Life Insurance Policies and Collateral Assignments
Did you know your life insurance policy can help you get a loan? Lenders widely accept life insurance as collateral because of the guaranteed funds, so if the worst happens, they’re still going to get repaid. Let’s take a look at the collateral assignment of a life insurance policy and see how it works.
Assigning Life Insurance to Secure a Loan
Getting approved for a loan depends on a number of different factors — one of which is how you intend to pay back the loan if you die. That’s where assigning a life insurance policy comes into play. It’s a useful feature that guarantees the money will be paid back, no matter what. Thus, a lender is more likely to approve your loan request.
You are free to assign your life insurance policy, granted there isn’t some kind of limitation in your contract that prevents it. You can even assign the same policy to multiple banks to secure more than one loan. Let’s say you have a $500,000 policy. You can assign one portion of it to one bank and another portion to another bank.
With an assignment, you can transfer the rights to all of or a portion of the policy’s proceeds to an assignee. Essentially, the assignment is subject to the negotiations and agreement between you and the lender.
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Collateral Assignment
The collateral assignment of a life insurance policy is conditional. A term policy secures the loan in the case of a death, and it is required for many types of bank loans. Collateral refers to the cash value in a life insurance policy — whole life or universal life policies that build up cash value — but it does not apply to term policies.
Unlike an absolute assignment — which pretty much assigns the policy lock, stock, and barrel with no possibility of reversal — the collateral assignment is a more limited type of transfer. If you die before the loan is paid back, the lender receives the amount that is still owed through the death benefit. The remaining balance is then directed to any other named beneficiaries. And the policy has to stay current, meaning you need to keep up with paying all the necessary premiums for the life of the loan.
Also, your access to the cash value (let’s say you have a whole or universal life policy) is restricted in an effort to protect the collateral. If the loan is paid off before your death, the lender will no longer be the beneficiary of the death benefit. Cash value assignments are more attractive to lenders because the funds can be recovered without the death of the borrower.
The insurance company has to be notified of the collateral assignment of a policy, but other than keeping up with the terms of the contract, they really don’t have any involvement or authority in the agreement.
Never Assign Your Bank as the Beneficiary
If your bank asks you to assign them as the beneficiary, don’t do it. If you die and have only paid off half your loan, the bank will get the remaining balance because they are the beneficiary, and that contract takes precedence over any will. Don’t let this happen.
Banks only require a collateral assignment, which means as the amount owed on your loan decreases, the amount that goes to the bank will decrease as well. If you take out a $100,000 loan on a collateral assignment and pay off half that loan, the collateral assignment will only pay the bank what’s left on the loan. The rest will go to the primary beneficiary. If there are no other listed beneficiaries, it will go to your estate. Never give the bank that full amount. The collateral assignment decreases the benefit to be in line with your loan.
What Types of Life Insurance Policies Work for a Collateral Assignment?
Any type of life insurance policy is acceptable for a collateral assignment, as long as the insurance company allows an assignment for that particular policy.
A permanent life insurance policy with a specific cash value allows the lender access to that amount as repayment of the loan if the borrower were to default. The policy owner’s access to the cash value is limited as a safeguard on the collateral. Again, as long as the loan is paid off before the borrower dies, the assignment is removed and the lender has no access to the death benefit. It’s as simple as that, really.
A term life insurance policy is a great (and inexpensive) option, too. Plus, some lenders only require the loan for a certain period of time that coincides with the term of the loan — five years, seven years, oftentimes a 10-year term policy works. Once the loan is paid off, you can cancel the policy or keep it going and continue to protect your family.
A Simple Example
Let’s say you purchase $300,000 of term life insurance coverage. Eventually, you go to your bank for a $150,000 loan and use a collateral assignment on the policy as partial collateral. Your children are named as the beneficiaries on your life insurance policy. After you die, both the bank and your children make claims with the insurance company for the death benefit. The bank would have the right to the money that is still owed to them above anything your children would receive. The collateral assignee (the bank) has priority. That means they will be paid before the rest of the death benefit is released to the beneficiaries (in this case, your children).
How Does It Work, and Where Do I Begin?
Some lenders will consider using an existing life insurance policy for an assignment. Others may say you need a new policy for their purposes. Either way, using life insurance as collateral to secure a loan is a fairly common practice that every insurance company can handle.
First, begin by securing your loan.
Go to your bank and find out what their requirements are and what kinds of loans they offer.
Loans are most often backed by the Small Business Administration and sold by larger banks like Wells Fargo, Chase, or Bank of America. Smaller banks are certainly an option as well.
Here is a list of the most active Lenders of SBA 7(a) General Small Business Loans.
Learn more about the Small Business Administration’s loan programs.
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True Blue Top 10 SBA Lenders
| Lender | Website | Phone Number |
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What Is the Process to Obtain a Collateral Assignment?
The collateral assignment is a simple form that needs to be filled out and signed by all parties involved: the lender, the insured, and the owner and payer, if different than the insured.
The forms can be signed at the time of application, or after the policy is issued. The time frame to process the request for the collateral assignment is typically 24 to 48 hours.
Some banks do require you get the form notarized at the time of signing (usually at the bank).
Here are some sample forms from three of our most popular companies that were used to get insurance policies for collateral assignments.
How to Get a Life Insurance Policy Quickly
If you do require a collateral assignment of life insurance, True Blue can help.
True Blue Life Insurance is an independent broker that represents over 60 life insurance companies. Based on your individual needs, we represent companies that can issue policies quickly, sometimes on the same day to within 1 week.
Do you need a policy right away? Get Same day Issue Life Insurance from the best term life insurance companies.
For a policy under $500,000 with no medical exam required, the typical time to approval is 7 to 14 days. Check out the No Medical Exam Life Insurance options.
For a term policy over $500,000 that requires a medical exam, the typical time to approval is 4 to 8 weeks.
Let us know about your situation.
We are the best at finding you the best deal, fast.
At True Blue Life Insurance, our goal is to help you find the best policy for your situation, whatever it may be.
When it comes to collateral assignments, our U.S.-based agents are trained to help match you with dozens of insurance policies that can meet your business loan needs. No high-pressure sales, no gimmicks. Only simple solutions focused on your needs.
Does asking a collateral assignment trigger an underwriting occasion? I have a couple policies that are a a little less than a year old which I intend to assign to an SBA lender, nevertheless because I obtained the policies my health has taken a turn for the worse.
I want to make sure that asking a collateral assignment isn’t likely to in some way danger the policy being repriced or even cancelled!
Asking for a collateral assignment will not trigger an underwriting event. People do this all the time.
Hi there Brian!
Does requesting a collateral assignment trigger an underwriting event? I have a few policies that are a a little less than a year old that I intend to assign to an SBA lender, however since I obtained the policies my health has taken a turn for the worse.
I want to make sure that requesting a collateral assignment isn’t going to in some way risk the policy being repriced or even cancelled!
Thanks for the insightful article and responses.
Hi Kevin. Requesting a collateral assignment will not affect your policy at all. You are just updating the beneficiary. Make sure you contact the insurance company because some don’t do collateral assignments.
Hi Luke: I’m 57 years old and relatively healthy. I have 2 life insurance policies with MetLife that I got through a previous employer (Group Universal Life and Group Variable) that are worth in excess of $750k but have no cash value. I’m in need of cash. I’ve called Life Settlements companies but they require that I have a terminal illness. Do you have any suggestions on how I might be able to extract cash from the policies?
We act as brokers for those looking to sell their life insurance policies, though in this scenario there is nothing we can do. Most life settlement companies require the insured to be over 70 years old, and the viability of buying/selling a policy is based on life expectancy. I wish I had better news.
Hello!
Is this something banks are getting away from? I’m having a hard time finding a lender. Any suggestions would be great!
Hi Ann!
This is going to vary based on lenders and their policies. I would recommend you reach out to some of the bigger banks and discuss this with loan officers to see what the requirements will be.
Hope this helps!
-Luke
I am 54 years old. I own my house outright but it is a gut and needs a total rehab. I plan to use the house to generate income once fixed. I want to turn my house into small hotel. Are there any insurance policy that will use my house as collateral so that I can get the cash from the policy to fix up my house? I do not have income coming in at this time or savings but my LLC owns the house and the house has no mortgage. I am trying to get creative and find funding because banks are not lending to people/LLC with houses that are gutted OR not livable condition. Also, if there is a policy out there, is there one that once I pay up the policy, the house/collateral can be removed from the policy. Please give me all scenarios available. Thanks.
Hi Hadassah!
I think there may be a breakdown in understanding in regards to how life insurance policies work or maybe I’m not understanding the question posed, so I will try to address this the best way I can.
“Are there any insurance policy that will use my house as collateral so that I can get the cash from the policy to fix up my house?”
An insurance policy isn’t going to give a loan unless there is cash value built up inside the policy to make loans against. For example, if you had a whole life policy that had accumulated $25k in cash value, you could potentially take a loan out on the policy to get some of the $25k built up. This only works with permanent policies, not term.
If the question is more about buying a policy to immediately place loans against, I can’t think of any that allow for that. Rarely do permanent policies start out with any cash value unless there was a sizable single premium paid up front. Even then, those policies can be seen a Modified Endowment Contracts and lead to a different scope of obstacles.
If you had a policy in force, you could use a loan from it as part of the creative funding process; however, it is important to remember that insurance companies are not in the lending business in general so using a house a collateral would not be something I can say I have ever heard of happening. (Largely due to insurance companies and lending institutions having compliance restrictions based on their regulated industries.)
Hope this helps.
-Luke
Hi Luke,
My name is David. I have a whole life insurance policy with the death benefit amount is $800,000 and the cash value is around $280,000. If I assign this policy to a bank as the collateral loan. What amount that bank will consider borrow to me? It’s base on the death benefit amount or cash value amount? Thanks,
Hi David!
Loan amounts and loan requirements vary from lender to lender based on a number of factors, so there isn’t a set amount I can say you will qualify for based on the information given. I would advise that you reach out to the lenders to get more insight on how they look at this policy from a collateral aspect.
Hope this helped!
-Luke
We want to do a debt consolidation of a very high amount of unsecured debt (> 100k). Our credit (other than the high utilizations which clearly impact score) is excellent – no late pays or other negatives, ever.
I have a 250k Term Life policy that I’ve had for years… I know I cannot take a loan against it, since it is a term policy, but would like to use as collateral for a debt consolidation. Is this something reasonable that a bank or lender would consider doing? Are there any you can recommend that would entertain such a loan product? Thanks much!
Hi Scott!
It may be possible, but I’m not sure exactly how as a sole source of collateral. Since a term policy has no cash value and isn’t considered an “asset” like a permanent policy would be, most lenders may not see it as viable form of collateral by itself. I’m not saying it is impossible, only that it largely depends on the lender and what they will accept. With a business debt refi, you could be looking at a few more requirements.
When working with clients in the past, I usually recommended they reach out to a local credit union and talk to a loan officer there to better understand what they would require. My experience with credit unions have often been more flexible with collateral requirements when it comes obtaining loans.
Hope this helped a little.
-Luke
How would one be able to obtain a lien release from a back that no longer against? The policy was used for collateral many years ago & now the insurance company requires a letter of release! Not sure what the loan was even used for, but it was paid a long time ago! The policy payout is a low dollar amount (1k)!
Hi Ray!
The best way to see who has a lien on the policy is to contact the insurance company and ask who is listed as the lien holder. From there, you can contact the lien holder and request the letter you are looking for.
Hope this helps a little.
-Luke
Mr. Luke Kinton, I have a $100k Term Life Insurance Policy and would like to get a loan for at least half of what it’s worth to pay for marriage, business and mortgage expenses.
Hi Rodney!
For loans, collateral is largely dependent on what the lending institution wants in return for the loan to protect their interests.I would start at your local bank or credit union and see if they accept your life insurance policy as collateral for the loan you are needing.
Thanks!
-Luke
Does the policy have to have cash value already built up or does it not? I see you also mentioned that some lenders may request a new policy all together. Thats where my question of cash value generates from.
Hi Kee Kee!
Typically lenders just want their stake secured in the event of death and term policies are often fine. This, however, is up to the lender. More often than not, a cheap term life policy for the life of the loan will suffice and is recommended for any liability (debt) you take on, including other loans like mortgages.
-Luke
My father just passed away. He has a life insurance policy that has a credit union that is a collateral assignee. We need a release of assignment letter from the credit union in order for my mom to get the life insurance money. The credit union doesn’t exist anymore, at least i can’t find it anywhere on the internet. How do we get this release of assignment letter?
Hi Sandra!
In this situation, retaining a lawyer may be in your best interest overall. If the credit union is no longer in existance, then you would need to find out who (if anyone) bought out their liabilities. If there is no record of this, then there may be a way to release this assignment through legal means. I highly encourage you to find a lawyer in your area who has experience in probate law who may be able to better assist you in rectifying this situation.
Hope all works out in your favor!
-Luke
Do you have to have good credit for this loan?
Hi Chris!
Your credit worthiness is dependent largely on the underwriting standards of the lending institution you are seeking a loan from. In the event that your credit isn’t in the best condition and prevents you from getting a traditional SBA loan, you could look at other options for the funding you need outside of the SBA program. Some lenders are more forgiving than others when it comes to credit, so I encourage you to do your due diligence when review loan options to find the best rates and terms.
Hope this helps!
-Luke Kinton
I am 74 my wife is 69, I am a veteran. I am working full time (45 hrs per wk). My health is marginal and my wifes health is at best questionable. We are in financial distress due to health costs from past and at present. Small loans are eating us up. I have a term life policy from NY Life and have had it for approximately 21 years. It is for $30,000. I need desperately to borrow 15 to 20K against it. We will be able to pay 7 to 800 per month and maintain the policy. The reduction of payments will be from 1900/month to the 7/800/month. We will assign the policy as long as the monthly payments are applied to the reduction from the policy until loan is paid out. Due to the circumstances our credit is terrible at present. Can anyone help?
Hi!
I’m sorry to hear about your present situation, I know it must be difficult to say the least.
The problem with term in this situation is that it has no cash value to borrow against, unless you convert it to a permanent policy. Even then, it may not covert to a face amount that would afford you the ability to borrow the amount you need.
One option you could look at is using it as collateral for an individual loan at a local bank or credit union. Credit unions are typically good for personal loans because they work heavily in local communities more so than many banks. I can’t guarantee that the policy alone is enough to secure the amount you are looking for, but it could be used to in tandem with other pieces of collateral.
Hope this helps!
i would like to sell my term life policy. who buys them
Hi Jim!
Selling a term life insurance policy isn’t as easy as selling a permanent policy, but is possible if it is convertible to a permanent policy. We aren’t the biggest fans of selling off life insurance policies in general; however I did provide some resources for you to look at:
https://www.youtube.com/watch?v=sgukklrx5Dw
http://www.lisa.org/life-policy-owners
http://www.coventrydirect.com/life-insurance-policy-worth/life-settlement-faqs/
We highly encourage you to consult with your tax, financial, and insurance advisers before you commit to anything.
I see that this type of collateral is mainly used for bank loans. On the other hand, would these life Insurance policies be effective if a person wants to borrow money from another person? Would that be something worth looking at as a possibility?
It would be largely dependent on if the person lending you the money is wanting you to have a life insurance policy or find value in being a beneficiary to protect their stake. Individuals, like banks, can make this part of the requirement of the loan if they so choose. It is entirely up to them.
Is assignment of life insurance policy only good for small business loans? Would it be good on a miscellaneous loan?
A collateral assignment of a policy can be used for any type of loan.
It will only come up if a bank is requiring it.
The good thing about a collateral assignment of a life insurance policy is that the proceeds will be used to pay off the outstanding balance on the loan, and the remaining will go to the estate or beneficiaries.
Hi
My name isAmy and I need to get a loan with collateral of my life insurance policy. Please call it will be only for $20,000 or less. My number is(Note from admin: redacted for privacy reasons)
Hi Amy!
We don’t actively provide loans, but we have a company that may be able to help. The company is called Fundera and here is the link to their site: http://bit.ly/2uhlbBu .
Best of luck to you in your search!