Life insurance is often the key to securing a loan.
Frequently, lenders request a collateral assignment of life insurance as a requirement for loan approval.
Your bank, or lending institution, has an interest in guaranteeing the loan they provide will be paid back, regardless of your circumstances.
Think of an assignment of life insurance as collateral as a promise to your lender.
It’s the lender’s job to assess your ability to repay a loan, and the promise of a life insurance policy can make all the difference.
Here, we will cover life insurance as a collateral assignment in its entirety so that you can make an educated decision moving forward.
A conditional assignment in which the lender is a recipient of the death benefit (or cash value) of a life insurance policy for an amount equivalent to the balance of the loan.
Let’s take a look at a couple of definitions related to collateral assignments:
- Collateral – something offered (in this case, life insurance) as a guarantee of loan repayment if you default on your loan.
- Conditional Assignment – your collateral assignment is conditional, meaning it is subject to specific conditions and terms, as opposed to an absolute assignment.
- In other words, your lender no longer qualifies for the death benefit or cash value of your policy once your loan is paid off.
SBA loans, structured settlement buyouts, and bank loans commonly require life insurance as collateral.
There are two primary requirements to secure a loan through the assignment of a life insurance policy:
- The life insurance company must approve the assignment (most do).
- The lender must accept the life insurance policy as collateral.
The steps to securing your loan through the assignment of life insurance as your collateral are typically uncomplicated:
- Purchase life insurance – be sure to name primary and contingent beneficiaries.
- Assign life insurance as collateral – name your lender as a collateral assignee.
- A collateral assignment is accomplished via a collateral assignment form. Your life insurance carrier typically provides the form.
- Note – a collateral assignment can only be processed after your policy’s issuance.
- List beneficiaries other than your lender (for example, your spouse). Your lender should NOT be your primary beneficiary.
- As a collateral assignee, your lender will ONLY receive the amount of life insurance proceeds which covers the balance (principal plus interest) of your loan, should you pass away prior to payoff.
- The remaining death benefit (or cash value amount if utilizing a permanent life insurance policy) will go to your designated beneficiaries.
Collateral assignments are first-in-line for your life insurance proceeds. Your beneficiaries are second-in-line.
Said differently, your policy’s proceeds go to your lender first, in the event of your death.
Just about any form of life insurance can qualify for collateral assignment as long the lender accepts it as collateral.
You will want to select the best life insurance policy to fit your needs.
Consider the following types:
It’s common to be in a hurry to secure a loan.
No exam life insurance often takes weeks off of the application process, making this type of life insurance ideal for a collateral loan assignment.
What is it? Life insurance issued without a medical examination of the insured.
No exam life insurance is available as term life insurance, universal life, and whole life insurance.
Is No Exam right for me?
There are a number of instances in which we recommend no exam life insurance:
- You need life insurance, fast. Some carriers will issue a no exam policy within minutes.
- You have a few health conditions. If you are in less than excellent health, you may qualify for better rates by skipping the paramedical exam.
- You haven’t seen a doctor in a number of years. It’s possible something might pop-up on your blood work that you are unaware of, like high cholesterol or elevated blood sugar.
- The idea of needles and nurses makes you wince. Yep, just go ahead and skip dreaded needle if you want.
Term life insurance is popular because you can purchase a large amount of coverage with cost-effective premiums.
Term life insurance provides coverage for when you need it most. For instance, you likely need protection while you are raising a family and working.
Premium payments and death benefit are typically level (they stay the same) for the amount of time chosen.
Is Term right for me?
Consider purchasing term if:
- You need a life insurance policy with a larger face amount.
- Your life insurance needs are for a particular amount of time.
- You are on a budget.
Whole life insurance, also called permanent life insurance, lasts your whole life.
What is it? Lifelong life insurance protection which includes a cash value component.
Whole life insurance, as long as you make your premium payments, will not expire.
Your premium payments are typically level, and can even go away in later years.
Is Whole right for me?
Whole life insurance can make sense under certain circumstances:
- You want a cash value component to your policy.
- The policy loan features interest you.
- Life insurance coverage which does not expire is ideal for you.
- You plan to give a financial gift via life insurance.
Universal life insurance (UL) is a specific type of permanent life insurance.
What is it? A form of whole life insurance with flexible premium payments and an investment piece.
Universal life insurance is known for its adaptability.
Is Universal right for me?
Universal life insurance includes unique characteristics:
- Market performance affects the investment component of your policy.
- Your premium payment amounts can be flexible. They are dependent on your life insurance needs and the needs of the policy.
- The death benefit is often adjustable.
- Your policy is permanent and lasts your whole life.
Guaranteed Universal life insurance (GUL) is ideal for someone who is looking for an affordable life insurance policy which would likely last your entire life.
What is it? GUL is a hybrid of term and permanent life insurance products.
Guaranteed Universal is popular because it’s a cost-effective way to secure life insurance coverage until you reach a certain age, often over age 100.
Is Guaranteed Universal right for me?
Also called No Lapse, Guaranteed Universal life insurance has many appealing features:
- Policy length is determined by an age limit, not term length. For example, your GUL policy can last up to age 121.
- Your policy will likely be more expensive than term life insurance but cost less than whole life insurance.
- There is often not a cash value component.
- Your premium payments and death benefit are level.
You have the option to utilize the cash value of a permanent life insurance product (Whole Life, Universal Life, sometimes Guaranteed Universal Life) for collateral assignment. That way, your beneficiaries receive all of the death benefit.
Keep in mind, your access to the cash value of your policy will commonly restricted if you have a collateral assignment attached to it.
You will want to go about securing your collateral assignment in the best possible way and avoid potential pitfalls.
Pay close attention to our list of important do’s and don’ts:
- Purchase life insurance that is approved for collateral assignment
- Name primary and contingent beneficiaries
- Verify with your lender that the policy will qualify
- After loan payoff, obtain a release of assignment from lender
- Submit release of assignment to life insurance carrier
- Assign lender as primary beneficiary
- Purchase a policy with a face amount that is less than your loan amount
- Let your policy lapse
- Lose the original policy
- Lose track of repayment schedule
It depends. The amount of time it takes to secure your collateral assignment is dependent on the carrier, the type of life insurance policy, and your unique needs.
For instance, if you purchase a no medical exam life insurance policy, the process will be much faster than if you participate in a paramedical exam (fully underwritten policy).
Potentially, your collateral assignment could be in place within days, or it might take weeks.
Keep in mind, you DO NOT want to list your bank or lending institution as your primary beneficiary.
Instead, name those you care about most, and depend on you financially, as your beneficiaries.
That way, your lender – as a collateral assignee – only receives a death benefit amount that equals the balance of your loan. The remaining policy proceeds will go to your beneficiaries.
In general, a life insurance purchase does not require you to have a stellar credit rating. In fact, qualifying for a loan usually has stricter credit score requirements.
If, however, you are going through bankruptcy proceedings, or you have recently, your life insurance application will likely be affected. Speak to an independent life insurance agent for information about bankruptcy and life insurance.
In a word, don’t.
Plan on your lender being notified if you miss a premium payment. If you encounter financial hardship and find difficulty in making your premium payments, contact your lender right away to discuss options.
Should you default on your life insurance policy, your lender could consider your loan to be in violation of the contractual provisions.
Your lender may make premium payments on your behalf to keep the policy in force. Your loan will (almost always) have the payments made for you tacked on to the loan balance.
If you are utilizing the cash-value of a whole life insurance policy as collateral, your lender will likely have the ability to pull funds from the cash-value to make your premium payments.
Yes. If you would like to use a different life insurance policy as a collateral assignment, speak to a life insurance agent about the process.
As long as the other life insurance policy qualifies, you can change your collateral assignment.
Remember, there are two primary requirements for the assignment of life insurance as collateral:
1. Your carrier must agree to the collateral assignment of the life insurance policy.
2. The lender must approve the collateral assignment – meaning the policy needs to be for an appropriate amount and length of time.
No. You do not need to be the insured on the life insurance policy.
You do, on the other hand, need to be the policy owner. The policy owner has control of the life insurance contract and has the ability to designate a collateral assignment.
Often the insured and policy owner are the same person.
This type of collateral assignment is unique to employers and their key employees. Split dollar plans are not designed for individuals looking to secure a loan.
Essentially, a collateral assignment under a split dollar structure allows an employer to loan money to a key employee to make premium payments on a life insurance policy. In turn, the employee assigns the life insurance policy as collateral for the loan.
The intended result is to provide additional value to employees who are vital to a company’s success.
Yes. As long as your policy meets the requirements, multiple lenders can accept your policy as a collateral assignment.
For example, let’s say you are in the process of securing loans through your bank and an additional lending institution. Your bank loan is for $50,000 and your lending institution loan is for $80,000. The term lengths on your loans are 10 years and 15 years, respectively.
In this hypothetical, say you own a 20-year term life insurance policy for $250,000. Your policy is for an amount and term length that would satisfy the collateral needs of both loans.
As long as the life insurance company and lenders agree, your policy can be used as a collateral assignment for the two loans.
Possibly. You will typically need written consent from your lender prior to taking out a loan.
Remember, policy loans are available through whole life insurance.
In essence, your lender must agree that the collateral assignment is not put in jeopardy as a result of a policy loan. You will want to contact your lender to discuss your options.
Contact your lender as soon as your loan is paid off.
The lender will provide a formal release of collateral assignment form. The form surrenders their rights to your life insurance policy.
You will submit the form to your life insurance carrier.
That way, your beneficiaries will not encounter delays to your policy’s proceeds.
The collateral assignment of life insurance DOES make sense if:
- You are in the process of securing a loan with a collateral assignment stipulation.
- You do not have cash reserves to use as collateral for loan approval.
The collateral assignment of life insurance does NOT make sense if:
- Your loan can be approved without a collateral requirement.
- Another acceptable (and preferred) form of collateral, like cash, is available.
There a number of important things you need to know if you are in the process of establishing a loan with a collateral assignment requirement:
- Your life insurance carrier must approve the assignment, while your lender must accept the assignment.
- Most types of life insurance policies qualify as collateral.
- Your lender should be your collateral assignee, NOT your primary beneficiary.
- A collateral assignment can take just a few days, however, it may require weeks, so plan accordingly.
Finally, the process of establishing a collateral assignment of life insurance is typically simple and straightforward, but feel free to ask someone for help.
Life insurance is an invaluable tool for securing an important loan.