policy for collateral assignment can offer a range of benefits and potential drawbacks. This method allows you to secure loans and is often safer than using physical assets as collateral. However, you should also note the inherent risks, primarily that the lender retains the first right to your policy’s death benefit upon your death.

Impact of Collateral Assignment on Beneficiaries

While the collateral assignment of life insurance has its benefits, it’s important to remember that it can impact the amount your beneficiaries receive. If you pass away with an outstanding balance on your loan:

Your Lender Will Be Paid First

In the collateral assignment arrangement, the lender is designated as the primary beneficiary for the outstanding loan amount. This means if you pass away before fully repaying the loan, the lender is entitled to receive payment from the death benefit first. The amount collected by the lender is limited to the remaining loan balance.

Any Remaining Death Benefit Will Be Disbursed to Your Beneficiaries

After the lender's claim is satisfied, the remaining death benefit is disbursed to your policy’s designated beneficiaries. The amount they receive depends on the loan balance at the time of your death. If the loan balance is substantial, your beneficiaries will receive significantly less than the policy's full death benefit.

Alternatives to Collateral Assignment

Alternatives to collateral assignment include personal loans , home equity loans , or surrendering the life insurance policy for its cash value. None of these options require using life insurance as collateral. Each option offers different benefits and risks compared to using life insurance as collateral.

These questions covers various topics related to collateral assignments, including the requirements, implications for beneficiaries and what happens under various scenarios.

How does collateral assignment differ from naming a beneficiary?

Collateral assignment allows a lender to claim the life insurance death benefit for an outstanding loan amount while naming a beneficiary designated who receives the death benefit. The lender's claim is prioritized over the beneficiaries' in collateral assignment.

Can any type of life insurance policy be used for collateral assignment?

Most types of life insurance policies, including term, whole and universal life, can be used for collateral assignment, provided the insurance company allows it and the policy has sufficient value.

Can the policyholder still change beneficiaries after a collateral assignment?

Yes, the policyholder can change beneficiaries after a collateral assignment, but the lender's right to the death benefit amount remains until the loan is repaid.

What happens if I cancel my life insurance before paying off the debt collateralized with my policy?

Canceling your life insurance policy before repaying the debt can lead to a breach of the loan agreement. This action may prompt the lender to increase your interest rate or demand immediate repayment of the outstanding loan balance.

These related sections offer additional insights into concepts and alternatives connected to collateral assignments and life insurance:

Using Collateral for a Personal Loan — This link explains how to use various types of collateral for securing a personal loan, providing a broader context to the specific use of life insurance as collateral.

Term vs. Permanent Life Insurance — This resource compares term and permanent life insurance, helping to understand which types of policies can be used for collateral assignments.

Permanent Life Insurance — This page details permanent life insurance, a type commonly used in collateral assignments due to its cash value component.

Life Insurance Calculator — This page lets you calculate the appropriate amount of life insurance coverage needed, which is crucial when considering using a policy for collateral.

About Nathan Paulus

Nathan Paulus is the Head of Content Marketing at MoneyGeek, with nearly 10 years of experience researching and creating content related to personal finance and financial literacy.

Paulus has a bachelor's degree in English from the University of St. Thomas, Houston. He enjoys helping people from all walks of life build stronger financial foundations.

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Life Insurance

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.

Kilito Chan / Getty Images

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

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

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

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

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

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

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

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

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

Types of Life Insurance Collateral

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

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

A Note on Annuities

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

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

The Process

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

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

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

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

Lenders Get Paid First

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

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

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

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

Key Takeaways

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

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

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

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

What Is A Collateral Assignment Of Life Insurance?

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

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

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

What Is Collateral Assignment?

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

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

What Is a death benefit?

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

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

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

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

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

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

Secured Loans vs. Unsecured Loans

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

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

A woman signing up for Collateral Assignment.

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 of life insurance

S ecured 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?

Why use life insurance as collateral?

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?

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

Alternatives to life insurance as collateral

Unsecured loan

Secured loan

Life insurance loan

Home equity line of credit (HELOC)

Frequently asked questions

Finding the best life insurance company is important for you and your family. What works well for others might not fit your needs or current budget. First, find out how much life insurance you need by speaking with a financial advisor and using this life insurance calculator as a starting point. Similar to shopping for car insurance, you might want to look at customer service and claim reviews and the company’s financial stability ratings, then get quotes from several providers and ask for recommendations from people you trust.

Life insurance can be used as collateral for auto or home loans, but it is also commonly used for small business loans . Often small business owners have to use most of their private money to fund their businesses. When it is time to expand, upgrade technology or maybe hire more staff, they may need a loan to invest in their business that won’t put their remaining personal finances at risk.

It is typical for borrowers to put up their real estate or vehicles as collateral since they are usually our most valuable assets. Some loan companies may accept cash in the form of money market accounts or certificates of deposit (CD) , investments or valuable items such as jewelry, art and collectibles. Valuables are usually subject to an appraisal before they are accepted.

Although we have talked above about collateral assignment of your life insurance policy to secure a loan, there is another type of assignment called absolute assignment. With collateral assignment, you still exercise control over the policy, and the assignment only exists as long as the loan is active. Absolute assignment, however, transfers all policy rights to the lender, who becomes the new owner of the policy. The original policyholder gives up their right to name beneficiaries or access the policy’s cash value. This arrangement is more like a sale of the policy , with the new owner assuming all rights and responsibilities over it.

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Home » Articles Library » 2 Ways to Transfer Ownership of a Life Insurance Policy

2 Ways to Transfer Ownership of a Life Insurance Policy

Things to Know about Borrowing Against Your Life Insurance Policy

As property, policyowners can transfer their life insurance contracts to other persons or entities. A policyowner can transfer either all or only some of the “bundle of rights” that comprises a life insurance policy to almost any person or entity.

The two basic ways of making a lifetime transfer of a policy are: (1) the absolute assignment; and (2) the collateral assignment. An absolute assignment, as its name implies, transfers all the policyowner’s rights irrevocably. A collateral assignment, again as its name implies, assigns so much of the death benefit as necessary for as long as necessary to secure a lender’s rights. But no more of the proceeds will go to the lender than the amount of debt owed.

Requirements

The assignment does not have to be of any particular form (absent specific provisions in state law or the contract to the contrary). Because life insurance is treated as personal property, policyowner may transfer ownership rights, not only by many different types of documents, but also by many different actions. For example, if a person sells a business and the business owns a life insurance policy, the sale of all the assets of the business carries with it the personal property the business owned – including the life insurance.

Likewise, a property settlement in connection with a divorce may have the effect of transferring the ownership of life insurance on the life of one or the other (or both) spouse(s) even though no one ever uses the word “assignment” with regard to these transfers. But this type of transfer (where a clause in the divorce decree disposes of life insurance) is both very dangerous and very awkward. If a policyowner names his new spouse as beneficiary of the insurance proceeds and the insurer has no notice or knowledge of the divorce decree’s change, both spouses are likely to claim the proceeds. Furthermore, if the decree requires the policyowner spouse to maintain the policy for the benefit of his or her ex-spouse, the policyowner cannot obtain a policy loan-even to keep the policy in force through a premium loan.

Before either the absolute or collateral type of assignment or any other instance of a policy ownership transfer is valid, the policyowner must notify the insurer (and, where required by the terms of the contract, the insurer must consent to the assignment). Once notified in writing at the insurer’s home office, the insurer must honor the policyowner’s transfer—unless the terms of the contract itself forbid assignments. So if the insurer then disregards (by intention or neglect) the assignee’s rights and makes payment to someone else, the courts may force the insurer to make a second payment to the assignee. If the policyowner gives no notice to the insurer, it will be protected in a transaction initiated by a former owner. For instance, if the former owner applies for a policy loan and he has not given the insurer proper notice that he had assigned the policy, the insurer is protected in making that loan.

The insurer does not, however, have to verify the bona fides of the transaction between the policyowner and the transferee nor the validity of the transaction. In other words, the insurer is not accountable for the mental or legal capacity of the policyowner to make the assignment (unless it had knowledge that the policyowner was not legally competent to make it or there were irregularities in the assignment form).

Absolute Assignments

Policyowners use an absolute assignment in life insurance planning when the policyowner wants to sell or give away all of his or her rights under the contract. The goal might be to obtain valuable consideration, to save estate taxes, avoid creditors, or purely for love and affection and to assure the transferee of financial security. There are many common examples of sales and gifts:

A client might sell a policy on his life to his business.
A business might sell a policy on an employee’s life to the employee or to the employee’s spouse or child or trust (or to a pension plan).
A shareholder might sell a policy on his life to a new business associate.
A client might give a policy on her life to her spouse.
A client might give a policy on his life to his children or to a family trust.

Tax Implications

Both sales and gift transactions have important and sometimes unexpectedly expensive tax implications. Planners should thoroughly research before allowing any sale of a life insurance policy. Also, understand what should be considered before allowing a client to make a gift of a policy. A valid gift requires that the donor have contractual capacity and intent to make a voluntary gratuitous transfer and the gift must be delivered to and accepted by the donee (assignee).

Nontax Implications

Planners must be aware of the nontax implications of an absolute assignment in order to avoid them and/or alert the client to their potential effect. Some of these are:

Although an absolute assignment itself may not per se change the interest of a revocable beneficiary, as a practical matter the new owner can immediately change the beneficiary and often makes that change almost simultaneously with the assignment. Some absolute assignment forms state that the new owner is automatically the primary policy beneficiary until the new owner makes a change to the beneficiary designation.

If the policyowner made an irrevocable beneficiary designation before making an absolute assignment of the policy, in most states the assignment will not defeat that designation (without the written consent of the beneficiary) and the transferee should be apprised of this fact.

Absolute assignments may put the policy and its proceeds beyond the claims of the policyowner’s creditors, but planners should inform policyowner that—like diamonds—an absolute assignment is forever. There is a loss of both control and flexibility from the transferor’s viewpoint.

Collateral Assignment for Life Insurance: A Comprehensive Guide

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

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

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

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

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

When Is Collateral Assignment Used?

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

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

How Life Insurance Collateral Works

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

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

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

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

Term vs. Permanent Life Policies

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

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

Current vs. New Policies

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

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

Assignees vs. Beneficiaries

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

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

Should You Consider Using Your Life Insurance as Collateral?

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

Pros

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

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

Cons

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

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

Alternatives to Collateral Assignment

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

Utilize a Life Insurance Cash Value Loan

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

Cash Surrender

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

Take Out a Home Equity Loan

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

Take Out an Unsecured Loan

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

Take Out a Term Life Insurance Policy

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

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

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

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What Is Split-Dollar Life Insurance?

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

Table of Contents

What Is a Split-Dollar Life Insurance Policy?

How does split-dollar life insurance work.

How Much Does It Cost?

Key Takeaways:

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

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

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

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

Collateral Assignment/Loan Regime

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

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

Endorsement Agreement

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

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

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

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

Find the best life insurance for you

Get free quotes and compare life insurance policies without your contact information.

How Do I Buy Split-Dollar Life Insurance?

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

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

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

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

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

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

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

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

Potential employee benefits include:

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

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

Other Life Insurance Companies

Banner Life
Colonial Penn
Corebridge Financial
Guardian Life
John Hancock
Lincoln Financial Group
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What is a Collateral Assignment of Life Insurance?

by Jeff Root

Last Updated: July 2020

A collateral assignment of life insurance is a contract that allows the death benefit of a life insurance policy to be used as collateral for a loan.

Collateral assignments are usually used in business loans. However, it can also be used for equipment loans, structured settlement buyouts , and other loans.

How Does a Collateral Assignment of Life Insurance Work?

In the event of the death of the person who is named on the life insurance policy, the lender who has the insurance policy assigned as collateral gets paid first.

A collateral assignment will always take precedence over beneficiary claims for the proceeds of the death benefit. When a business owner applies for a business loan and wants to use their death benefit as collateral, the loan company must then ascertain whether should the owner die, will it affect the business, and cause the loan to default.

The death benefit on the life insurance policy is there as security that the lender will get the loan repaid should the recipient of the loan die.

It is important to remember that although only the policy owner can pledge the death benefits of a policy to the lender, they may not necessarily be the individual named on the policy. This individual could be their spouse or even the director of the company.

How to Set Up a Collateral Assignment of Life Insurance

When setting up a collateral assignment of life insurance, the lender should never be named as the beneficiary of the policy.

Setting Up the Beneficiary of the Life Insurance Policy

The beneficiaries should be the loved ones of the person named on the policy, as should the named person die, the loan will get paid off first, and then the collateral assignment is released and the death benefit will be paid to these beneficiaries.

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 , so make sure you choose a life insurance agent who thoroughly understands the collateral assignment process.

Types of Life Insurance You Can Use for Collateral

In order to set up a collateral assignment of life insurance, there is no particular type of life insurance policy required by a lender.

The only stipulation is that the actual life insurance policy itself must be assignable. The loan policyholder must always make sure that the life insurance company is aware of and will allow the use of the policy as collateral for a loan.

An existing life insurance policy can be used to satisfy the lender’s requirements as long as the amount of the death benefit on the policy is enough to cover the loan amount required.

Here are some examples of policies accepted for collateral assignment:

Term life insurance
Whole life insurance
Universal life insurance
Second-to-die insurance

What Happens to the Collateral Assignment After the Loan is Paid?

If a loan is taken out using a collateral assignment of the life insurance policy, here is what happens when the loan is repaid in full. If the person insured on the policy is still living, then the lender relinquishes all rights to any death benefit on the policy and they will return all documents.

Keep Your Life Insurance Company Informed

Most life insurance companies will have strict rules that must be followed to ensure the collateral assignment of the life insurance policy will be allowed and they must always be informed that the assignment has been made.

The life insurance company will need to submit written notification to the lender that the collateral assignment of life insurance has been filed. This could be as a separate cover letter with a copy of the executed collateral assignment form or a just a stamped filed copy of the collateral assignment form itself.

The Lender will Need Information About Your Life Insurance Policy

The lender will also need to make further checks before allowing the loan to go ahead. They will need to check that there is no collateral assignment of the life insurance policy already in place and that all life insurance premiums are not only up to date, but have also been made for a period of at least six months.

Also, they will check that if the policy has a cash surrender value, there have been no borrowings secured against that and that the original life insurance policy is not required in order to make a claim.

Some types of loans have a cash surrender value. This is the amount that an insurance company will payout to the policyholder if the life insurance policy is terminated before it reaches maturity. If there is a filed collateral assignment of life insurance against the policy, any monies paid out will be used to pay off the balance of the loan before either the policyholder or their beneficiaries.

Filing the Collateral Assignment of Life Insurance

When a life insurance company sets a collateral assignment of life insurance, this usually takes about seven to ten days to be filed and acknowledged. However, some companies may expedite this if the collateral assignment is required more urgently.

If you need help with setting up a collateral assignment of life insurance, contact us.

Companies like SelectQuote and Zander Insurance are high volume call centers and often don’t see collateral assignments all the way through.

We’ve helped hundreds of people set up collateral assignments and have expert life insurance agents who can help. Our agents have a thorough understanding of the needs of the collateral assignment process and will be able to guide you through this and ensure that all the requirements of the loan company are met.

Reader Interactions

February 11, 2015 at 3:38 pm

Would collateral assignment of a life insurance policy help in securing a mortgage or a refinance?

February 11, 2015 at 3:44 pm

William, No it wouldn’t.

June 23, 2015 at 9:46 am

Im attempting to complete a 5yr delayed property settlement and want to guarantee my adult daughter receives the death benefits from a whole life policy on my ex spouse. Im entitled 1/2 of everything including his retirement so he is being nice. I don’t trust him to not change her as the beneficiary so can I have the death benefit assigned to her like a collateral assignment to ensure the payout goes directly to her?

July 3, 2015 at 12:10 pm

Kathy, the easiest way to structure this would be to make yourself the owner of the policy. Simply fill out a “change of ownership” form. Only the owner can change the beneficiary of a policy. In other words, you’ll be the “owner” and he’ll be the “insured”. It’s done all the time.

July 6, 2015 at 7:35 pm

I have a large term for policy. Which I have held for 15 yrs. I would like to sell it or use it as collateral. What company can I call?

July 7, 2015 at 9:28 am

Mike, No on the collateral unless you’re trying to secure a loan. I need more information if you want to sell, specifically your age. I’ll email you.

October 22, 2020 at 10:09 am

I was a beneficiary on my dad’s life insurance policy, and which he recently passed. I contacted the life insurance company and they told me a bank was the owner and beneficiary for the policy now. What does this mean?

November 12, 2020 at 11:59 pm

That means your dad likely had an SBA loan or some other type of loan that was collateralized with life insurance. With your fathers death, the life insurance company will be paying the bank to cover the loan.

HOWEVER, most of the time the bank only receives what was left on the loan and the rest will be paid to the beneficiary. I’d look into that.

And sorry for your loss. Good luck!

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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!

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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Collateral Assignment of Life Insurance in Canada: Everything You Need to Know

Collateral assignment can be lucrative way to secure loans for future assets!

16 minute read Originally published: March 7, 2023

Collateral assignment of life insurance canada

Collateral assignment of life insurance in Canada can be a valuable tool for individuals seeking to use their life insurance policies as collateral for loans or other forms of credit. By assigning a portion of their life insurance policy as collateral, policyholders can secure loans with lower interest rates and favorable terms. However, collateral assignment of life insurance can be complex, and understanding the risks and benefits is crucial to making informed decisions about this strategy. In this blog, we will provide an in-depth guide to collateral assignment of life insurance, discussing what it is, how it works, its benefits, risks, and alternatives. We will also provide case studies and frequently asked questions to help you gain a better understanding of this important topic. Whether you are a policyholder, a borrower, or just curious about collateral assignment of life insurance in Canada, this blog will provide you with the information you need to make informed decisions about your life insurance and financial needs.

In this blog:

What is Collateral Assignment of Life Insurance?

Benefits of collateral assignment of life insurance, the collateral assignment process, factors to consider about collateral assignment, when to use collateral assignment of life insurance, alternatives to collateral assignment, types of collateral assignment of life insurance, risks and drawbacks of collateral assignment of life insurance, case studies collateral assignment of life insurance, conclusion: collateral assignment of life insurance: everything you need to know, frequently asked questions (faqs) about collateral assignment of life insurance.

Collateral assignment of life insurance is a process where a policyholder assigns a portion of their life insurance policy as collateral to secure a loan or other form of credit. In this arrangement, the lender becomes the beneficiary of the collateral assigned policy, giving them the right to receive the death benefit if the policyholder passes away before the loan is fully paid off.

The amount of the policy assigned as collateral typically corresponds to the amount of the loan or credit being sought, and the collateral assignment is removed once the loan or credit is repaid in full. Policyholders may use collateral assignment of life insurance to secure various types of loans, including mortgages, personal loans, or business loans.

One of the key benefits of collateral assignment of life insurance is that it allows borrowers to secure loans with lower interest rates and better terms, as the loan is secured by the life insurance policy. Additionally, it can be an attractive option for borrowers who may not have sufficient collateral or credit history to secure a loan through other means.

It is important to note that collateral assignment of life insurance can have drawbacks and risks, such as reducing the death benefit for beneficiaries and limiting the policyholder’s ability to make changes to the policy. As such, it is important for policyholders to carefully consider the pros and cons before pursuing this strategy and consult with a licensed insurance professional and financial advisor to determine whether it is the right choice for their needs.

Collateral assignment of life insurance can offer several benefits for policyholders and borrowers alike. Here are some of the key benefits:

Lower Interest Rates: Collateral assignment of life insurance can help borrowers secure loans with lower interest rates compared to other forms of unsecured borrowing, such as credit cards.

Easier Approval: Collateral assignment of life insurance can be an attractive option for borrowers who may not have sufficient credit history or collateral to qualify for a loan through traditional means.

Flexible Repayment : Because the loan is secured by the life insurance policy, borrowers may be able to enjoy more flexible repayment terms, such as longer loan durations or smaller monthly payments.

No Additional Collateral: Unlike other forms of secured borrowing, such as a mortgage or car loan, collateral assignment of life insurance does not require additional collateral to secure the loan.

Protects Insurance Coverage: Collateral assignment of life insurance does not cancel the life insurance policy, and the policyholder can still access its benefits as long as they continue to pay their premiums.

While collateral assignment of life insurance can offer many benefits, it’s important to keep in mind that it can also have drawbacks and risks. For example, reducing the death benefit can leave beneficiaries with less protection, and limiting the policyholder’s ability to make changes to the policy can affect their insurance coverage.

Collateral assignment of life insurance involves several steps to assign a portion of a policy as collateral for a loan or credit. The process begins with the borrower applying for a loan or credit and the lender assessing their creditworthiness and collateral requirements. The policyholder then assigns a portion of their life insurance policy as collateral, naming the lender as the beneficiary of that portion. A collateral assignment agreement is signed by both parties to outline the terms and conditions of the arrangement, and the insurer is notified of the collateral assignment and updates the policy accordingly. Once the borrower repays the loan according to the agreed-upon terms, the collateral assignment is removed from the policy. It’s important to note that the collateral assignment process may vary depending on the lender and insurer, and it’s crucial to review the terms and conditions of the collateral assignment agreement carefully.

Before pursuing collateral assignment of life insurance, there are several factors that policyholders and borrowers should consider to determine whether it’s the right strategy for their needs. Here are some key factors to keep in mind:

Cost: Collateral assignment of life insurance can come with costs, such as administrative fees, processing fees, and interest charges, which can impact the overall cost of the loan or credit.

Impact on Death Benefit: Assigning a portion of a life insurance policy as collateral can reduce the death benefit for beneficiaries , leaving them with less protection in the event of the policyholder’s death.

Limitations on Policy Changes: Collateral assignment of life insurance may limit the policyholder’s ability to make changes to their policy, such as reducing or canceling coverage or changing beneficiaries.

Impact on Insurance Coverage : Depending on the amount of the policy assigned as collateral, the policyholder’s insurance coverage may be reduced or even canceled if the loan or credit is not repaid.

Risks of Default : Defaulting on a loan secured by collateral assignment of life insurance can result in the loss of the assigned portion of the policy and potentially even the entire policy.

By carefully considering the factors that could impact the cost, the death benefit, policy changes, insurance coverage, and risks of default, you can determine whether collateral assignment of life insurance is right for your needs. Consulting with a professional can provide valuable insights and guidance on how to navigate the complexities of collateral assignment of life insurance, and help you make the best decision for your unique circumstances.

Collateral assignment of life insurance can be a valuable strategy in a variety of situations. It allows policyholders to assign a portion of their life insurance policy as collateral to secure a loan or other form of credit, such as a mortgage, personal loan, or business loan. This can be an attractive option for borrowers who may not have sufficient collateral or credit history to qualify for a loan through traditional means. Collateral assignment of life insurance can also provide a quick and easy source of funding in case of emergencies or unexpected expenses.

Collateral assignment of life insurance can be a valuable strategy in a variety of situations, such as:

Securing a Loan: Collateral assignment of life insurance can be an attractive option for borrowers seeking to secure loans with lower interest rates and favorable terms, particularly if they lack sufficient credit history or collateral to qualify for other forms of secured borrowing.

Financing a Business: Business owners may use collateral assignment of life insurance to secure loans to finance their businesses, purchase equipment, or invest in growth opportunities.

Estate Planning: Collateral assignment of life insurance can be used as part of estate planning, particularly if there is a need for liquidity to pay estate taxes or other expenses.

Settlements and Lawsuits: Plaintiffs in lawsuits or settlement negotiations may use collateral assignment of life insurance to secure loans to cover legal fees, expenses, or settlement payments.

Emergencies: Collateral assignment of life insurance can provide a quick and easy source of funding in case of emergencies or unexpected expenses.

Collateral assignment of life insurance can reduce the death benefit for beneficiaries, limit the policyholder’s ability to make changes to their policy, and impact their insurance coverage. Additionally, there may be costs associated with collateral assignment of life insurance, such as administrative fees, processing fees, and interest charges, which can increase the overall cost of the loan or credit.

In Canada, borrowers have several alternatives to collateral assignment of life insurance when it comes to securing loans or credit. Unsecured loans, such as personal loans or credit cards, do not require collateral but may come with higher interest rates and stricter credit requirements. Homeowners can use their home equity to secure a loan or line of credit with lower interest rates and favorable terms through a home equity loan or line of credit. Personal lines of credit allow borrowers to access funds as needed and typically come with lower interest rates than credit cards. Additionally, borrowers can consider borrowing money from their savings and retirement accounts, such as a Registered Retirement Savings Plan (RRSP) or a Tax-Free Savings Account (TFSA) .

In Canada, collateral assignment of life insurance allows policyholders to assign a portion of their life insurance policy as collateral to secure a loan or credit. The types of collateral assignment of life insurance available in Canada include absolute assignment, security assignment, collateral assignment, split dollar life insurance, and premium finance.

There are several types of collateral assignment of life insurance that policyholders can choose from, including:

Absolute Assignment : In an absolute assignment, the policyholder assigns the ownership of the policy to the lender or creditor, giving them full control of the policy’s cash value and death benefit.

Security Assignment: A security assignment allows the policyholder to retain ownership of the policy, but assigns a portion of the policy as collateral to secure a loan or credit.

Collateral Assignment: A collateral assignment is similar to a security assignment, but only assigns a specific portion of the policy as collateral, leaving the remaining portion available for the policyholder’s beneficiaries.

Split Dollar Life Insurance : Split dollar life insurance is a type of collateral assignment that allows the policyholder and lender to share the benefits of the policy, with the policyholder retaining a portion of the death benefit for their beneficiaries.

Premium Finance: Premium finance involves using the cash value of a life insurance policy as collateral to secure a loan to pay the policy’s premiums.

By understanding the different types of collateral assignment of life insurance and how they work, you can make an informed decision that meets your financial needs and goals.

While collateral assignment of life insurance can be a valuable strategy for securing loans or credit, there are some risks and drawbacks that policyholders and borrowers should consider before pursuing this strategy.

Collateral assignment of life insurance is a financial strategy that involves assigning a portion of a life insurance policy’s death benefit or cash value as collateral for a loan or credit. While it can be a useful tool for securing financing without using personal assets as collateral, there are several risks and drawbacks that policyholders and borrowers should consider before pursuing this strategy.

One of the most significant risks of collateral assignment of life insurance is the reduced death benefit paid out to beneficiaries. By assigning a portion of the policy as collateral, the beneficiaries may receive a reduced payout upon the policyholder’s death, leaving them with less financial support than anticipated. Moreover, collateral assignment of life insurance can limit the policyholder’s ability to make changes to the policy, such as increasing the death benefit or changing the beneficiaries. This can impact their insurance coverage and leave them with fewer options to adapt to changing circumstances.

Another risk is the potential for default. If the borrower fails to repay the loan or credit secured by collateral assignment of life insurance, the policy’s cash value and death benefit may be used to satisfy the debt, leaving the policyholder’s beneficiaries with little or no financial support. Additionally, there may be administrative fees, processing fees, and interest charges associated with collateral assignment of life insurance, increasing the overall cost of the loan or credit and reducing the policy’s cash value and death benefit.

It’s important to note that alternatives to collateral assignment of life insurance are available, such as unsecured loans, home equity loans, and personal lines of credit. These alternatives may be more suitable for some borrowers and provide similar financing without the risks and limitations associated with collateral assignment of life insurance. It’s essential to review the terms and conditions of any loan or credit agreement carefully and ensure that the arrangement is suitable for your needs and financial goals.

It’s important to carefully consider the risks and drawbacks associated with collateral assignment of life insurance before pursuing this strategy. Policyholders and borrowers should review the terms and conditions of the collateral assignment agreement carefully and ensure that the arrangement is suitable for their needs.

In each of these Canadian case studies, collateral assignment of life insurance was used to secure a loan or credit. The strategy allowed the borrowers to obtain the funds they needed without incurring additional debt on their homes or other assets.

Case Study 1:

Monica and George have recently bought a house and need $100,000 for home improvements. They already have a mortgage on the property and don’t want to take out a second mortgage or a home equity loan. They decide to use collateral assignment of life insurance to secure the loan. Monica and George assign a portion of their $500,000 life insurance policy to their lender and use the cash value as collateral for the loan. This strategy allows them to obtain the funds they need without incurring additional debt on their property.

Case Study 2:

Jaspreet owns a small business and needs to borrow $50,000 to purchase new equipment. She has an existing life insurance policy with a cash value of $100,000 and decides to use collateral assignment of life insurance to secure the loan. She assigns a portion of her policy’s cash value as collateral and uses the loan to purchase the new equipment. The strategy allows her to secure the financing she needs without using personal assets as collateral.

Case Study 3:

Mohammed is a retiree who wants to borrow $20,000 to finance a vacation. He has a life insurance policy with a cash value of $30,000 and decides to use collateral assignment of life insurance to secure the loan. He assigns a portion of his policy’s cash value as collateral and uses the loan to fund his vacation. The strategy allows him to obtain the funds he needs without incurring additional debt on his home or other assets.

Collateral assignment of life insurance can be a useful strategy for securing loans or credit, but it’s essential to understand how it works and its potential risks and drawbacks. Policyholders and borrowers should carefully consider the type of collateral assignment that works best for their unique circumstances and consult with a licensed insurance professional and financial advisor for guidance. While collateral assignment of life insurance may reduce the death benefit paid out to beneficiaries and limit policy changes, it can also be a valuable tool for securing financing without incurring additional debt on personal assets.

Alternatives to collateral assignment of life insurance, such as unsecured loans, home equity loans, and personal lines of credit, may also be suitable for some borrowers. It’s crucial to review the terms and conditions of any loan or credit agreement carefully and ensure that the arrangement is suitable for your needs and financial goals.

In the end, collateral assignment of life insurance is just one of the many financial tools available to Canadians. By understanding its benefits, drawbacks, and limitations, you can make an informed decision that meets your financial needs and goals. Remember, consulting with a licensed insurance professional and financial advisor can provide valuable guidance and insights on how to navigate the complexities of collateral assignment of life insurance and ensure that it’s the right choice for your needs.

What is collateral assignment of life insurance?

Collateral assignment of life insurance is a financial strategy that involves assigning a portion of a life insurance policy’s death benefit or cash value as collateral for a loan or credit.

What are the benefits of collateral assignment of life insurance?

Collateral assignment of life insurance can be a valuable tool for securing financing without using personal assets as collateral. It can also provide policyholders with access to cash value for their financial needs.

What are the risks of collateral assignment of life insurance?

The risks of collateral assignment of life insurance include reduced death benefits, limitations on policy changes, the risk of default, additional costs, and potential alternatives.

What types of collateral assignment of life insurance are available in Canada?

There are different types of collateral assignment of life insurance available in Canada, including absolute assignment, security assignment, collateral assignment, split dollar life insurance, and premium finance.

When is collateral assignment of life insurance suitable?

Collateral assignment of life insurance may be suitable for individuals who need to secure financing without using personal assets as collateral. It’s important to carefully consider the risks and drawbacks associated with collateral assignment of life insurance before pursuing this strategy.

What are the alternatives to collateral assignment of life insurance?

Alternatives to collateral assignment of life insurance include unsecured loans, home equity loans, and personal lines of credit, which may be more suitable for some borrowers.

Do I need to consult with an insurance professional or financial advisor before pursuing collateral assignment of life insurance?

Consulting with a licensed insurance professional and financial advisor can provide valuable guidance on how to navigate the complexities of collateral assignment of life insurance and ensure that the arrangement is suitable for your needs.

What happens if I default on a loan secured by collateral assignment of life insurance?

If you default on a loan secured by collateral assignment of life insurance, the lender may have the right to take possession of the policy’s cash value or death benefit to satisfy the outstanding debt.

Can I cancel or make changes to my life insurance policy after assigning it as collateral?

Collateral assignment of life insurance may limit your ability to make changes to your policy or cancel it altogether, depending on the terms of the agreement. It’s important to review the terms of the collateral assignment carefully before entering into an agreement.

Can I assign my life insurance policy as collateral for multiple loans or credit?

It may be possible to assign a portion of your life insurance policy as collateral for multiple loans or credit, depending on the terms of the collateral assignment agreement and the policy’s cash value. However, it’s important to carefully consider the potential risks and drawbacks of this strategy before pursuing it.

How do I know if collateral assignment of life insurance is the right choice for me?

Determining if collateral assignment of life insurance is the right choice for your financial needs depends on your unique circumstances, financial goals, and risk tolerance. Consulting with a licensed insurance professional and financial advisor can provide valuable guidance on how to navigate the complexities of collateral assignment of life insurance and ensure that the arrangement is suitable for your needs.

Contact us now to learn more about Collateral Assignment of Life Insurance

Now that you have read our blog: “Collateral Assignment of Life Insurance: Everything You Need to Know,” it is worth looking into your options if you are in need of a loan or if you want to get your life insurance money ahead of time. At Protect Your Wealth, we’ve been providing expert advice for all types of life insurance, and retirement and investing planning, since 2007. As your Life Insurance broker and financial planner , we work with you to create a personalized plan for your family or business that covers and meets your needs.

To schedule a consultation about your investment goals, or if you have any questions about insurance in Ontario or Canada, please contact Protect Your Wealth or call us at 1-877-654-6119 to talk to an advisor today! We’re proudly based out of Hamilton , and service clients anywhere in Ontario , British Columbia and Alberta including areas such as Kelowna , Waterdown , Kitchener , and Red Deer .

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

Aaron marshbanks left more than $34 million in unpaid loans in largest bank fraud in state history.

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

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

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

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

Estate settlement moving slowly

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

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

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

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

Trust says creditors are paid first

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

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

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

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

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

Dozens of loans, dozens of LLCs

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

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

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

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

Nebraska Examiner is part of States Newsroom, a nonprofit news network supported by grants and a coalition of donors as a 501c(3) public charity. Nebraska Examiner maintains editorial independence. Contact Editor Cate Folsom for questions: [email protected] . Follow Nebraska Examiner on Facebook and Twitter .

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IMAGES

ASSIGNMENT OF LIFE INSURANCE POLICY AS COLLATERAL
Irrevocable Life Insurance Trusts (ILIT) 101
State Farm Collateral Assignment Of Life Insurance Form
The Truth About Collateral Assignment of Life Insurance
What Is Collateral Assignment Life Insurance, And Why Do Borrowers Need
Assignment of Life Insurance Policy as Collateral

VIDEO

Video 2 Collateral Assignment Opportunities
Private Non-Equity Collateral Split-dollar
Irrevocable Trusts and Life insurance
Life Insurance Trusts (ILIT)
Reverse Life Insurance
Need a Life Insurance Policy for a Collateral Assignment Loan

COMMENTS

A Collateral Assignment of Life Insurance
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 ...
What Is Collateral Assignment of Life Insurance?
You are the assignor. Once your policy is set up, a collateral assignment will supersede your beneficiaries' right to the death benefit. If you die, the life insurance company pays the lender, or assignee, the loan balance. Any remaining benefit will go to your beneficiaries.
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 ...
What Is Collateral Assignment of Life Insurance?
Advertising & Editorial Disclosure. Collateral assignment of life insurance is an arrangement where a policyholder uses the face value of their life insurance policy, which can be a term or permanent life insurance policy, as collateral to secure a loan. If the policyholder dies before the loan is paid off, the lender is prioritized to receive ...
What Is Collateral Assignment?
Collateral assignment of your life insurance policy can help you get approved for a loan. Learn how it works, how it impacts your policy, and alternatives to consider. ... But if the policy has an irrevocable beneficiary, that beneficiary will need to approve any collateral assignment.
What Is a Collateral Assignment of Life Insurance?
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.
What is a Collateral Assignment of Life Insurance?
With collateral assignment of life insurance, ownership of an asset transfers from the borrower to the lender. This transfer only remains in place until the loan is paid in full. In this situation, the transferred asset is your life insurance policy. The goal is only to satisfy your loan obligation. Once that debt is repaid, you'll end the ...
What Is 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.
How does collateral assignment of life insurance work?
There are two main types of life insurance you can use for collateral assignment: term or permanent. Term life insurance offers coverage for a certain length of time, while permanent life insurance covers you for your entire lifetime. Permanent life insurance also has a cash value component that accumulates over time. Requirements will vary by lender, so make sure they accept the type of life ...
What Is A Collateral Assignment Of Life Insurance?
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%.
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 ...
Life Insurance Collateral Assignment [Pros and Cons]
How the Life Insurance Collateral Assignment Process Works. 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 ...
2 Ways to Transfer Ownership of a Life Insurance Policy
The two basic ways of making a lifetime transfer of a policy are: (1) the absolute assignment; and (2) the collateral assignment. An absolute assignment, as its name implies, transfers all the policyowner's rights irrevocably. A collateral assignment, again as its name implies, assigns so much of the death benefit as necessary for as long as ...
Collateral Assignment for Life Insurance: Benefits & More
Collateral assignment of life insurance allows the lender to be the primary recipient of your life insurance policy's death benefit if you have an outstanding loan balance when you die. Some assignments also allow the lender to tap into the policy's cash value if you default on your loan. While using life insurance as collateral does not ...
Collateral Assignment of Life Insurance
At this stage, there's no need to list the lender as a beneficiary. Step 3: Activate your policy. Then, request a collateral assignment form from your agent or insurer directly. Step 4: Complete the form and return it to the insurance company. After processing, the insurer acknowledges the collateral assignment.
What is Split-Dollar Life Insurance?
A split-dollar life insurance policy is a policy wherein two parties share the premium costs as well as the policy benefits. Most often, a split-dollar insurance policy is held between an employer ...
Collateral Assignment of Life Insurance: What, Why, & How?
A collateral assignment of life insurance is a contract that allows the death benefit of a life insurance policy to be used as collateral for a loan. Collateral assignments are usually used in business loans. However, it can also be used for equipment loans, structured settlement buyouts, and other loans.
PDF Collateral Assignment of Life Insurance Policy
to this assignment and to the rights of the Assignee. D. This assignment is made and the Policy is to be held as collateral security for any and all liabilities of one or more of the undersigned to the Assignee, either now existing or that may later arise in the ordinary course of business between any of the
Guidelines for Collateral Assignment of Life Insurance
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 ...
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 ...
PDF INSTRUCTIONS FOR COLLATERAL ASSIGNMENT FORM Step 1
irrevocable beneficiary. exists the assignment . ... Collateral Assignment and must be returned with the completed Collateral Assignment form. Step 2 - Return Completed Forms to USAA . After completing and signing the form, you can return it to us one of three ways: by upload, mail, or fax. ... Select "Life & Health Insurance/Annuities." ...
Collateral Assignment of Life Insurance in Canada: Everything You Need
Collateral assignment of life insurance is a process where a policyholder assigns a portion of their life insurance policy as collateral to secure a loan or other form of credit. In this arrangement, the lender becomes the beneficiary of the collateral assigned policy, giving them the right to receive the death benefit if the policyholder ...
PDF Irrevocable Collateral Assignment of Life Insurance Proceeds
This irrevocable assignment is made tothe Kansas Medicaid program in order become resource eligible for coverage under the medical assistance program. 2. The policy owner acknowledges that by making this assignment irrevocable, the policy cannot be cancelled, although it does not affect the right of the policy owner to cancel the insurance
Lawyers argue over who gets life insurance proceeds of dead ...
On Friday, arguments were submitted over who deserves to benefit from six life insurance policies, worth a total of $3.6 million, that Marshbanks took out in the years before he died.

What Is a Collateral Assignment of Life Insurance?

Key Takeaways

How a Collateral Assignment of Life Insurance Works

Example of Collateral Assignment of Life Insurance

Alternatives to Collateral Assignment of Life Insurance

What Are the Benefits of Collateral Assignment of Life Insurance?

What Kind of Life Insurance Can Be Used for Collateral?

Is Collateral Assignment of Life Insurance Irrevocable?

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

The Bottom Line

Collateral assignment of life insurance

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Insurance Disclosure

What is collateral assignment of life insurance?

Why use life insurance as collateral?

Pros and cons of using life insurance as collateral

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

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

Alternatives to life insurance as collateral

Unsecured loan

Secured loan

Life insurance loan

Home equity line of credit (HELOC)

Frequently asked questions

Related Articles

What Is Collateral Assignment of Life Insurance?

Related Content

How Collateral Assignment of Life Insurance Works

Applying for Collateral Assignment

Obtain a Collateral Assignment Form

Fill Out the Form Correctly

Signed by Both Policyholder and Lender

Submit Completed Form

Await Approval or Rejection From Insurance Company

Receive a Letter of Acknowledgment

Obtaining Required Documentation

Pros and Cons of Collateral Assignment

Impact of Collateral Assignment on Beneficiaries

Your Lender Will Be Paid First

Any Remaining Death Benefit Will Be Disbursed to Your Beneficiaries

Alternatives to Collateral Assignment

How does collateral assignment differ from naming a beneficiary?

Can any type of life insurance policy be used for collateral assignment?

Can the policyholder still change beneficiaries after a collateral assignment?

What happens if I cancel my life insurance before paying off the debt collateralized with my policy?

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

Definition and Examples of Collateral Assignment

Types of Life Insurance Collateral

A Note on Annuities

The Process

Lenders Get Paid First

Key Takeaways

What Is A Collateral Assignment Of Life Insurance?

What Is Collateral Assignment?

What Is a death benefit?

Secured Loans vs. Unsecured Loans

How Does Applying for Collateral Assignment Work?

What about Missed Payments and Cash Value Life Insurance?

Who Can You Add as a Collateral Assignee?

Common Collateral Assignees Include:

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

Tips to Make Sure Your Life Policy Is Paid Out Quickly

The Benefits of Using Collateral Assignment of Life Insurance

What Are Some Alternatives to Collateral Assignment?

What Is Term Life?

What Is Cash Value?

Our Verdict on Collateral Assignment

Where Can I Learn More about Life Insurance?

Collateral assignment of life insurance

What is collateral assignment of life insurance?

Why use life insurance as collateral?

Pros and cons of using life insurance as collateral

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

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

Alternatives to life insurance as collateral