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What Is a Collateral Assignment of Life Insurance?

Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University.

A collateral assignment of life insurance is a conditional assignment appointing a lender as an assignee of a policy. Essentially, the lender has a claim to some or all of the death benefit until the loan is repaid. The death benefit is used as collateral for a loan.

The advantage to using a collateral assignee over naming the lender as a beneficiary is that you can specify that the lender is only entitled to a certain amount, namely the amount of the outstanding loan. That would allow your beneficiaries still be entitled to any remaining death benefit.

Lenders commonly require that life insurance serve as collateral for a business loan to guarantee repayment if the borrower dies or defaults. They may even require you to get a life insurance policy to be approved for a business loan.

Key Takeaways

The borrower of a business loan using life insurance as collateral must be the policy owner, who may or may not be the insured.
The collateral assignment helps you avoid naming a lender as a beneficiary.
The collateral assignment may be against all or part of the policy's value.
If any amount of the death benefit remains after the lender is paid, it is distributed to beneficiaries.
Once the loan is fully repaid, the life insurance policy is no longer used as collateral.

How a Collateral Assignment of Life Insurance Works

Collateral assignments make sure the lender gets paid only what they are due. The borrower must be the owner of the policy, but they do not have to be the insured person. And the policy must remain current for the life of the loan, with the policy owner continuing to pay all premiums . You can use either term or whole life insurance policy as collateral, but the death benefit must meet the lender's terms.

A permanent life insurance policy with a cash value allows the lender access to the cash value to use as loan payment if the borrower defaults. Many lenders don't accept term life insurance policies as collateral because they do not accumulate cash value.

Alternately, the policy owner's access to the cash value is restricted to protect the collateral. If the loan is repaid before the borrower's death, the assignment is removed, and the lender is no longer the beneficiary of the death benefit.

Insurance companies must be notified of the collateral assignment of a policy. However, other than their obligation to meet the terms of the contract, they are not involved in the agreement.

Example of Collateral Assignment of Life Insurance

For example, say you have a business plan for a floral shop and need a $50,000 loan to get started. When you apply for the loan, the bank says you must have collateral in the form of a life insurance policy to back it up. You have a whole life insurance policy with a cash value of $65,000 and a death benefit of $300,000, which the bank accepts as collateral.

So, you then designate the bank as the policy's assignee until you repay the $50,000 loan. That way, the bank can ensure it will be repaid the funds it lent you, even if you died. In this case, because the cash value and death benefit is more than what you owe the lender, your beneficiaries would still inherit money.

Alternatives to Collateral Assignment of Life Insurance

Using a collateral assignment to secure a business loan can help you access the funds you need to start or grow your business. However, you would be at risk of losing your life insurance policy if you defaulted on the loan, meaning your beneficiaries may not receive the money you'd planned for them to inherit.

Consult with a financial advisor to discuss whether a collateral assignment or one of these alternatives may be most appropriate for your financial situation.

Life insurance loan (policy loan) : If you already have a life insurance policy with a cash value, you can likely borrow against it. Policy loans are not taxed and have less stringent requirements such as no credit or income checks. However, this option would not work if you do not already have a permanent life insurance policy because the cash value component takes time to build.

Surrendering your policy : You can also surrender your policy to access any cash value you've built up. However, your beneficiaries would no longer receive a death benefit.

Other loan types : Finally, you can apply for other loans, such as a personal loan, that do not require life insurance as collateral. You could use loans that rely on other types of collateral, such as a home equity loan that uses your home equity.

What Are the Benefits of Collateral Assignment of Life Insurance?

A collateral assignment of a life insurance policy may be required if you need a business loan. Lenders typically require life insurance as collateral for business loans because they guarantee repayment if the borrower dies. A policy with cash value can guarantee repayment if the borrower defaults.

What Kind of Life Insurance Can Be Used for Collateral?

You can typically use any type of life insurance policy as collateral for a business loan, depending on the lender's requirements. A permanent life insurance policy with a cash value allows the lender a source of funds to use if the borrower defaults. Some lenders may not accept term life insurance policies, which have no cash value. The lender will typically require the death benefit be a certain amount, depending on your loan size.

Is Collateral Assignment of Life Insurance Irrevocable?

A collateral assignment of life insurance is irrevocable. So, the policyholder may not use the cash value of a life insurance policy dedicated toward collateral for a loan until that loan has been repaid.

What is the Difference Between an Assignment and a Collateral Assignment?

With an absolute assignment , the entire ownership of the policy would be transferred to the assignee, or the lender. Then, the lender would be entitled to the full death benefit. With a collateral assignment, the lender is only entitled to the balance of the outstanding loan.

The Bottom Line

If you are applying for life insurance to secure your own business loan, remember you do not need to make the lender the beneficiary. Instead you can use a collateral assignment. Consult a financial advisor or insurance broker who can walk you through the process and explain its pros and cons as they apply to your situation.

Progressive. " Collateral Assignment of Life Insurance ."

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Home » Articles Library » 2 Ways to Transfer Ownership of a Life Insurance Policy

2 Ways to Transfer Ownership of a Life Insurance Policy

Things to Know about Borrowing Against Your Life Insurance Policy

As property, policyowners can transfer their life insurance contracts to other persons or entities. A policyowner can transfer either all or only some of the “bundle of rights” that comprises a life insurance policy to almost any person or entity.

The two basic ways of making a lifetime transfer of a policy are: (1) the absolute assignment; and (2) the collateral assignment. An absolute assignment, as its name implies, transfers all the policyowner’s rights irrevocably. A collateral assignment, again as its name implies, assigns so much of the death benefit as necessary for as long as necessary to secure a lender’s rights. But no more of the proceeds will go to the lender than the amount of debt owed.

Requirements

The assignment does not have to be of any particular form (absent specific provisions in state law or the contract to the contrary). Because life insurance is treated as personal property, policyowner may transfer ownership rights, not only by many different types of documents, but also by many different actions. For example, if a person sells a business and the business owns a life insurance policy, the sale of all the assets of the business carries with it the personal property the business owned – including the life insurance.

Likewise, a property settlement in connection with a divorce may have the effect of transferring the ownership of life insurance on the life of one or the other (or both) spouse(s) even though no one ever uses the word “assignment” with regard to these transfers. But this type of transfer (where a clause in the divorce decree disposes of life insurance) is both very dangerous and very awkward. If a policyowner names his new spouse as beneficiary of the insurance proceeds and the insurer has no notice or knowledge of the divorce decree’s change, both spouses are likely to claim the proceeds. Furthermore, if the decree requires the policyowner spouse to maintain the policy for the benefit of his or her ex-spouse, the policyowner cannot obtain a policy loan-even to keep the policy in force through a premium loan.

Before either the absolute or collateral type of assignment or any other instance of a policy ownership transfer is valid, the policyowner must notify the insurer (and, where required by the terms of the contract, the insurer must consent to the assignment). Once notified in writing at the insurer’s home office, the insurer must honor the policyowner’s transfer—unless the terms of the contract itself forbid assignments. So if the insurer then disregards (by intention or neglect) the assignee’s rights and makes payment to someone else, the courts may force the insurer to make a second payment to the assignee. If the policyowner gives no notice to the insurer, it will be protected in a transaction initiated by a former owner. For instance, if the former owner applies for a policy loan and he has not given the insurer proper notice that he had assigned the policy, the insurer is protected in making that loan.

The insurer does not, however, have to verify the bona fides of the transaction between the policyowner and the transferee nor the validity of the transaction. In other words, the insurer is not accountable for the mental or legal capacity of the policyowner to make the assignment (unless it had knowledge that the policyowner was not legally competent to make it or there were irregularities in the assignment form).

Absolute Assignments

Policyowners use an absolute assignment in life insurance planning when the policyowner wants to sell or give away all of his or her rights under the contract. The goal might be to obtain valuable consideration, to save estate taxes, avoid creditors, or purely for love and affection and to assure the transferee of financial security. There are many common examples of sales and gifts:

A client might sell a policy on his life to his business.
A business might sell a policy on an employee’s life to the employee or to the employee’s spouse or child or trust (or to a pension plan).
A shareholder might sell a policy on his life to a new business associate.
A client might give a policy on her life to her spouse.
A client might give a policy on his life to his children or to a family trust.

Tax Implications

Both sales and gift transactions have important and sometimes unexpectedly expensive tax implications. Planners should thoroughly research before allowing any sale of a life insurance policy. Also, understand what should be considered before allowing a client to make a gift of a policy. A valid gift requires that the donor have contractual capacity and intent to make a voluntary gratuitous transfer and the gift must be delivered to and accepted by the donee (assignee).

Nontax Implications

Planners must be aware of the nontax implications of an absolute assignment in order to avoid them and/or alert the client to their potential effect. Some of these are:

Although an absolute assignment itself may not per se change the interest of a revocable beneficiary, as a practical matter the new owner can immediately change the beneficiary and often makes that change almost simultaneously with the assignment. Some absolute assignment forms state that the new owner is automatically the primary policy beneficiary until the new owner makes a change to the beneficiary designation.

If the policyowner made an irrevocable beneficiary designation before making an absolute assignment of the policy, in most states the assignment will not defeat that designation (without the written consent of the beneficiary) and the transferee should be apprised of this fact.

Absolute assignments may put the policy and its proceeds beyond the claims of the policyowner’s creditors, but planners should inform policyowner that—like diamonds—an absolute assignment is forever. There is a loss of both control and flexibility from the transferor’s viewpoint.

Collateral assignment of life insurance

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Secured loans are often used by individuals needing financial resources for any reason, whether it’s to fund a business, remodel a home or pay medical bills. One asset that may be used for a secured loan is life insurance. Although there are pros and cons to this type of financial transaction, it can be an excellent way to access needed funding. Bankrate’s insurance editorial team discusses what a collateral assignment of life insurance is and when it might—or might not—be the best loan option for you.

What is collateral assignment of life insurance?

A collateral assignment of life insurance is a method of securing a loan by using a life insurance policy as collateral . If you pass away before the loan is repaid, the lender can collect the outstanding loan balance from the death benefit of your life insurance policy . Any remaining funds from the death benefit would then be disbursed to the policy’s designated beneficiary(ies).

Why use life insurance as collateral?

Collateral assignment of life insurance may be a useful option if you want to access funds without placing any of your assets, such as a car or house, at risk. If you already have a life insurance policy, it can be a simple process to assign it as collateral. You may even be able to use your policy as collateral for more than one loan, which is called cross-collateralization, if there is enough value in the policy.

Collateral assignment may also be a credible choice if your credit rating is not high, which can make it difficult to find attractive loan terms. Since your lender can rely on your policy’s death benefit to pay off the loan if necessary, they are more likely to give you favorable terms despite a low credit score.

Pros and cons of using life insurance as collateral

If you are considering collateral assignment, here are some pros and cons of this type of financial arrangement.

It may be an affordable option, especially if your life insurance premiums are less than your payments would be for an unsecured loan with a higher interest rate.
You will not need to place personal property, such as your home, as collateral, which you would need to do if you take out a secured loan. Instead, if you pass away before the loan is repaid, lenders will be paid from the policy’s death benefit. Any remaining payout goes to your named beneficiaries.
You may find lenders who are eager to work with you since life insurance is generally considered a good choice for collateral.
The amount that your beneficiaries would have received will be reduced if you pass away before the loan is paid off since the lender has first rights to death benefits.
You may not be able to successfully purchase life insurance if you are older or in poor health.
If you are using a permanent form of life insurance as collateral, there may be an impact on your ability to use the policy's cash value during the life of the loan. If the loan balance and interest payments exceed the cash value, it can erode the policy's value over time.

What types of life insurance can I use as collateral for a loan?

You may use either of the main types of life insurance— term and permanent —for collateral assignment. If you are using term life insurance, you will need a policy with a term length that is at least as long as the term of the loan. In other words, if you have 20 years to pay off the loan, the term insurance you need must have a term of at least 20 years.

Subcategories of permanent life insurance, such as whole life , universal life and variable life, may also be used. Depending on lender requirements, you may be able to use an existing policy or could purchase a new one for the loan. A permanent policy with cash value may be especially appealing to a lender, considering the added benefit of the cash reserves they could access if necessary.

How do I take out a loan using a collateral assignment of life insurance?

If you already have enough life insurance to use for collateral assignment, your next step is to find a lender who is willing to work with you. If you don’t yet have life insurance, or you don’t have enough, consider the amount of coverage you need and apply for a policy . You may need to undergo a medical exam and fill out an application .

Once your policy has been approved, ask your insurance company or agent for a collateral assignment form, which you will complete and submit with your loan application papers. The form names your lender as an assignee of the policy—meaning that they have a stake in its benefits for as long as the loan exists. You will also name beneficiaries or a single beneficiary, who will receive whatever is left over from the death benefits after the loan is repaid.

Note that you will need to stay current on your life insurance premium payments while the collateral assignment is active. This will be stated in the loan agreement, and failure to do so could have serious repercussions.

Alternatives to life insurance as collateral

If you are considering a collateral assignment of life insurance, there are a few alternative funding options that might be worth exploring. Since many factors determine each option, working with a financial advisor may be the best way to find the ideal solution for your situation.

Unsecured loan

Depending on your situation, an unsecured loan may be more affordable than a secured loan with life insurance as collateral. This is more likely to be the case if you have good enough credit to qualify for a low-interest rate without having to offer any type of collateral. There are many different types of unsecured loans, including credit cards and personal loans.

Secured loan

In addition to life insurance, there are other items you can use as collateral for a secured loan . Your home, a car or a boat, for example, could be used if you have enough equity in them. Typically, secured loans are easier to qualify for than unsecured, since they are not as risky for the lender, and you are likely to find a lower interest rate than you would with an unsecured loan. The flip side, of course, is that if you default on the loan, the lender can take the asset that you used to secure it and sell it to recoup their losses.

Life insurance loan

Some permanent life insurance policies accumulate cash value over time that you can use in different ways. If you have such a policy, you may be able to partially withdraw the cash value or take a loan against your cash value. However, there are implications to using the cash value in your life insurance policy, so be sure to discuss this solution with a life insurance agent or your financial advisor before making a decision.

Home equity line of credit (HELOC)

A home equity line of credit (HELOC) is a more flexible way to access funds than a standard secured loan. While HELOCs carry the downside of risking your home as collateral, you retain more control over the amount you borrow. Instead of receiving one lump sum, you will have access to a line of credit that you can withdraw from as needed. You will only have to pay interest on the actual amount borrowed.

Frequently asked questions

What is the best life insurance company, what type of loans are collateral assignments usually associated with, what are other common forms of collateral, what are the two types of life insurance assignments.

What is collateral insurance and how does it work?

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Life insurance death benefits

Absolute Assignment of Life Insurance Policies

An absolute assignment transfers all ownership rights of a life insurance policy.

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1. What Is the Assignment of Insurance Benefits?
2. What Is a Life Insurance Assignment?
3. Does Life Insurance Count Towards the Two Million for Federal Estate Tax?

An absolute assignment of a life insurance policy involves transferring all rights and ownership decisions to another party. You could have one of several reasons for wanting to do this; for example, using the policy as collateral for a loan, or making a donation to your favorite charity at death. Making an absolute assignment is relatively simple as long as your life insurance policy allows it.

How Transfer of Ownership Works

Absolute assignment is akin to a transfer of ownership, in that you are giving all ownership rights to another party. Although you remain the insured under the contract, the new party can change the beneficiary (usually to itself), it can make decisions about investment options of a whole-life policy, and it can take any other action that does not jeopardize the policy's in-force status. You remain responsible for the premium payments, and you could be in breach of the assignment provisions if you don't pay them.

Collateral Loan Bank Assignment

Absolute assignment of life insurance is often done when a person applies for a loan. If the bank is concerned that the loan might not be repaid if you died, if might require a life policy with an absolute assignment to the bank. The bank names itself the beneficiary of the policy up to the amount of the loan balance. Any residual death benefit would go to your named beneficiary.

Financing a Charitable Gift

Another use of absolute assignment is to make a charitable gift. This approach is gaining in popularity.

Life insurance is often purchased to finance a charitable donation by the estate of a deceased individual. One drawback to this approach is that the entire gift goes through the estate and might incur probate delays and fees.

The use of an absolute assignment streamlines the process, as the charity can name itself the beneficiary of the policy. The charity can issue you a tax receipt for every premium, which you can deduct as a charitable contribution.

Absolute Assignment Legal Considerations

Insurance companies freely provide assignment forms that are straightforward and easy to fill out. Once an assignment is complete, a copy of the form should be filed with the insurance company.

The life insurance company may withhold part of its payout to any beneficiary -- including a newly designated one -- if a premium hasn't been fully paid, or because of other indebtedness. That might have legal ramifications for you and the assignee, in which the insurance company will take no part.

Standard Life Insurance Co. of New York: Absolute Assignment Form
Waypoint Partners: Assigning Your Life Insurance Policy
Collateral Assignment Agreement

Philippe Lanctot started writing for business trade publications in 1990. He has contributed copy for the "Canadian Insurance Journal" and has been the co-author of text for life insurance company marketing guides. He holds a Bachelor of Science in mathematics from the University of Montreal with a minor in English.

What is the assignment of insurance benefits, what is a life insurance assignment, does life insurance count towards the two million for federal estate tax, what happens to homeowner's insurance when a person dies, what is the collateral assignment of a life insurance policy, borrowing as a beneficiary from an irrevocable life insurance trust, how to change the maturity date on whole life insurance policy, can you change the owner of a nonqualified annuity, how to cancel an irrevocable trust life insurance policy, how do i set up a trust fund with a life insurance policy, tax consequences of changing beneficiaries on a life insurance policy, how much can i borrow against cash value.

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Life Insurance Assignment – What They Are and Why You Need Them

Everything You Need to Know about Absolute vs. Collateral Assignments

Collateral assignment, how is a collateral assignment used, how to complete a collateral assignment, releasing a collateral assignment, death and collateral assignments, collateral assignments for the uninsurable, absolute assignment, final words.

What is a collateral assignment?

A collateral assignment of life insurance gives lenders the right to collect your policy’s death benefit up to the amount of the outstanding loan balance.

A typical scenario involves taking out a business loan .

The lender may require a life insurance policy as collateral.

The type of life insurance policy used, whether a term, whole life, or universal life doesn’t matter.

The insurance policy will pay off the balance if you die while the loan is outstanding.

Life insurance for SBA loans is required when you borrow from the SBA.

The collateral assignment applies to the entire policy, including any life insurance rider benefits that may be part of the policy.

The process is similar whether you are adding the assignment to an existing policy or are buying new coverage.

There are two parties to a collateral assignment.

Assignor – Is the owner of the life insurance policy
Assignee – Is the lender

Life insurance companies have standardized forms used for this purpose.

The owner completes the form and sends it to the lender for review and signature.
Once complete, you will send the form to the insurance company.
The insurance company records the assignment and sends a confirmation to the owner and lender that the assignment is complete.

This may all seem confusing if you haven’t used an assignment before, but the reality is that most life insurers make it pretty easy to complete.

When you pay off your lender, you have the right to have the collateral assignment removed.

The life insurance companies have collateral release forms as well.

The owner completes the form and sends it to the lender.
The lender signs off on the release.
Once complete, the insurance company records the release and sends the discharge letter to all parties.

Once complete, you should re-check with the home office to ensure that your policy released the assignment.

Your agent can help with this.

How do collateral assignments work when you die?

Check out this example:

Policy Face Amount = $1,000,000
Beneficiary = Your Spouse
Original Bank Loan = $200,000
Outstanding Loan Balance at Death = $100,000

What happens next?

Your beneficiary will file the death claim with the life insurance company.
The life insurance company will review the claim and see a collateral assignment attached to your policy.
The insurer contacts the lender for an updated payoff figure.
Payoff amounts are sent directly to the lender.
Your beneficiary receives the balance of the policy death benefit .

For the above example, your lender would receive $100,000, and your beneficiary would receive the remaining $900,000 as intended.

I would like to remind you that you NEVER want to name your lender as the beneficiary, as they would receive the entire proceeds rather than just what was owed.

While lenders may want a life insurance policy as collateral, sometimes it’s difficult to obtain if the insured has substantial health issues .

If you have an existing life insurance policy in effect, it’s possible to use that for the assignment.

Another option that exists in some states is contingent coverage.

Contingent coverage is a one-year policy that you can renew.

The policy will exclude death from the known health issue but provide coverage for new health issues that develop or from accidental deaths .

Many lenders accept this coverage when it’s the only option available.

What is an absolute assignment?

You use absolute assignments when you permanently relinquish all ownership rights to your life insurance policy.

Some examples:

Life Insurance Settlements

With this transaction, you are selling your life insurance policy to a third party.

You may convert a term policy to permanent insurance before it is sold.

Another example may involve admitting seniors to a nursing home.

The nursing home may take over the policy you have.

1035 Exchange

A 1035 exchange is a tax-free transfer of cash value from universal life or whole life policy to another similar policy.

Gifting Life Insurance to Charities

You can use absolute assignments to permanently transfer your policy to your favorite charity.

Irrevocable Life Insurance Trusts (ILIT)

You use absolute assignments to permanently transfer your policy to an ILIT.

An example would be a survivorship policy you and your spouse own that you are transferring to the trust.

Many other potential issues may arise with transfers to an ILIT that are beyond the scope of this article.

Business Cases

If you purchased key person life insurance on an employee, absolute assignments are used to transfer ownership to the employee.

You may have questions about your life insurance assignment and how it works.

The following are general guidelines, as each situation is uniquely different.

Can the collateral assignment change the beneficiary?

No, the collateral assignment does not change the beneficiary.

The life insurance assignment gives the lender the right to receive proceeds equal to their outstanding loan balance.

Can a business be a beneficiary in a collateral assignment of life insurance?

A business can be the beneficiary of a life insurance policy that is collaterally assigned.

Life insurance assignments are common for absolute and collateral assignments.

What is most important is that we understand what is involved with this process.

That’s where we’ll help you make the best decision for your life insurance.

There is never any pressure or obligation with our life insurance service.

Please take a few minutes to submit your quote request today. Thank you.

About The Author

Michael Horbal

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What Is A Collateral Assignment?

Certain links on this page will refer you to products we might recommend. This creates no additional cost to you , and helps provide us an income so we can continue to bring valuable information to your fingertips. For more information on how we're paid, click our link below. Full Disclosure

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.

Definitions
Requirements
How To Decide

What Is Collateral Assignment Of Life Insurance?

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.
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.

Requirements For Assignment Of 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.

Process Of Securing Collateral Assignment

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 .
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.

Key Details

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.

Important Note!

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.

Once your loan is satisfied, your beneficiaries receive the remaining death benefit.

Types Of Life Insurance Used As Collateral

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.

What is it? Life insurance issued for a specific period of time. For example, 10 or 20 years .

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

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

Don’t

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

Commonly Asked Questions About Collateral Assignments

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.

Not necessarily. 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.

Is Collateral Assignment Right For Me?

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.

Final Thoughts

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.

Heidi Mertlich

Heidi Mertlich is the owner of NoPhysicalTermLife.com. She is an independent life insurance agent specializing in no medical exam life insurance. Heidi is also an author for LifeInsurancePost.com, an online community of life insurance experts.

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What is voluntary life insurance, what is temporary life insurance.

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Collateral Assignment Life Insurance Guide

Before delving further into finer details about collateral assignment, you need to understand what it is.

What is a collateral assignment?

This is a conditional assignment where a borrower allows their lender to receive proceeds from his/her insurance policy as a means of repaying a loan. When you borrow a loan from a bank or a credit union, they will often request for collateral. If you don’t have a different form of collateral, you can assign your insurance policy as collateral to the lender

A collateral assignment also requires a beneficiary to be named. The beneficiary will receive the remaining proceeds of the insurance policy after you die, after the loan balance is completely paid off. So, your beneficiary should be someone you trust or someone you would like your money to go to after your death.

There are two types of assignment for life insurance that you should avoid mixing up.

Collateral assignment and absolute assignment.

Collateral Assignment

With collateral assignment , you are in full control of the insurance policy, meaning that you are the only person with the power to make any changes and pay the required premiums.

Absolute Assignment

As opposed to collateral assignment, an absolute assignment signs over all the rights of the insurance policy to the lender. You remain to be the insured party but you hand over all control to your lender. This means that they possess the power to make any changes to the policy, like adding beneficiaries and they are also responsible for paying premiums. This form of assignment is also regarded as a gift or sale.

When collaterally assigning a life insurance policy, there are two main things you need to consider. First of all, you need to ensure that your insurer allows collateral assignment. While most insurance companies do, it is still important to confirm if your insurer does.

Second and last, you need to confirm with your lender if it accepts life insurance policies as collateral. You do not want to be in for surprises so make sure to ask just so as to get the facts straight.

Best Life Insurance to Use for Collateral

You can use any type of life insurance as collateral. The choice you make should be determined by your needs so at the time of choosing it as collateral, you ought to have enough information regarding the involved processes. The following are life insurance policies that can be used as collateral.

Term Life Insurance

Proceeds from a term life insurance policy are usually issued for a specific time period that could be 10 years, 15 years, 20 years, and so on. The major advantage of term life insurance is that premiums for purchasing a large coverage are cost-effective.

In addition, the death benefits and premiums will remain the same until the end of the term. In its simplest form, term life insurance is used to provide coverage at the needed/specified time.

When to Consider Term Life Insurance

If you are considering a term life insurance policy, then ensure that your needs for insurance coverage are for a certain period of time. Also, term life insurance is the best option when you are on a budget and when you want a large face amount from your insurance policy.

Whole Life Insurance

As opposed to term life insurance which covers you for a specific period of time, whole life insurance is meant to cover you until the event of your death. It includes cash value components and stays value for as long as you make your premium payments. The premium payments will remain the same up to the end or and if lucky you may not have to pay them later in life.

When to Consider Whole Life Insurance

For whole life insurance to work for you, you need to go through the loan policy features and ensure that you are comfortable with them. Also, if you plan to use your life insurance policy to give a financial gift then whole life insurance may be your best choice. Unless you want a short term coverage only choose whole life insurance if you want coverage that won’t expire for the rest of your life.

No Exam Life Insurance

No exam life insurance is usually issued without a medical examination. Due to this, it usually has downsides to it but is still a great option for you if you want approval in a shorter period. It is a great option for collateral assignment and is usually available as whole life, universal, and term life insurance.

When to Consider No Exam Life Insurance

As mentioned, no exam life insurance usually takes off a considerable amount of time for approval, so is a great option if you need insurance as fast as possible. Also, if your health is in great condition, then a no exam life insurance may help you get good rates for the insurance policy. If you are worried that something you didn’t know of might manifest itself then you can skip the whole medical examination process straight to the application process.

Universal Life Insurance

Universal Life(UL) insurance is similar to the whole life insurance but only differs in that it has flexible premium payments.

When to Consider Universal Life Insurance

You may consider universal life insurance if you need a permanent policy that will last as long as you live. Also, you need to know that with universal life insurance, the death benefit can be adjusted and so can the premiums you pay every year. The two depend on both your needs and those of the policy. In addition, the investment component of your insurance policy will be affected by market performance.

Guaranteed Universal Life Insurance

A guaranteed universal life insurance policy, abbreviated as GUL, is a combination of permanent and term life insurance. It is the best option for you if you need a lifelong insurance policy that is not expensive. With guaranteed universal life insurance, you will receive coverage until you attain a certain age which is usually over 100years.

When to Consider Guaranteed Universal Life Insurance

When choosing guaranteed universal life insurance as your policy, you need to know that the death benefits and premiums remain the same until the end. It is a cheaper option compared to whole life insurance but will cost more than term life insurance and it has no cash value component.

Generally, collateral assignment will be good for you if you lack enough cash reserves that you can use as collateral for your loan. It will also make sense for you when you are applying for a loan with specifications for collateral assignment.

On the other hand, you may not need a collateral assignment if your loan can be approved without one. Also, you may not need a collateral assignment if you prefer to use another form of collateral which you can easily access.

The Collateral Assignment Process

You may be confused as to what to apply for first, the loan or the insurance policy. The very first step is to consult with your potential lender to ensure that life insurance can be used as collateral. If it can, you need to also confirm if an existing policy can be used. Moving forward, you will be able to know if the insurance policy you wish to use as collateral is valid to your lender. Read on to see the steps involved in collateral assignment process.

Application

The first step for the collateral assignment process is the application of the insurance policy. During this process, you need to name a beneficiary, who could be your spouse, child, or anyone else who is dependent on you.

Completing the Collateral Assignment Form

After the insurance policy is approved, you will be required to fill in the collateral assignment form. Filing and acknowledgment may take a varying time period depending on the company and the urgency.

Signing of the Form

You are required to sign the form before forwarding it back to the insurance company. Some companies will request for a signature that is notarized so be sure to confirm with them.

Acknowledgment of the Assignment

After the collateral assignment form has been signed and sent back to the insurance company, you will have to wait for them to acknowledge the process. This may take some days but the process can be accelerated if need be.

When applying for a collateral assignment make sure that you don’t list your lender as your beneficiary. Only name a spouse or another family member as your beneficiary. If you list your lender as the beneficiary, they may claim the insurance proceeds that exceed the initial loan amount.

After your death, the policy proceeds that go to the bank or credit union which is the collateral assignee will only cover the principal balance and interest. The remaining proceeds are transferred to whoever you listed as your beneficiary.

However, there may come a time when you need to change the collaterally assigned insurance company. So if you need such a change, there are also a few steps involved. They include;

You need to find an insurance policy that you can afford while also fulfilling all the requirements of your lender.

After approval of the coverage, you will have to sign the collateral assignment form together with the lender. The insurance company then signs the form before processing as an acknowledgment of the new collateral assignment.

An email is sent by the insurance company to both the lender and the insured as formal communication of the whole change process.

When to Best Use Collateral Assignment

If you do not have enough borrowing power to get a loan, then a collateral assignment would be a great solution. It is good to note that a collateral assignment will work best in some case scenarios when compared to others. The following are some of the best situations to best use a collateral assignment.

If You Have a New Policy

You can apply for a new insurance policy specifically for the collateral assignment, even if you have another one that already covers your family and other beneficiaries. You can choose to have the older policy strictly for your family then use a new one for collateral assignment.

However, it is important to understand that you can assign your policy to one lender. All that is needed is to ensure that your insurer meets all the requirements and that all your lenders accept the policy as collateral.

If You Cannot Borrow

If you are not eligible for loans from most lenders, then your best shot to securing a loan is through a collateral assignment. It allows you to borrow a loan even when you don’t have the power to do so.

If You Have Additional Coverage

With every stage of life, you will require a certain amount of coverage. What may be enough coverage in your younger years may not be necessary in your older years. Later in your life, you may be able to afford a collateral assignment and still have the coverage you need.

Making and Ending a Collateral Assignment

Making a collateral assignment is easy and begins from downloading the form or asking your insurance company to mail it to you. Before making your inquiry, first check with the company to ensure that it allows for collateral assignment.

If you decide to make any changes to the insurance policy and the collateral assignment, then you will need to send copies of the correspondence to your lender.

On the completion of the loan repayment, it means that the collateral assignment is ended. Your lender needs to send a release form to your insurer so as to lift the assignment from the insurance policy. Upon receiving the release form, the insurance company transfers back all the policy rights to you and cancels the collateral assignment.

While a collateral assignment is highly beneficial, it also has a few downsides. Let’s look at the two sides of the coin below.

The following are some of the top advantages of having life insurance as a collateral assignment;

Freedom to Your Property

One reason why you should have your insurance policy as a collateral assignment is that it gives you the freedom to do what you wish with your personal property. When you list your own property as collateral, your lender can claim it when you default your loan. Also, you may be faced with serious problems when you sell the property listed as collateral.

Using your life insurance policy as collateral is a unique way to pay up your loan even when you pass away. Your death, which means the end of insurance premiums payments also denotes the loan balance repayments from the policy proceeds.

Affordability

With some life insurance policies, you will be able to receive large coverage even when paying small premiums. This is an affordable way of repaying a huge loan without breaking your back.

Disadvantages

A collateral assignment is appealing to most people, but it also has a few disadvantages listed below;

Loss of Policy Control

Your lender has the right to purchase a different policy for you and add the premiums to the initial principal if you don’t pay for the initial policy premiums. This would only happen if the loan is not fully repaid, so make sure that the insurance policy remains active until you fully repay your loan.

Limited Death Benefit

If the death benefit is assigned to the lender, they could claim all the death benefit proceeds. To avoid such a situation, assign a different insurance policy as collateral or just a portion of the initial policy.

Limited Use of Cash Value

When cash value is used as collateral for your policy, it may limit flexibility. With a whole life insurance policy, the cash value component can be used later in life to shrink annual premiums which makes coverage more affordable. With other insurance policies, the cash value is tied to the investment index.

Getting Insured

The struggle for getting insured is real. To get insured, it may take a few weeks, especially if you want the policy to be medically underwritten. The other struggle is getting attractive premiums if you are healthy. On the brighter side, the underwriting process has been quickened but it is still hard to get an affordable premium with appealing premiums, all in a short period of time.

Key Message

When applying for a collateral assignment, it is important to ensure that insurer approves it and the lender accepts it. From there, you can plan accordingly to avoid unnecessary delays if you need it in a short time. Also, avoid making mistakes like naming your lender as your primary beneficiary. In your collateral assignment, your lender should only be your assignee and nothing else. While you may not be able to place value to your life insurance policy, it is an important part of securing an important loan.

About Jason Hill Founder and President | CFA Insurance

Absolute Assignment

What does absolute assignment mean.

Absolute assignment refers to a policyholder transferring his or her ownership of a policy to another party. That transfer means that all of the coverage within that policy will now go to the newly named party. The original owner of the policy does not have to state his or her reasons for doing so nor does he or she need to stipulate any conditions for the transfer.

Insuranceopedia Explains Absolute Assignment

There are a number of reasons why a policyholder transfers all of their rights to a policy to another person or entity. They might think of it as a gift to someone else. It could be the sole means of paying off a loan. Even if the insured has now given up their rights to all of the claims and privileges, they are still responsible for payments for the policy. The new owner might have been asked by the original owner to pay the insurer after the transfer is completed, but if the newly named party fails to do so, the negligence will not be blamed on that person but on the original policyholder.

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LESSON 3: LIFE INSURANCE POLICIES, PROVISIONS, OPTIONS AND RIDERS

3.9.9 assignment provision - absolute and collateral.

Since the policyowner actually owns the policy, not the insurer, the owner has every right to give the policy away just like any other owned piece of property; the insurer's permission is not required. The transfer of ownership is referred to as assignment and the new owner is the assignee .

If the policy is transferred under an absolute assignment , the transfer is irrevocable and the assignee receives full control of the policy. As long as the beneficiary was not designated as an irrevocable, the assignee can even change the beneficiary without the beneficiary's permission.

If the policy is transferred as a means of establishing security on a debt, it is considered a collateral assignment . If the insured dies before the debt is repaid, the balance of the debt is paid to the creditor out of the policy proceeds. If there are any funds left once the debt has been satisfied, the rest of the proceeds go to the policy's beneficiary.

A policyowner has assigned a $10,000 policy to cover a $5,000 mortgage. How will the company pay the claim at the insured's death?

If an absolute assignment was made, the company will pay the entire proceeds to the assignee. If a collateral assignment was made, the company will usually make the check payable jointly to the assignee and the beneficiary. If a partial assignment was made, the unpaid mortgage balance will be paid to the assignee and the remainder will be paid to the beneficiary named in the policy.

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What is an Assignee on a Life Insurance Policy?

When people take out a life insurance policy, it’s typically a step taken to prepare your loved ones for life after you pass away. What you may not know is that insurance policies are owned entities, which means they can be used as collateral for a loan or even be sold to offer money to you when you’re in a tough spot. There are also different methods available to do this, which we’ll explain in this article.

An individual who is taking out insurance will have many choices, such as whether you prefer to purchase whole life insurance or term life insurance . You also have choices when it comes to using your policy to leverage money that has already been invested in it.

Part of that is understanding the difference between a collateral assignment and an absolute assignment, so you can be sure to choose the solution that works best with your financial needs. The other part of it involves knowing the most important terms related to an assignment so that you go in with the knowledge you need.

Collateral Assignment of Life Insurance

If you have ever taken out a standard personal loan, a collateral assignment of life insurance has a lot of similarities to that process. The collateral for the loan is the life insurance policy and an organization or individual who pays out the loan is the assignee . They are also the ones who take over the policy on a conditional basis.

One important thing to know is that the assignee cannot resell the policy, make use of its cash value, or make changes to it. The assignee may only take the money for the death benefit if you, as the policyholder, default on the loan.

In the typical situation, if the collateral assignment is standing at your death, the assignee will let the insurance company know about the debt remaining, including interest. They will then be provided with that amount. If there are extra benefits, those will go to your beneficiary listed in the policy.

Absolute Assignment of Life Insurance

Another way to acquire a loan using life insurance is through an absolute assignment. This differs from collateral assignment since instead of using the loan as collateral, you are signing the full policy over to a person or entity. This person or business is considered the assignee, while the person who is selling the policy is the assignor.

The individual who buys the insurance policy gains ownership of the policy. This makes them responsible for the premiums and lets them make changes or choose different beneficiaries .

Each absolute assignment will have different terms based on the contract that is signed. For instance, it might explain that the assignor is transferring all title, rights, and interest in the policy to the assignee. Depending on the insurance company, an ownership clause may be used to make the transfer itself.

Understanding Policy Provisions

To ensure the assignee is protected, the insurance company needs to be notified that an assignment is in place. If the company doesn’t have notice of the assignment, the process might be paid to a beneficiary or a different assignee. This can be an issue since the insurance company will not pay the amount out again to another person.

Many life insurance policies come with policy provisions related to assignments. The most common include:

The assignment is subject to all indebtedness related to the insurance company regarding the policy.
The assignment only becomes binding when the original or duplicate is filed at the insurance company’s home office.
The insurance provider has no responsibility for the sufficiency, effect, or the validity of the assignment.

Because of these provisions, it’s crucial to ensure that you make the assignment correctly. This applies whether it is an absolute assignment or a collateral assignment. The best thing you can do to avoid problems is to speak with an experienced insurance professional who can guide you to the best solution for your needs.

Comparing Assignments Among Life Insurance Policies

If you are in a situation where you need money and it needs to happen quickly, ask yourself whether your cash value in your life insurance policy could help you out. After you decide the answer to that, make sure that you consider the larger picture.

Going with an absolute assignment approach may be able to offer you a large sum of money at one time. However, you also need to realize that your family and loved ones will no longer have the protection that was provided by the policy. If this is a policy that you have been dutifully paying into for decades, losing all the value is something you need to decide whether you’re ready for.

On the other hand, a collateral assignment doesn’t whisk away the policy in its entirety. You can get control of your policy back as soon as you resolve your financial problem and pay back the loan. A collateral assignment is one of the most common ways to borrow from a life insurance policy to use the cash value on necessities.

Collateral assignments let you regain the benefits associated with a long-term life insurance policy at some point in the future. Since most people are familiar with paying off student loans, auto loans, and mortgages, this agreement is similar. Making all of the payments on time can help with both financial concerns in the present as well as creating long-term financial success.

Selecting Between Life Insurance Assignment Options

Every person is unique and will be in a different situation when considering a life insurance assignment. For one person, choosing a collateral assignment might be the right choice since the individual wants the life insurance benefits back after paying off the loan. Someone else may not be interested in those benefits and need a larger amount of money, which an absolute assignment can offer.

You’ll want to consider all your options before borrowing through your life insurance , whether that involves an assignment or another type of loan. Be aware of all of your options and make sure your choice is right for the present and your future financial situation.

Collateral Assignment of Life Insurance (Including Key Steps)

In the world of personal finance, bank loans of one type or another are a routine occurrence. It is also common for business owners to borrow money in starting a new venture and/or funding the expansion of an existing enterprise.

In securing such loans, lenders often require a life insurance policy on the borrower. Many people are somewhat unfamiliar with this type of requirement and may have a variety of questions, such as...

bank buildings image - collateral assignment of life insurance

What is a collateral assignment of life insurance? Is there a difference between absolute assignment vs. collateral assignment? Or, what is involved in the assignment of a life insurance policy?

These or other related questions are understandable, given that this request by a prospective lender may be the first time an individual has ever heard of a collateral assignment. This article, Collateral Assignment of Life Insurance (Including Key Steps) , provides information related to the collateral assignment of life insurance, compares absolute assignment to collateral assignment, and discusses the process for collateral assignment, as well as other considerations in understanding how life insurance policies work .

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Collateral assignment of life insurance.

In applying for personal or business loans, a borrower’s repayment capacity, credit history, collateral assets, and other factors are routinely evaluated by a prospective lender.

As part of the repayment consideration, the lender may require a life insurance policy on the borrower as a condition of the loan. This requirement is more common with business loans, such as U.S. Small Business Administration (SBA) loans, but may also apply to personal lending in certain circumstances.

contract application image - collateral assignment of life insurance

This type of arrangement is referred to as a collateral assignment and guarantees loan repayment in the event of a borrower’s untimely death. In this scenario, the policy owner is the assignor , and the lender requiring collateral assignment is the assignee .

In a collateral assignment, the insured borrower’s death benefit would be used to repay the outstanding loan amount, with any remaining benefit being paid to the policy’s listed beneficiaries. The life insurance policy used for collateral assignment may be either an existing policy or a new policy taken out specifically for this purpose.

Please note that a collateral assignment is preferred to simply listing the lender as a beneficiary on the policy since the outstanding loan amount usually decreases over time. Additionally, a collateral assignment will routinely terminate once the perspective loan balance has been paid in full.

According to the U.S. Small Business Administration , "l enders should require life or disability insurance where there is a concern over whether the business could survive in the absence of an individual. When life or disability insurance is deemed prudent, the lender may accept a COLLATERAL ASSIGNMENT of an existing or new decreasing term or universal life insurance policy. LENDER SHOULD NOT BE NAMED AS A BENEFICIARY."

Types of Life Insurance for Collateral Assignment

If a death benefit only is required by a lender, either type of life insurance (i.e., term or permanent) is normally acceptable for collateral assignment.

On the other hand, if the lender requires “collateral” as a condition of extending the loan, an adequately funded cash value policy or other assets as collateral may be required.

young boy image - types of life insurance for collateral assignment

Additionally, either an existing policy that you own or a new policy purchased specifically for collateral assignment may be acceptable.

Term Life Insurance

In many instances, term life insurance is the most logical and economical type of policy for providing a lender-required death benefit. Additionally, if a new policy is being established to meet lender requirements, a policy term length can be selected, which coincides with the terms of the loan.

As an example, a 10-year term life insurance policy could be purchased for collaterally assigned to a 10-year loan. Since term life is “pure” protection and provides no cash value, this type of policy will likely meet collateral assignment requirements for a death benefit only. If a lender requires additional collateral as a condition of loan approval, an existing permanent policy with accumulated cash value may be preferred.

Permanent Life Insurance

A permanent life insurance policy may also be used for collateral assignment. In the case of a permanent life policy, the accumulated cash value may be assessed to repay any outstanding balance in the event of borrower default, as well as providing death benefit protection. On a positive note, this “collateral” may be helpful in qualifying for a loan but also limits the policy owner’s access to the cash value as long as there is an outstanding balance.

In either event, once the loan is paid off, collateral assignment restrictions to both the cash value and death benefit are removed. It is also important to note that the policy owner has a responsibility to ensure that a policy used for collateral assigned remains in force and that required premiums are paid.

Group Life Insurance

In some instances, an individual’s group life insurance (employee benefits) may be used for collateral assignment. This is not common but is offered by some insurance companies as an option for group policy members. If you are considering a collateral assignment of life insurance that is part of a group policy or employee benefits, you should contact your benefits administrator and/or issuing insurance company to determine availability.

Collateral Assignment vs. Policy Loans

In answering questions related to the collateral assignment of life insurance, we sometimes receive inquiries concerning how collateral assignment differs from a policy loan.

First off, a collateral assignment and a policy loan are completely different processes.

which way sign image - collateral assignment vs policy loans

With a collateral assignment, a borrower’s life insurance policy death benefit and/or cash value may be used to repay the outstanding loan balance in the event of borrower death and/or default. In comparison, a life insurance policy loan involves borrowing money directly from the life insurance company using the accumulated cash value as collateral. If you own a permanent life insurance policy (i.e., whole life, universal life, variable life, etc.), and have adequate cash value, a policy loan may be a great option to consider.

In comparing loan options, it is important to consider interest rates, loan terms, and other factors. It is also important to note that with a policy loan, you will be charged interest on the amount borrowed, an unpaid loan may reduce the death benefit paid to beneficiaries, and a policy lapse can have significant tax implications.

If you are considering taking out a policy loan on an existing life insurance policy, please consult your insurance and tax professionals for advice specific to your individual situation.

Absolute Assignment vs. Collateral Assignment

Another question that we receive related to the assignment of life insurance policies involves the difference between an absolute assignment vs. a collateral assignment.

As the name implies, an absolute assignment is exactly that, a complete assignment of all interest in a policy’s ownership. According to The Economic Times , "absolute assignment shifts the ownership of the insurance policy.”

child bike image - absolute assignment vs collateral assignment

Also, assigning a bank as a beneficiary on a life insurance policy is another common mistake. Being named as the primary beneficiary gives the bank rights to the entire death benefit regardless of the current balance on any loan. Whereas, as discussed above, a collateral assignment only commits policy benefits for the term and/or outstanding balance of the loan. So, after the loan amount is paid, the remaining death benefit would go to the policy’s primary beneficiaries.

To reiterate, NEVER provide an absolute assignment or primary beneficiary designation to a lender if all that is required is the collateral assignment of life insurance.

Process for Collateral Assignment of Life Insurance

In completing a collateral assignment of life insurance, it is extremely important to follow the requirements of both the proposed lender and prospective insurance company.

The attention to detail through this process can help to ensure that the collateral assignment is accurately completed, meeting ender requirements.

checklist image - process for collateral assignment of life insurance

Using an Existing Life Insurance Policy

If you are required to provide a collateral assignment for a loan and have an existing life insurance policy with an adequate face amount, you can reach out to the issuing insurance company’s policy service department to request collateral assignment instructions and required forms. Most insurance companies allow collateral assignment of life insurance unless otherwise prohibited in the policy contract.

While the insurance company must be notified and will require certain paperwork to process the request, they are otherwise not involved in the loan process. When completing life insurance company collateral assignment forms, be prepared to provide detailed information related to both your existing policy and perspective loan.

Applying for a New Life Insurance Policy

If you require a collateral assignment for a loan and do not have an existing life insurance policy, you will need to apply for a new policy to meet the terms of your lender. Though the primary purpose of the new policy may be to satisfy lender requirements, it is always advised that you consider comprehensive coverage needs when applying for life insurance. As an example, you may choose to apply for a longer term policy that you plan to keep after the loan has been paid off for personal or business protection.

As with any purchase of life insurance, it is important to select the right type of policy, amount of coverage, and insurance company based on your individual situation. In naming beneficiaries on a life insurance policy purchased for collateral assignment, ensure to name personal beneficiaries (not the lender). This designation is extremely important since named beneficiaries will receive any death benefits above and beyond the outstanding loan amount.

Additionally, since life insurance policy approval may take anywhere from a few days for simplified issue (non-medical) products to up to 4 weeks or more for fully underwritten (requires medical exam) policies, the application and approval timeline should be taken into consideration. It is best to work with an experienced independent agent who can make appropriate recommendations and facilitate the application process. Once your new life insurance policy is approved and inforce, you can initiate the collateral assignment process by reaching out to the insurer for instructions and required paperwork, as discussed above.

Key Steps in the Collateral Assignment Process

The following are key steps in the collateral assignment process for most insurance companies and lending institutions. It is important to ensure that you follow the specific instructions provided by your individual insurance company. Additionally, consideration of the policy approval timeline is also advised since life insurance underwriting can take several weeks to complete.

Determine lender requirements for collateral assignment related to proposed loan.
Identify an existing policy or apply for a new policy, with appropriate death benefit.
If applying for a new insurance policy, list personal beneficiaries, NOT the lender.
Ensuring that new policy is inforce prior to requesting collateral assignment.
Request forms required for collateral assignment from the insurance company.
Complete required insurance company paperwork requesting collateral assignment.
Once collateral assignment is complete, provide verification to lender as required.

Need life insurance for collateral assignment?

Our team can assist in choosing the right type of policy, an appropriate amount of coverage, and the best insurance company for your situation. Get the quality coverage you need at affordable rates. Give us a call at (800) 770-8229 , or request an instant quote today!

James Shiver is the founder of ChoiceLifeQuote.com and a multi-state licensed independent life insurance agent serving the individual family and small-business markets. Dr. Shiver also serves as a university business professor, as well as being an Accredited Financial Counselor®.

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What Is Collateral Assignment of Life Insurance?

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Updated: December 14, 2023

How It Works
Overview of Application Process
Pros and Cons
Impact on Beneficiaries
Alternatives

How Collateral Assignment of Life Insurance Works

The collateral assignment allows you to use your life insurance policy as security for a loan. The process involves legally designating your policy as collateral, which means if you pass away before fully repaying the loan, the lender can claim the death benefit to cover the remaining balance. You start by choosing either a term policy or whole life insurance and then complete a collateral assignment agreement. This agreement is legally binding and sets the terms for the lender to access the death benefit .

For your beneficiaries, this arrangement means the death benefit they receive could be reduced. If you die with an outstanding loan balance, the lender is paid first from the policy's proceeds. Any remaining amount goes to your beneficiaries only after the loan is settled.

For example, a policyholder with a $500,000 policy was assigned as collateral for a $200,000 loan. If the policyholder dies before settling the loan, the lender will receive $200,000 from the policy's death benefit. Meanwhile, the remaining $300,000 gets disbursed to the policy's beneficiaries.

Applying for Collateral Assignment

Applying for collateral assignment is a process moderated by your life insurance company designed to secure loans using your life insurance policy as collateral. It involves a series of steps:

Obtain a Collateral Assignment Form

Request a collateral assignment form from your life insurance provider. This form is crucial for designating the lender as a beneficiary for the loan amount. Ensure you obtain the correct form, as forms vary based on policy type and insurer.

Fill Out the Form Correctly

Complete the form with accurate details, including policy number, loan amount and lender information. Pay close attention to all sections to avoid errors that could delay or invalidate the assignment. Incomplete or incorrect information can lead to processing delays or rejection.

Signed by Both Policyholder and Lender

Ensure both the policyholder and lender sign the form, confirming the agreement. This dual signature legally binds both parties to the terms of the collateral assignment. Any discrepancy in signatures may question the form's validity.

Submit Completed Form

Submit the signed form back to the insurance company for processing. Consider using a traceable delivery method for submission to confirm receipt. Delays in submission can impact the timeline of the loan approval process.

Await Approval or Rejection From Insurance Company

Wait for the insurer to review and approve or reject the collateral assignment. The insurer may request additional information or clarification, which can extend the approval timeline.

Receive a Letter of Acknowledgment

You and your lender will receive a letter of acknowledgment from the insurer if your collateral assignment application is approved.

Obtaining Required Documentation

The required documentation for collateral assignment of life insurance is straightforward. Typically, you'll need to provide two main types of documents:

Collateral Assignment Form: This form is critical because it officially transfers a portion of your life insurance policy benefits to the lender as collateral. It demonstrates to the lender that you have taken the requisite steps to secure your loan against your life insurance policy.
Original Life Insurance Policy and Proof of Loan: Lenders may require your original life insurance policy to ensure it is valid and enforceable. Proof of the loan agreement or obligation, such as a mortgage note or other loan document, is also commonly required. This establishes the legitimacy of your loan and substantiates the collateral assignment.

Pros and Cons of Collateral Assignment

Utilizing a life insurance policy for collateral assignment can offer a range of benefits and potential drawbacks. This method allows you to secure loans and is often safer than using physical assets as collateral. However, you should also note the inherent risks, primarily that the lender retains the first right to your policy’s death benefit upon your death.

Impact of Collateral Assignment on Beneficiaries

While the collateral assignment of life insurance has its benefits, it’s important to remember that it can impact the amount your beneficiaries receive. If you pass away with an outstanding balance on your loan:

Your Lender Will Be Paid First

In the collateral assignment arrangement, the lender is designated as the primary beneficiary for the outstanding loan amount. This means if you pass away before fully repaying the loan, the lender is entitled to receive payment from the death benefit first. The amount collected by the lender is limited to the remaining loan balance.

Any Remaining Death Benefit Will Be Disbursed to Your Beneficiaries

After the lender's claim is satisfied, the remaining death benefit is disbursed to your policy’s designated beneficiaries. The amount they receive depends on the loan balance at the time of your death. If the loan balance is substantial, your beneficiaries will receive significantly less than the policy's full death benefit.

Alternatives to Collateral Assignment

Alternatives to collateral assignment include personal loans , home equity loans , or surrendering the life insurance policy for its cash value. None of these options require using life insurance as collateral. Each option offers different benefits and risks compared to using life insurance as collateral.

These questions covers various topics related to collateral assignments, including the requirements, implications for beneficiaries and what happens under various scenarios.

These related sections offer additional insights into concepts and alternatives connected to collateral assignments and life insurance:

Using Collateral for a Personal Loan — This link explains how to use various types of collateral for securing a personal loan, providing a broader context to the specific use of life insurance as collateral.

Term vs. Permanent Life Insurance — This resource compares term and permanent life insurance, helping to understand which types of policies can be used for collateral assignments.

Permanent Life Insurance — This page details permanent life insurance, a type commonly used in collateral assignments due to its cash value component.

Life Insurance Calculator — This page lets you calculate the appropriate amount of life insurance coverage needed, which is crucial when considering using a policy for collateral.

About Nathan Paulus

Nathan Paulus is the Head of Content Marketing at MoneyGeek, with nearly 10 years of experience researching and creating content related to personal finance and financial literacy.

Paulus has a bachelor's degree in English from the University of St. Thomas, Houston. He enjoys helping people from all walks of life build stronger financial foundations.

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Assignment of leases and rents: absolutely collateral.

[caption id="attachment_25168" align="aligncenter" width="616"]

Jeffrey B. Steiner[/caption] Generally speaking, rents comprise the principal income derived from commercial real property ownership prior to the sale of the property. In traditional, non-recourse lending, where the special purpose entity borrower may become insolvent, lenders rely on the rent and related income from the property as security for the loan. One mechanism employed by commercial mortgage lenders to secure their interest in the rental stream is to require in the mortgage document an assignment of leases and rents pursuant to which the borrower ‘presently and absolutely’ assigns to the lender the rents from the real property. In turn, the lender grants the borrower a license, revocable upon an event of default, to collect and use the rents. Lenders have elected to include the language purporting to affect a “present” and “absolute” transfer with the hope of achieving the benefits of an “absolute” assignment of the rents over a “collateral” assignment. If the assignment is deemed to be an “absolute” transfer of legal title of the rents from the borrower to the lender, then such assignment would become enforceable immediately upon an event of default and revocation of borrower’s license to collect and use the rents—meaning, that the lender would have the right and ability to collect the rents directly from the tenants as soon as an event of default has occurred. By contrast, if the assignment is considered “collateral,” the lender runs the risk that, following an event of default and a resulting borrower bankruptcy, the rents will be deemed property of the bankruptcy estate, subject to a bankruptcy plan and protected by the Bankruptcy Code’s automatic stay. Case Law New York case law surrounding the treatment of assignments of leases and rents, whether by “absolute” or “collateral” assignment nominally suggests that judges will give effect to the intended purpose of these assignments, ignoring such “absolute” assignment language and interpreting the assignment as a “collateral” one for the mortgage loan. For this reason, a majority of New York state courts have ruled that lenders cannot create an absolute assignment of leases and rents in a mortgage transaction regardless of the language used. In Dream Team Assocs. v. Broadway City , 2003 N.Y. Slip Op 50894U, 2003 WL 21203342 (N.Y.Civ.Ct. May 7, 2003), for instance, the court addressed the question of whether an assignment of rents constitutes an absolute assignment and ruled that “[u]nder New York law…the language used in the assignment instrument itself is not determinative of what rights are actually transferred.” Relying on the fact that New York is a “lien theory” state rather than a “title theory” state, state courts typically hold that an assignment of leases and rents, regardless of the wording of the provision or form taken, will not be a present assignment when given as security for the loan. It follows then that, if assignments of rents do not serve to transfer immediate title to the rents, they instead transfer equitable title and constitute a pledge of the rents to which the lender cannot become entitled until taking some extra, affirmative enforcement steps. In In re Soho 25 Retail , No. ADV. 11-1286-SHL, 2011 WL 1333084, at *6–8 (Bankr. S.D.N.Y. March 31, 2011), the court sought to summarize certain potential steps to enforcement as follows: “requesting the appointment of a receiver to collect the rents, demanding or taking possession [of the property], commencing foreclosure proceedings, or seeking an order for the sequestration of rents.” These additional, affirmative steps do not seem onerous at first glance. However, as any mortgage lender will attest, the foreclosure process in New York State is slow. Furthermore, mortgage lenders are properly advised to avoid the exercise of any such rights prior to an appointment of a receiver or the consummation of foreclosure for fear of being found to be a mortgagee in possession, which could cause lenders to be deemed to have assumed all of the same duties and liabilities of the owner of the property. The rule was recently restated by the court in Allen v. Echeverria , 11 N.Y.S.3d 170, 173 (N.Y. App. Div. 2015), that is, a mortgagee who takes possession of the property mortgaged as collateral is “bound to employ the same care and supervision over the mortgaged premises that a reasonably prudent owner would exercise in relation to his own property; he is bound to make reasonable and needed repairs, and is responsible for any loss or damage occasioned by his willful default or gross neglect in this regard.” Most commercial mortgage lenders are not in the business of managing properties and do not want to be subject to the liability that could arise during such management, especially when the title to the property remains vested in an adverse party, i.e., its defaulted borrower. In light of the bankruptcy risks and the potential that an assignment of rents will not be deemed an absolute assignment, vigilant lenders will avail themselves of alternative mechanisms to exert control over the rents, namely, (i) cash management arrangements and (ii) guaranties that provide for liability in the event of a misappropriation of the rents. Through “lockbox” arrangements between the lender, the borrower and third-party banks, lenders will control the rents deposited by tenants directly into such lender-controlled clearing accounts. The rents will then be distributed according to the terms agreed upon by the parties at closing or otherwise at the direction of the lender in order to pay debt service and to accumulate reserves for the payment of property taxes and insurance. Borrowers will typically have no right to access these funds and, in all cases following an event of default, the banks will be prohibited from following any instructions received from borrowers. For loans in which lenders perceive greater risk, they can structure cash management to exercise greater control of the rents and to make less funds available to the borrower, decreasing the risk that rents will be misused. Additionally, loan documents always provide that, during an event of default, the rents deposited into the cash management accounts will be deemed to be additional collateral for the loan and may be applied by the lender to pay down the debt in lender’s sole discretion. Lenders may also protect against the misuse of rents by including a carve-out to the non-recourse nature of the mortgage loan in a guaranty executed by a borrower-affiliated person or entity. In such a guaranty, the guarantor will be liable to the lender to the extent of any loss suffered by the lender due to the misapplication or misappropriation of rents by the borrower or its affiliates.

Mortgage lenders should not rely on assignments of leases and rents, whether as a clause in the mortgage or as a separate agreement, to protect their interests in the income from their collateral prior to the appointment of a receiver or the final sale of the property at foreclosure. The enforcement of these agreements may take considerable time and money before the lender even gains a legal right to collect rents. Lenders should account for these risks by taking other legal measures which grant them greater control and actually give them enforceable rights immediately upon default. Jeffrey B. Steiner is a member of DLA Piper. Shane Goodhue, a law clerk (assoc.) at the firm, assisted in the preparation of this article.

Organic & Biomolecular Chemistry

First total synthesis of asperilactone b. revision of absolute stereochemistry of asperilactones b and c..

The first total synthesis and absolute configuration assignment of asperilactone B (I) has been accomplished. Additionally, a revision of the absolute stereochemistry of asperilactone C has been done. The first total synthesis of the opposite enantiomer of asperilactone B (ent-I) has also been achieved, as well as C-7 epimers of both asperilactones B (8) and C (9).

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S. Djokić, G. Benedeković, J. Kesić, M. V. Rodić, M. Popsavin, V. Popsavin and J. Francuz, Org. Biomol. Chem. , 2024, Accepted Manuscript , DOI: 10.1039/D4OB00583J

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COMMENTS

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Rodgers, a British journalist who has worked in Russia at various times since the 1990s, writes about the plight of the English-speaking correspondents who have covered Russia, going all the way back to the Russian Revolution in 1917. That their task was not easy is hardly surprising, yet Rodgers repeatedly emphasizes the difficulties they ...
Assignment Moscow: Reporting on Russia from Lenin to Putin: James
Not always perfect, at times downright misleading, they have, overall, been immensely valuable. In Assignment Moscow, former foreign correspondent James Rodgers analyses the news coverage of Russia throughout history, from the coverage of the siege of the Winter Palace and a plot to kill Stalin, to the Chernobyl explosion and the Salisbury ...

What Is a Collateral Assignment of Life Insurance?

Key Takeaways

How a Collateral Assignment of Life Insurance Works

Example of Collateral Assignment of Life Insurance

Alternatives to Collateral Assignment of Life Insurance

What Are the Benefits of Collateral Assignment of Life Insurance?

What Kind of Life Insurance Can Be Used for Collateral?

Is Collateral Assignment of Life Insurance Irrevocable?

What is the Difference Between an Assignment and a Collateral Assignment?

The Bottom Line

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Collateral assignment of life insurance

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What is collateral assignment of life insurance?

Why use life insurance as collateral?

Pros and cons of using life insurance as collateral

What types of life insurance can I use as collateral for a loan?

How do I take out a loan using a collateral assignment of life insurance?

Alternatives to life insurance as collateral

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Table of Contents

About The Author

Michael Horbal

What Is A Collateral Assignment?

Table of Contents

What Is Collateral Assignment Of Life Insurance?

Requirements For Assignment Of Life Insurance As Collateral

Process Of Securing Collateral Assignment

Key Details

Types Of Life Insurance Used As Collateral

Is No Exam right for me?

Is Term right for me?

Is Whole right for me?

Is Universal right for me?

Guaranteed Universal

Is Guaranteed Universal right for me?

Don’t

Commonly Asked Questions About Collateral Assignments

Is Collateral Assignment Right For Me?

Final Thoughts

Heidi Mertlich

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When to Consider No Exam Life Insurance