The Collateral Assignment of a Life Insurance Policy

Last updated: November 17, 2017 at 0:03 am

collateral assignment of life insurance policyDid 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.

Collateral Assignment

collateral assignment life insuranceThe 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?

collateral assignment life insurance signingAny 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.

Furthering your financial education is an investment everyone should make.

True Blue Top 10 SBA Lenders

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

collateral assignment life insurance teamIf you do require a collateral assignment of life insurance, True Blue can help.

True Blue Life Insurance is an independent broker that represents over 40 life insurance companies. Based on your individual needs, we represent companies that can issue policies quickly, sometimes on the same day to within one week.

Do you need a policy right away? Click here 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 seven 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 four to eight weeks. Click here for an instant quote.

To speak with a True Blue agent about obtaining a life insurance policy for a collateral assignment, call 866-816-2100, or let us answer your question here.
22 replies
  1. Amy Stiner
    Amy Stiner says:

    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)

    Reply
    • Luke Kinton
      Luke Kinton says:

      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!

      Reply
    • Brian Greenberg
      Brian Greenberg says:

      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.

      Reply
  2. D S
    D S says:

    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?

    Reply
    • Luke Kinton
      Luke Kinton says:

      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.

      Reply
  3. m Redford
    m Redford says:

    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?

    Reply
    • Luke Kinton
      Luke Kinton says:

      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!

      Reply
    • Luke Kinton
      Luke Kinton says:

      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

      Reply
  4. sandra m kelly
    sandra m kelly says:

    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?

    Reply
    • Luke Kinton
      Luke Kinton says:

      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

      Reply
  5. Kee Kee
    Kee Kee says:

    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.

    Reply
    • Luke Kinton
      Luke Kinton says:

      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

      Reply
    • Luke Kinton
      Luke Kinton says:

      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

      Reply
  6. Ray Burnett
    Ray Burnett says:

    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)!

    Reply
    • Luke Kinton
      Luke Kinton says:

      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

      Reply
  7. Scott C
    Scott C says:

    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!

    Reply
    • Luke Kinton
      Luke Kinton says:

      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

      Reply

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About Brian Greenberg

Brian started his financial career working for Metlife Insurance Company. Using his internet skills, he decided to pursue a better way to provide customers with life insurance by building a quoting engine and underwriting fulfilment process. With True Blue Life Insurance, Brian is licensed to sell life, health, and annuities throughout the United States. He is committed to constantly improving the online life insurance process.