What is a Collateral Assignment?
A collateral assignment ensures that if you pass away, your insurance company can use your benefit to pay any outstanding debt on a loan. The remainder of the benefit will go to your beneficiaries as intended. You won’t name your bank as a beneficiary in this situation; rather the money will revert to the bank upon your death.
Can I use life insurance as collateral on a loan?
You can – and certain types of loans such as SBA loans require this type of collateral.
In this case, the policy payout is the “collateral” on the loan, and the value will be deducted directly from the total policy payout your beneficiary would receive. Note that you can use the full amount of your policy as loan collateral or a partial amount — regardless, your beneficiary will only receive a partial payout if you pass away and the entire loan debt has not been settled.
After the loan is paid off, the policy reverts to its original state, and your beneficiaries will receive the original amount as intended. If your policy is worth more than the actual loan amount, you can ask your insurer for collateral assignment paperwork to start this process. Also note that certain types of policies may or may not be eligible for collateral assignment – for instance, many group policies are not eligible.
How do I use my policy as collateral?
When exercising this assignment, the borrower always has to be the policy owner.
Both term AND whole life insurance can be used as collateral. Throughout the life of the loan, you MUST still pay premiums and there is typically no change in premium. In most cases, you can ask for a collateral assignment form after you’ve signed up and paid your first premium. If you’re approaching a lender to use your life insurance benefit as collateral, lenders may request proof of premium payment over time
What if I default on my loan?
If you default on your loan, the lender is titled to the cash value of the policy, and you’re responsible for paying any other outstanding loan debt. Your lender will pursue this debt using collection and legal channels as normal to reclaim any other monies owed.
Need a collateral assignment?
If you have questions about a collateral assignment of life insurance, we can help! Feel free to reach out, and we can discuss this and other assignments you can take advantage of throughout the life of your policy.