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, or if you can’t pay back the loan, they’re still in the business of getting 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 — or if you simply can’t pay it back. 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 — so a lender is more likely to approve your loan request.
You are free to assign your life insurance policy to whomever you wish, granted there isn’t some kind of limitation in your life insurance contract that prevents it.
With an assignment, you can transfer the rights to all of or a portion of the policy’s proceeds to an assignee. Exactly how these rights are transferable depends upon the provisions of the assignment in the policy, the intentions of both parties involved and the circumstances of the assignment. It sounds kind of complicated, but it really isn’t. Essentially, the assignment is subject to the negotiations and agreement between you and the lender.
A collateral assignment of life insurance is conditional. It appoints a lender as the beneficiary of a death benefit, which they can use as collateral on a loan. If you are unable to pay it back, for whatever reason, the lender can cash in the life insurance policy and recover what is still owed.
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. You have to be the owner of the policy, but not necessarily the insured. 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 a 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.
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 Simple Example
Let’s say you purchase $150,000 of life insurance coverage. Eventually, you go to your bank for a $350,000 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 (your children).
How Does it Work?
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.
Based on your individual needs, True Blue Life Insurance compares the policies and rates of hundreds of different insurance companies to find your best solution. Speak with a licensed agent today about assigning an existing policy or obtaining a new one. Just call 1-866-816-2100.
- 5 Reasons to Buy Life Insurance - May 25, 2016
- Why Women Need Life Insurance - February 29, 2016
- The Collateral Assignment of a Life Insurance Policy - February 23, 2016
- Converting Term Life Insurance - January 30, 2016
- Court-Ordered Life Insurance in Divorce - January 25, 2016
- Captive vs. Independent Insurance Agents - December 31, 2015
- Life Insurance for Cigar Smokers - December 21, 2015
- Life Insurance For Smokeless Tobacco Users - November 30, 2015
- What is Accidental Death Benefit Insurance? - November 23, 2015
- Underwriting Your Life Insurance Application - October 30, 2015