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Collateral Assignment of Life Insurance
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Secured loans let you borrow money using one of your assets as collateral to get easier approval and better rates and terms. Life insurance may not be the first asset to come to mind when getting a secured loan, but you can use your policy as collateral through a process called collateral assignment of life insurance. This article will explain how collateral assignment of life insurance works and how to apply for it, then review some alternatives to using life insurance as collateral.
What is the collateral assignment of life insurance?
Collateral assignment of life insurance involves using your life insurance policy’s death benefit as loan collateral. 1 This means that if you can’t repay what you owe, the lender has the right to collect the collateral amount from your policy.
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How to apply for collateral assignment of life insurance
Here’s how to apply for collateral assignment of life insurance:
1. Know the requirements
Knowing life insurance collateral requirements is vital before applying for collateral assignment. Lenders generally require an active life insurance policy with cash value. This means that a term life insurance policy may not qualify. However, exact requirements vary by lender. If you need to get a new life insurance policy in order to get a collateral assignment, research and gather quotes from several insurance companies to choose the right option for you.
2. Fill out a life insurance application
Once you’ve found a policy that will meet a lender’s loan requirements, you can apply for life insurance . As mentioned, you will likely need life insurance with cash value. Check with the lender to see if the policy you’re approved for qualifies for a life insurance collateral assignment before signing the contract.
3. Fill out a collateral assignment form
Once you sign your life insurance contract and pay your first premiums, complete a collateral assignment form with your insurer. You’ll fill out your lender’s contact details so your insurer can designate them as a collateral assignee while your loan is outstanding.
4. Sign and submit the form
After completing the collateral assignment form, you and your lender must sign it. Your insurer may be able to provide electronic versions of the documents and e-signature capabilities to streamline the process.
5. Apply for a loan
Wait for your bank to confirm that your insurer has made them the collateral assignee. Then, apply for your chosen loan and fill out any relevant life insurance policy information on the application.
How collateral assignment of life insurance may affect your beneficiaries
Using your life insurance policy as collateral may impact your beneficiaries if you default on the loan or pass away with an outstanding balance. 2 Either event could reduce the death benefit payout your beneficiaries receive.
For example, if you take out a $50,000 loan using your $500,000 policy as collateral but pass away with a $40,000 loan balance, your lender can collect a portion of your death benefit. That can leave your beneficiaries with less money to cover expenses in your absence.
Alternatives to the collateral assignment of life insurance
Here are some alternatives to the collateral assignment of life insurance 2 :
Borrow from your life insurance policy
Permanent life insurance policies, such as whole life insurance , let you build cash value with each premium payment. Once your policy grows large enough, you can borrow against it. Policy loans offer favorable rates and no fixed repayment deadline. Accrued interest is added to your loan balance.
You can keep the loan outstanding as long as you want. However, your policy can lapse if the balance grows larger than your cash value.
Withdraw from your policy
You can withdraw money from your life insurance policy once you have accumulated enough cash value. However, this may reduce your death benefit. Withdrawing may also trigger tax consequences.
Surrender your policy
You can surrender life insurance if you no longer need your coverage. The insurer pays you the cash value minus surrender charges, letting you access your wealth. If you decide to go this route, your policy will be cancelled, and you’ll stop paying premiums.
Consider a different type of loan
You can get other loans, depending on your financial circumstances. For example, if you have significant equity in your home, you could get a home equity loan or line of credit. You could also apply for an unsecured personal loan to avoid risking your assets as collateral.
Is collateral assignment of life insurance right for me?
Collateral assignment of life insurance may make sense in a few situations:
- Business loans: If you’re a business owner and have a substantial death benefit, you could borrow against a large amount of it to fund your business.
- Medical expenses: The average cost of a hospital stay is 13,262. 3 If you have medical expenses insurance doesn’t cover, securing a loan with your life insurance could help you pay for them.
- Debt refinancing or consolidation: Borrowing against your death benefit could help you consolidate and refinance higher-interest debts, like personal loans and credit cards. This can save you money on interest and streamline your monthly payments.
Remember the risks of a life insurance collateral assignment before using it for these or other situations. If you’re not sure whether it’s the best choice for you, consider speaking with a financial advisor to explore your options.
Get a life insurance quote
Collateral assignment of life insurance can be a good option for borrowing a significant amount of money at favorable rates and terms. However, it’s important to remember that defaulting on the loan or passing away with an outstanding balance could reduce the death benefit payout your beneficiaries receive.
If you need a way to help protect your loved ones for your entire life and receive a significant asset you could borrow against, Aflac’s whole life insurance policies with cash value can be a great option. Start chatting with an agent today to learn more.
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1 The Balance – What is a Collateral Assignment (of a Life Insurance Policy)? Updated November 10, 2021. https://www.thebalancemoney.com/what-is-collateral-assignment-5176411 . Accessed May 8, 2023.
2 Investopedia – What is a Collateral Assignment of Life Insurance? Updated April 30, 2023. https://www.investopedia.com/ask/answers/111714/what-collateral-assignment-life-insurance.asp . Accessed May 8, 2023.
3 Debt.org – Hospital and Surgery Costs. Updated March 30, 2023. https://www.debt.org/medical/hospital-surgery-costs/ . Accessed May 8, 2023.
Coverage is underwritten by American Family Life Assurance Company of Columbus. In New York, coverage is underwritten by American Family Life Assurance Company of New York. 68000 series: In Arkansas, Idaho, Oklahoma, Oregon, Pennsylvania, Texas, & Virginia, Policies: ICC1368100, ICC1368200, ICC1368300, ICC1368400. In Delaware, Policies A68100-A68400. In New York, NY68100-NY68400.65000 series: In Virginia, Policies ICC0965JTO & ICC0965JWO. B61000 series: In Arkansas, Idaho, Oklahoma, Oregon, Pennsylvania, Texas, & Virginia, Policies: ICC18B61JWO & ICC18B61JTO. In Delaware, Policies B61JWO, B61JTO. B60000 series: In Arkansas, Idaho, Oklahoma, Pennsylvania, Texas, & Virginia, Policies: ICC18B60C10, ICC18B60100, ICC18B60200, ICC18B60300, & ICC18B60400. Q60000 series: Whole: In Arkansas, Delaware & Oregon, Policy Q60100M. In Idaho Policy Q60100MID. In Oklahoma, Policy Q60100MOK. In Texas, Policy Q60100MTX.Q60000 series: Term: In Delaware, Policies Q60200CM. In Arkansas, Idaho, Oklahoma, Oregon, Texas, Policies ICC18Q60200C, ICC18Q60300C, ICC18Q60400C.
Final Expense insurance coverage is underwritten by Tier One Insurance Company. The life insurance policy described herein contains an optional Accelerated Death Benefits Rider that is intended for favorable tax treatment under Section 101(g) of the Internal Revenue Code. Aflac does not give legal or tax advice. Please consult with a qualified legal, tax, and accounting advisor before engaging in any transaction. In AR, AZ, ID, OK, OR, PA, TX and VA: Policies ICC21-AFLLBL21 and ICC21-AFLRPL21; and Riders ICC21-AFLABR22, ICC21-AFLADB22, and ICC21-AFLCDR22. Tier One Insurance Company is part of the Aflac family of insurers. In California, Tier One Insurance Company does business as Tier One Life Insurance Company (Tier One NAIC 92908).
This is a brief product overview only. Coverage may not be available in all states, including but not limited to DE, ID, NJ, NM, NY or VA. Benefits/premium rates may vary based on state and plan levels. Optional riders may be available at an additional cost. Policies and riders may also contain a waiting period. Refer to the exact policy and rider forms for benefit details, definitions, limitations and exclusions. For complete details, including availability and costs, please contact your local Aflac agent.
Content within this article is provided for general informational purposes and is not provided as tax, legal, health, or financial advice for any person or for any specific situation. Employers, employees, and other individuals should contact their own advisers about their situations. For complete details, including availability and costs of Aflac insurance, please contact your local Aflac agent.
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Except in New York, individual insurance and group dental and vision insurance is offered by American Family Life Assurance Company of Columbus. In NY both group and individual coverage is offered by American Family Life Assurance Company of New York. Group policies are offered by Continental American Insurance Company (CAIC). CAIC is not licensed to solicit business in New York, Guam, Puerto Rico or the Virgin Islands. In CA, CAIC does business as Continental American Life Insurance Company (CAIC NAIC 71730) Dental and Vision plans are administered by Aflac Benefit Solutions, Inc. Aflac Worldwide Headquarters | Columbus, GA Aflac Group | Columbia, SC American Family Life Assurance Company of New York | Albany, NY Aflac’s Premium Life, Absence and Disability Services are available in all states, except Puerto Rico, Guam or the Virgin Islands, and are offered by Continental American Insurance Company (CAIC). Self-funded plans and absence services are administered by CAIC in all states but NY. In NY, self-funded plans and absence services are administered by and insurance is offered by American Family Life Assurance Company of NY. Administrative services are not insurance and are not considered legal advice. Products may not be available in all states and may vary depending on state law. Direct to Consumer Business is underwritten by Tier One Insurance Company, doing business as Tier One Life Insurance Company in California (Tier One NAIC 92908)
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What is collateral assignment of life insurance?
Life insurance can act as collateral to secure a loan. The policy’s death benefit goes to pay the loan balance first, and remaining funds go to your beneficiaries.
Updated June 16, 2023 | 3 min read
Policygenius content follows strict guidelines for editorial accuracy and integrity. Learn about our editorial standards and how we make money .
Collateral assignment of life insurance is an agreement that gives a lender first claim to collect an outstanding loan balance from your life insurance death benefit . That allows your life insurance to serve as the collateral that many loans — especially small business loans or Small Business Administration (SBA) loans — require as part of giving you the money.
In other words, your life insurance death benefit becomes the property that ensures that the lender can collect the loan value if you die before the loan is paid off. After the loan is repaid, any remaining death benefit funds go to your beneficiaries .
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How collateral assignment works
Collateral assignment, unlike credit life insurance , lets you name beneficiaries you choose instead of having the lender be the sole beneficiary. You can use either a term life or a permanent life insurance policy for collateral assignment.
If your current life insurance policy is worth more than the loan, you may be able to use it as collateral. In other cases, loan companies that take life insurance as collateral may require you to buy a new policy that covers at least the full amount due.
Either way, the process of getting a policy is the same. You go through the application and underwriting process, and wait to receive your offer. Then, you complete paperwork to set up a collateral assignment.
Once you’ve paid off the loan, you get a release from the lender. The collateral assignment condition on your policy ends, but the policy can stay active.
→ Learn more about how life insurance underwriting works
Whom to name as your beneficiary
When buying life insurance for collateral assignment, name the beneficiaries as you would for a personal policy (e.g., spouse, relative, trust for children). The lender is not your beneficiary; they are the assignee on the collateral assignment paperwork. You are the assignor .
A collateral assignment supersedes your beneficiaries’ rights to the death benefit. If you die, the life insurance company pays the lender, or assignee, the loan balance. As noted earlier, any remaining benefit goes to your beneficiaries.
Who owns the life insurance policy
You’re the policy owner and the payor — which means you’re responsible for the premium payments. Some lenders may require an escrow account for the life insurance premiums; others may require proof of payment or prepayment.
If you’re using a permanent life insurance policy for the collateral assignment, a lender may have access to the cash value if you default on the loan.
→ Learn more about cash value life insurance
When to fill out collateral assignment paperwork
You only complete a collateral assignment agreement once a life insurance policy is active. After you pay your first premium , and sign your policy papers, you can request a collateral assignment form from the life insurance company or your insurance broker.
You’ll need your loan officer’s name and number for the form, as well as your policy number, Social Security number, and other personal information.
Once completed and signed by both the assignee and the assignor, you’ll file the collateral assignment form with the life insurance company and the lender according to whichever procedures they use for this process.
When collateral assignment ends
Collateral assignment ends only if you pay off your loan before you pass away. Your lender must agree that the terms of your loan have been met and send a release to your insurer to terminate the agreement.
If your policy lapses — or you choose to cancel it — that could violate your loan contract. The lender may even pay your premiums on your behalf to prevent a policy lapse. In that scenario, the lender adds the cost of any premiums they paid for your policy to your loan total.
Collateral assignment pros & cons
Collateral assignment of life insurance has clear pros and cons. Review the following list carefully to decide if it’s a good option for you.
Collateral assignment pros:
It enables people to secure business loans or similar needed funds.
It’s less risky for a family than using a home or other essential property as collateral.
Policyholders can choose beneficiaries to receive any remaining death benefit funds.
Downsides of collateral assignment:
The lender has first right to the death benefit, so your family may not get the benefit you intended.
Lapsing or canceling the policy could violate your business loan terms, causing problems with the lender.
You’re responsible for paying life insurance premiums.
Alternatives to collateral assignment
Other ways to use a life insurance policy for debt repayment include the following options.
Life insurance loan: If you own a permanent life insurance policy, a life insurance loan allows you to borrow directly from your policy’s cash value. Any unpaid balance, plus interest, is deducted from your death benefit.
Cash surrender: The cash surrender value is the cash value built up in the policy minus administrative fees. Surrendering your policy cancels your coverage, so you’d need another policy for continued financial protection. You could also face penalties if you cancel during your policy’s surrender period.
Term life insurance: You should always buy enough insurance to cover your debts . On average, term life is five to 15 times cheaper than whole life. Even if your lender doesn’t require collateral, your beneficiaries can use the death benefit to pay off your debts and keep the remainder.
For most people, term life is the most affordable and straightforward option to provide coverage for any outstanding loans when they die, with or without a collateral assignment attached.
If you need to use your life insurance policy for collateral assignment, the process is as simple as buying a policy and filling out the appropriate paperwork.
Frequently asked questions
A collateral assignment of life insurance directs your insurance provider to use your death benefit to pay off an existing loan if you die while in debt. After the lender is paid, any remaining funds go to your policy’s beneficiaries.
Your lender is the assignee of your collateral assignment agreement. You are the assignor of the agreement and the owner of your life insurance policy.
Collateral assignment can only be revoked if your lender confirms that your debt is paid and sends a release of collateral assignment to your insurer. The assignment cannot be changed if you change your mind or if your life insurance policy lapses.
Julia Kagan is a contributing editor at Policygenius, where she specializes in life insurance. Previously, Julia was the senior personal finance editor at Investopedia for nearly a decade, a vice president and editorial director at Consumer Reports, the editor of Psychology Today, and the vice president of content at Zagat Surveys.
Senior Editor & Licensed Life Insurance Expert
Nupur Gambhir is a licensed life, health, and disability insurance expert and a former senior editor at Policygenius. Her insurance expertise has been featured in Bloomberg News, Forbes Advisor, CNET, Fortune, Slate, Real Simple, Lifehacker, The Financial Gym, and the end-of-life planning service Cake.
Associate Content Director
Antonio helps lead our life insurance and disability insurance editorial team at Policygenius. Previously, he was a senior director of content at Bankrate and CreditCards.com, as well as a principal writer covering personal finance at CNET.
Maria Filindras is a financial advisor, a licensed Life & Health insurance agent in California, and a member of the Financial Review Council at Policygenius.
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