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What Is a Collateral Assignment of Life Insurance?

collateral assignment of life insurance lenders

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

collateral assignment of life insurance lenders

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 ."

Fidelity Life. " What Is a Collateral Assignment of a Life Insurance Policy? "

Kansas Legislative Research Department. " Collateral Assignment of Life Insurance Proceeds ."

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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.

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Almost there couple of quick questions, share this infographic, best life insurance companies that allow assignment of collateral (2022), life insurance companies that allow the assignment of collateral are fairly common. a collateral assignment will make the lender the immediate beneficiary of your policy. if you pay off your loan before you die, you can dismiss your collateral assignment and make sure your beneficiaries receive the full death benefit., it’s all about you. we want to help you make the right coverage choices..

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What You Should Know

  • A collateral assignment allows you to pay off a loan with your life insurance death benefit
  • Lenders may or may not accept a collateral assignment depending on the type of policy you have
  • If you pay off your loan before you die, you can remove the collateral assignment in order for your beneficiaries to receive the full death benefit of your life insurance policy

If you need to take out a loan, or if you have taken out a loan, and you need collateral, you may be curious to learn about life insurance companies that allow the assignment of collateral.

Plenty of life insurance companies allow you to use a collateral assignment with your policy.

Essentially, a collateral assignment on your life insurance policy allows you to name a lender as your beneficiary. When you die, if your loan has not been paid off, the lender will receive the full payment of the loan from your death benefit.

If any amount remains from your death benefit, your beneficiaries will receive the money.

There are alternatives to using your life insurance policy as collateral, such as a collateral assignment with your mortgage. You can see a collateral assignment of a life insurance sample by doing a bit of research online.

When you look for a collateral assignment example, you can see how the process works and whether the loan you have or a future loan you may need will require that you use your life insurance policy as collateral.

As you shop around for life insurance companies that allow the assignment of collateral, be sure to use online quote tools to compare multiple companies at once and see how much you could save on your policy.

You may want to consult a life insurance guide to make sure you know the ins and outs of different policies and how much you might expect to pay for life insurance.

In fact, you can use our free quote tool above to find and compare rates from top life insurance companies in your state.

Which life insurance companies allow collateral assignments?

While there are some life insurance companies that don't allow collateral assignments, there are plenty of companies that do. Depending on where you live, you likely have a lot of options if you want to use a collateral assignment with your life insurance policy.

Some of the top life insurance companies that may allow you to use a collateral assignment include:

  • Northwestern Mutual
  • Banner Life
  • Pacific Life
  • Guardian Life
  • New York Life
  • John Hancock
  • Mutual of Omaha

In order to know for sure whether a life insurance company will allow for a collateral assignment of your policy, you may need to speak to a representative. You can do this as you shop around for life insurance policies online.

What is considered the collateral on a life insurance policy loan?

A collateral assignment on a life insurance policy allows for you to use the death benefit of a life insurance policy to pay off a loan.

In order to use a collateral assignment on your life insurance, you will need to use the following process:

  • Apply for a life insurance policy and name your beneficiaries.
  • Complete a collateral assignment of life insurance form naming your lender.
  • Wait for the life insurance company to acknowledge the collateral assignment.
  • If the loan is paid in full, the lender must send a form to that effect to ensure your beneficiaries receive the full benefit of your policy.

In order for you to create a collateral assignment on your life insurance policy, you must find a company that allows it, and you also need to make sure you have a lender that accepts life insurance as collateral.

How is a collateral assignment used in a life insurance contract?

If you have a collateral assignment in effect, your lender will get the death benefit of your life insurance policy if you pass away before paying off your loan.

If your death benefit exceeds the amount of your loan, your beneficiaries will receive the remainder. Most of the time, lenders won't accept a collateral assignment on a term life insurance policy because it may expire before the loan is paid.

With a whole or permanent life insurance policy, a lender would be more likely to accept a collateral assignment as a potential payment.

Once you pay off your loan, you can dissolve your collateral assignment. But you will need the lender to agree and submit a form that states you've paid your loan and that the collateral assignment should no longer be in place.

Should I use a collateral assignment on my life insurance policy?

You could potentially benefit from a collateral assignment if you need a particular type of loan. People who need a small business loan or a Small Business Administration (SBA) loan often consider using a collateral assignment.

If you don't need a loan, or you have a loan you will easily be able to pay off, a collateral assignment on your life insurance policy will not be necessary.

As you search for life insurance companies that allow you to use a collateral assignment, be sure to get quotes from different companies and see how much a policy might cost.

The price for a life insurance policy will vary based on your age, your gender, and the type of life insurance policy you want. You may want to look for a digital life insurance company that offers online quotes .

When you shop, be sure to use our free quote tool below to find the best rates based on your unique needs.

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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

Related Content

Advertising & Editorial Disclosure

Collateral assignment of life insurance is an arrangement where a policyholder uses the face value of their life insurance policy, which can be a term or permanent life insurance policy, as collateral to secure a loan. If the policyholder dies before the loan is paid off, the lender is prioritized to receive a portion of the death benefit equivalent to the outstanding loan balance. The remaining benefit then goes to the policy's beneficiaries.

  • Collateral assignment involves using a life insurance policy as security for a loan , where the lender has a claim on the death benefit if the borrower defaults or passes away before repaying the loan.
  • The lender receives priority over the death benefit , which means they are paid first from the policy's payout before any beneficiaries if the loan remains unpaid.
  • Various life insurance policies, including term, whole and universal, can be used for collateral assignment , depending on the insurance company's policies and the policy's value.
  • If a life insurance policy lapses or is canceled during a collateral assignment, it can breach the loan agreement , potentially resulting in immediate loan repayment demands.
  • After the loan is fully repaid, the policyholder must formally release the collateral assignment to restore the policy to its original status and ensure beneficiaries receive the full death benefit.

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.

How does collateral assignment differ from naming a beneficiary?

Collateral assignment allows a lender to claim the life insurance death benefit for an outstanding loan amount while naming a beneficiary designated who receives the death benefit. The lender's claim is prioritized over the beneficiaries' in collateral assignment.

Can any type of life insurance policy be used for collateral assignment?

Most types of life insurance policies, including term, whole and universal life, can be used for collateral assignment, provided the insurance company allows it and the policy has sufficient value.

Can the policyholder still change beneficiaries after a collateral assignment?

Yes, the policyholder can change beneficiaries after a collateral assignment, but the lender's right to the death benefit amount remains until the loan is repaid.

What happens if I cancel my life insurance before paying off the debt collateralized with my policy?

Canceling your life insurance policy before repaying the debt can lead to a breach of the loan agreement. This action may prompt the lender to increase your interest rate or demand immediate repayment of the outstanding loan balance.

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.

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What Is Collateral Assignment (of a Life Insurance Policy)?

Meredith Mangan is a senior editor for The Balance, focusing on insurance product reviews. She brings to the job 15 years of experience in finance, media, and financial markets. Prior to her editing career, Meredith was a licensed financial advisor and a licensed insurance agent in accident and health, variable, and life contracts. Meredith also spent five years as the managing editor for Money Crashers.

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Definition and Examples of Collateral Assignment

How collateral assignment works, alternatives to collateral assignment.

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If you assign your life insurance contract as collateral for a loan, you give the lender the right to collect from the policy’s cash value or death benefit in two circumstances. One is if you stop making payments; the other is if you die before the loan is repaid. Securing a loan with life insurance reduces the lender’s risk, which improves your chances of qualifying for the loan.

Before moving forward with a collateral assignment, learn how the process works, how it impacts your policy, and possible alternatives.

Collateral assignment is the practice of using a life insurance policy as collateral for a loan . Collateral is any asset that your lender can take if you default on the loan.

For example, you might apply for a $25,000 loan to start a business. But your lender is unwilling to approve the loan without sufficient collateral. If you have a permanent life insurance policy with a cash value of $40,000 and a death benefit of $300,000, you could use that life insurance policy to collateralize the loan. Via collateral assignment of your policy, you authorize the insurance company to give the lender the amount you owe if you’re unable to keep up with payments (or if you die before repaying the loan).

Lenders have two ways to collect under a collateral assignment arrangement:

  • If you die, the lender gets a portion of the death benefit—up to your remaining loan balance.
  • With permanent insurance policies, the lender can surrender your life insurance policy in order to access the cash value if you stop making payments.

Lenders are only entitled to the amount you owe, and are not generally named as beneficiaries on the policy. If your cash value or the death benefit exceeds your outstanding loan balance, the remaining money belongs to you or your beneficiaries.

Whenever lenders approve a loan, they can’t be certain that you’ll repay. Your credit history is an indicator, but sometimes lenders want additional security. Plus, surprises happen, and even those with the strongest credit profiles can die unexpectedly.

Assigning a life insurance policy as collateral gives lenders yet another way to secure their interests and can make approval easier for borrowers.

Types of Life Insurance Collateral

Life insurance falls into two broad categories: permanent insurance and term insurance . You can use both types of insurance for a collateral assignment, but lenders may prefer that you use permanent insurance.

  • Permanent insurance : Permanent insurance, such as universal and whole life insurance, is lifelong insurance coverage that contains a cash value. If you default on the loan, lenders can surrender your policy and use that cash value to pay down the balance. If you die, the lender has a right to the death benefit, up to the amount you still owe.
  • Term insurance : Term insurance provides a death benefit, but coverage is limited to a certain number of years (20 or 30, for example). Since there’s no cash value in these policies, they only protect your lender if you die before the debt is repaid. The duration of a term policy used as collateral needs to be at least as long as your loan term.

A Note on Annuities

You may also be able to use an annuity as collateral for a bank loan. The process is similar to using a life insurance policy, but there is one key difference to be aware of. Any amount assigned as collateral in an annuity is treated as a distribution for tax purposes. In other words, the amount assigned will be taxed as income up to the amount of any gain in the contract, and may be subject to an additional 10% tax if you’re under 59 ½.

A collateral assignment is similar to a lien on your home . Somebody else has a financial interest in your property, but you keep ownership of it.

The Process

To use life insurance as collateral, the lender must be willing to accept a collateral assignment. When that’s the case, the policy owner, or “assignor,” submits a form to the insurance company to establish the arrangement. That form includes information about the lender, or “assignee,” and details about the lender’s and borrower’s rights.

Policy owners generally have control over policies. They may cancel or surrender coverage, change beneficiaries, or assign the contract as collateral. But if the policy has an irrevocable beneficiary, that beneficiary will need to approve any collateral assignment.

State laws typically require you to notify the insurer that you intend to pledge your insurance policy as collateral, and you must do so in writing. In practice, most insurers have specific forms that detail the terms of your assignment.

Some lenders might require you to get a new policy to secure a loan, but others allow you to add a collateral assignment to an existing policy. After submitting your form, it can take 24 to 48 hours for the assignment to go into effect.

Lenders Get Paid First

If you die and the policy pays a death benefit , the lender receives the amount you owe first. Your beneficiaries get any remaining funds once the lender is paid. In other words, your lender takes priority over your beneficiaries when you use this strategy. Be sure to consider the impact on your beneficiaries before you complete a collateral assignment.

After you repay your loan, your lender does not have any right to your life insurance policy, and you can request that the lender release the assignment. Your life insurance company should have a form for that. However, if a lender pays premiums to keep your policy in force, the lender may add those premium payments (plus interest) to your total debt—and collect that extra money.

There may be several other ways for you to get approved for a loan—with or without life insurance:

  • Surrender a policy : If you have a cash value life insurance policy that you no longer need, you could potentially surrender the policy and use the cash value. Doing so might prevent the need to borrow, or you might borrow substantially less. However, surrendering a policy ends your coverage, meaning your beneficiaries will not get a death benefit. Also, you’ll likely owe taxes on any gains.
  • Borrow from your policy : You may be able to borrow against the cash value in your permanent life insurance policy to get the funds you need. This approach could eliminate the need to work with a traditional lender, and creditworthiness would not be an issue. But borrowing can be risky, as any unpaid loan balance reduces the amount your beneficiaries receive. Plus, over time, deductions for the cost of insurance and compounding loan interest may negate your cash value and the policy could lapse, so it’s critical to monitor.
  • Consider other solutions : You may have other options unrelated to a life insurance policy. For example, you could use the equity in your home as collateral for a loan, but you could lose your home in foreclosure if you can’t make the payments. A co-signer could also help you qualify, although the co-signer takes a significant risk by guaranteeing your loan.

Key Takeaways

  • Life insurance can help you get approved for a loan when you use a collateral assignment.
  • If you die, your lender receives the amount you owe, and your beneficiaries get any remaining death benefit.
  • With permanent insurance, your lender can cash out your policy to pay down your loan balance.
  • An annuity can be used as collateral for a loan but may not be a good idea because of tax consequences.
  • Other strategies can help you get approved without putting your life insurance coverage at risk.

NYSBA. " Life Insurance and Annuity Contracts Within and Without Tax Qualified Retirement Plans and Life Insurance Trusts ." Accessed April 12, 2021.

IRS. " Publication 575 (2020), Pension and Annuity Income ." Accessed April 12, 2021.

Practical Law. " Security Interests: Life Insurance Policies ." Accessed April 12, 2021.

What Is A Collateral Assignment Of Life Insurance?

A couple signing up for Collateral Assignment

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A collateral assignment is sometimes a necessity if you’re applying for larger financing amounts such as a mortgage or business loan.

But what is a collateral assignment and how do you go about getting it on your life insurance policy? 

In this article, we’ll cover what collateral assignment is, how you can add it to your life insurance, and what alternatives there are out there. 

What Is Collateral Assignment? 

A collateral assignment is a process by which a person uses their life insurance policy as collateral for a secured loan.

In simple terms, collateral assignment is reassigning priorities for who gets paid the death benefit of your life insurance policy.

What Is a death benefit?

A death benefit or face value of a life insurance contract is the amount of money that your beneficiaries will receive from your policy when you die.

Once you apply for collateral assignment and it’s approved, your specified debtor (the loan provider) will be paid first and then your beneficiaries will receive what is left over in your life insurance policy.

This is different from using your cash value to loan money as you are taking out a loan from another financial institution and using your policy as a guarantee that you’ll cover any debt when you die. 

For example, let’s say you want to take out a secured loan from your local bank and want to use your life insurance policy as a collateral assignment.

In this situation, you’d still have to pay back any debt you have with interest during the loan period. 

However, the life insurance policy would be used if the borrower dies and there was an outstanding loan balance remaining. 

Secured Loans vs. Unsecured Loans

Secured loans are debts that are backed by assets that a lender can claim if the debt isn’t repaid. These types of loans often offer better interest rates and more generous payment terms.

Unsecured loans are debts that don’t have collateral. These types of loans are more expensive to repay and considered riskier than secured loans.

A woman signing up for Collateral Assignment.

Source: Pexels

How Does Applying for Collateral Assignment Work?

The process for getting collateral assignments for life insurance is the same as when you apply for new life insurance coverage. 

All you’ll be doing is indicating to your life insurance provider that your lender will be given priority for the amount of money you have borrowed through them.

There is an:

Application process.

Underwriting process.

Offer that you’ll receive.

You’ll be required to name beneficiaries as well as indicate ownership of the life insurance policy in the collateral assignment form which will be provided by your life insurance company.

This is because you’re changing the terms of your payout and your life insurance provider will need to follow these instructions once you die.

NB Some insurance companies don’t offer collateral assignment on new loans and generally only provide this feature to an existing life insurance policy.

You should check beforehand to see what will be required to apply for a collateral assignment. If you need help finding plans that offer this, send an email to a licensed insurance agent today.

Once you’ve assigned a new collateral assignee to your life insurance policy, they will be entitled to lay a claim on your death benefit for any debt you have with them.

For example, let’s say you take out a collateral assignment life insurance policy worth $200,000 for a loan of $75,000 over 7 years at an interest rate of 18%.

If you die after five years, based on these figures, you’ll still have $41,231.02 owed on your loan.

Your $200,000 life insurance plan will be used to cover this and your beneficiaries will receive the remaining $158 768.98 from your life insurance policy.

Your lender is only allowed to take the amount outstanding on the debt owed and cannot take more. 

What about Missed Payments and Cash Value Life Insurance?

If you have a permanent life policy with a cash value account, sometimes called cash value life insurance, your lender will have access to it to cover missed payments on your loan.

For example, let’s say you miss a payment on your loan and have a collateral assignment. Your lender will be able to access your cash value account and withdraw that month’s payment to cover your debt.

Who Can You Add as a Collateral Assignee?

You can add any person or institution as a collateral assignee to your life insurance policy if you owe them money.

This can include banks, lenders, private individuals, businesses, or credit card companies. 

The most common collateral assignments are for business loans and mortgages. This is because they are loans for high amounts that are paid off over several years. 

In fact, some banks and financial lenders may require that you add them as collateral assignees when you apply for any of the financing options mentioned below.

Common Collateral Assignees Include:

💵 Bank loans

💳 Credit cards

🏡 Mortgages

💼 Business loans

What Do I Do If I’ve Paid Off My Debt?

If you’ve managed to pay off your debt - firstly, congratulations! Secondly, you’ll want to notify your life insurance company that you’ll be changing your collateral assignments on your life policy.

While there is no legal claim that a company can make to debts that aren’t owed anymore, there may be a hold up in paying out the death benefit to your beneficiaries and other collateral assignees.

Life insurance companies will have to figure out who must be paid first, according to the order stated in your collateral assignment terms.

In general, life insurance policies will settle claims within 24 hours of being notified of a policyholder’s death.

The process can be delayed if you do not release your collateral assignees from your life insurance contract. 

Tips to Make Sure Your Life Policy Is Paid Out Quickly

Here are some tips if you want your beneficiary claims to be handled as fast as possible:

1) Keep a copy of your life insurance policy and policy number in a safe place or with your lawyer, financial advisor, or estate planner.

2) Speak to your beneficiaries about your policies and give them the contact details of the relevant life insurance company.

3) Make sure your life insurance contract is updated to reflect your latest list of beneficiaries.

4) Make sure you have your beneficiaries' details listed in the contract or with your lawyer.

The Benefits of Using Collateral Assignment of Life Insurance

While adding a collateral assignment to your current life insurance policy may require an application, paperwork, and time, there are benefits:

Many lenders like it: Banks and financial institutions sometimes prefer it when applicants use their life insurance policy as collateral for a loan. This is because they know that their debt will be serviced long-term by your insurance company which makes their loan to you a lower risk.

Your private property won’t be jeopardized: The last thing you want when you go into debt is to put your personal items, such as your car, investments, or home on the line as collateral. Using collateral assignment is an alternative to this and can protect you in the event that you can’t service your debt.

It can be affordable for some people: If you’re in good health and young, you may be paying affordable rates for permanent life cover. In situations like this, it can make sense to use your life cover as collateral for debts you’ve incurred.

A form to sign up for Collateral Assignment.

What Are Some Alternatives to Collateral Assignment?

Term Life Insurance: Getting a term life insurance contract to cover specific debts is one way of ensuring your estate and family are protected when you die.

There are multiple types of term life insurance plans and they are more affordable than permanent life insurance. This makes options like level term life insurance and decreasing term life insurance ideal for different types of debts you may have over your lifetime.

What Is Term Life?

Term life is a temporary life coverage option that lasts for a specific period of time. It is different from permanent life insurance which lasts until you die or you stop paying premiums.

Term life contracts are typically between 5 to 20 years, however, you can get renewable term life plans and even a forty-year term life plan .

Borrow from your life insurance: If you have a permanent life insurance policy, such as universal, whole, or indexed life cover, you can borrow money from your cash value account. 

However, keep in mind that you’ll be required to pay interest on any amount that you borrow and any amount of debt incurred will be deducted from your policy’s death benefit when you die.

What Is Cash Value?

Cash value is a feature of permanent life insurance plans that policyholders can contribute additional money toward while they have a policy in force.

This money is set aside in a cash value account which is tax-deferred and can be used in a number of ways.

In some cases, if your policy allows it, you can end your contract and get the cash surrender value of it. This amount is usually much less than the value of your total life insurance contract. 

Our Verdict on Collateral Assignment

Many banks, lenders, and financial institutions want long-term guarantees that you’ll be able to service your debt if anything happens to you.

In some situations, getting collateral assignments on your life insurance to cover these debts is a good option for people who are trying to access finance from these institutions. 

However, there is a risk that your death benefit payout may be delayed for your beneficiaries if you don’t keep your different collateral assignees up to date.

If you already have a life insurance policy, you should contact your provider to find out what the process is and what you’ll need to do to change the collateral assignees on your policy.

If you don’t have a policy yet, our advice is to look at all of your options before you decide to take a permanent life insurance contract with a collateral assignment.

There are alternatives out there that are more affordable if you’re looking to protect your family and estate from debt.

Term life is one such option that is adaptable to your life and easy to get. 

For example, a decreasing term life insurance policy might be the right choice for someone who has recently bought a home and wants to cover their mortgage while they pay it back.

Another option is final expense insurance, which is a permanent life policy for smaller amounts, usually under $50,000.

With final expense insurance, your beneficiaries can pay for anything they want, including any debts you may have had in your life.

The process for applying is simple and you won't have to go through a medical exam or intensive underwriting as you would with traditional permanent life insurance. 

If you need any assistance with finding, comparing, or learning about the different life insurance options to cover your debts, speak to one of our expert advisors today at 1-888-912-2132 or [email protected] .

Where Can I Learn More about Life Insurance?

If you’re looking to learn more about life insurance, different kinds of coverage, or costs, visit our life insurance hub to find our latest articles.

We do the research so that you don’t have to and our articles cover complicated topics like what is a cash value account, what is key person insurance, or how long life insurance takes to pay out a death benefit.  

If you need help with quotes, try out a life insurance quote finder or reach out to us via email at [email protected] to get in touch with a licensed life insurance agent for your state.

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What Is A Collateral Assignment?

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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.

Table of Contents

  • 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.

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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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Collateral Assignment of Life Insurance: Everything You Need to Know

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  • August 8, 2023

Life insurance isn’t just about peace of mind for the future; it can also serve as a lifesaver when you’re looking for ways to secure a loan. This clever maneuver is known as a collateral assignment of life insurance. It’s a deal between you and your lender where your life insurance policy, specifically the cash value component, is used as collateral for a loan.

When assigning your life insurance policy as collateral for a loan, the lender will become a temporary beneficiary of your policy. If the assigner dies before repaying the loan, the lender can claim the death benefit up to the outstanding loan balance. If the policyholder defaults, the cash value of the policy will be collected.

Who can benefit from the collateral assignment of life insurance?

If you need to secure a loan but don’t have typical assets like a house or significant savings, collateral assignment of life insurance could be your ticket. It’s great for small business owners, entrepreneurs, and folks with sizable insurance policies but limited liquid assets. 

To use a life insurance policy as collateral, the policy term should be at least as long as the loan duration and should possess a cash value component equal to the loan amount.

What types of life insurance can be used as collateral?

To make this work, you’ll need a permanent life insurance policy that has a cash value component. This includes options like whole life, universal life, and variable life insurance. Unfortunately, term life insurance doesn’t quite make the cut, as it lacks a cash value.

How to use life insurance as collateral for a loan?

1. Ensure the lender accepts life insurance as collateral.

2. Apply for the collateral assignment through the bank or directly with the insurer. 

3. Fill out an “assignment of Life Insurance Policy as Collateral form” provided by your insurer. 

4. Submit the form to the insurer, and wait for approval.

5. Once the collateral assignment is approved, notify your bank or lender. 

6. Bank or lender will set the loan terms such as the interest rate, payment terms, and other obligations.

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Is life insurance as collateral widely accepted? Do all banks accept it?

Typically, permanent life insurance policies such as whole life and universal life, which have a cash value component, can be used as collateral. Lenders such as banks want security, and the cash value component of a whole life insurance policy provides this. This cash value grows over time and can be used if the borrower defaults on the loan, which decreases the risk for the lender.

How is the loan amount determined when using life insurance as collateral?

The borrowing capacity is determined as a proportion of the cash value, varying across different insurance companies. Typically, the permissible borrowing range hovers around 90% to 95%. Applying these percentages to a cash value of $50,000, one could potentially secure a loan amounting to $45,000 to $47,500.

What happens when you are unable to pay back the life insurance loan?

The cash value of your policy will be collected by the lender. If this is insufficient, the amount you owe is deducted from the death benefit when you pass away. In some instances, you might also incur a substantial tax bill.

Is the collateral assignment of the life insurance agreement permanent? 

No, the collateral assignment of the life insurance agreement is not permanent. It’s tied to the lifespan of the loan. Once the loan is fully repaid, the assignment can be released, and the life insurance policy returns to its original beneficiary arrangement.

What are the tax implications of using life insurance as collateral for a loan?

If the amount you borrow directly from the insurance company is equal to or less than the total insurance premiums you have paid, it is not subject to taxation. However, If you surrender your policy, or allow it to lapse, and the total amount of outstanding loans and interest surpasses what you have paid in premiums, there is a possibility of incurring a tax liability. In essence, you would be required to pay income tax on any investment earnings in that scenario.

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Collateral Assignment for Life Insurance: A Comprehensive Guide

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When you apply for a loan, the lender wants to make sure you have the financial resources to repay your debt. In some cases, the underwriter may ask you to provide a form of collateral. This is typically something of value that you pledge to forfeit to the lender if you default on the loan.

Depending on your circumstances, you may be able to use your life insurance policy as a form of collateral. This could help improve your approval chances for a loan or a mortgage, but there are some important things to understand before utilizing it. Learn how collateral assignment in life insurance works, explore the upsides and downsides of choosing this option, and some alternatives you may want to consider.

Table of Contents

What does it mean to have collateral assignment of life insurance.

Collateral assignment of life insurance allows the lender to be the primary recipient of your life insurance policy’s death benefit if you have an outstanding loan balance when you die. Some assignments also allow the lender to tap into the policy’s cash value if you default on your loan. While using life insurance as collateral does not prevent you from naming your own primary and contingent beneficiaries , it does mean that the lender is paid in full before anyone else. Once the loan balance is covered, your named beneficiaries receive whatever is left.

In some cases, collateral assignment allows the lender to take over your entire policy if you stop making payments on your loan. If you stop paying your policy premiums, the lender may also take over premium payments and add the cost to your principal balance. Collateral assignment can vary depending on the lender and the insurance carrier , so it’s important to carefully read all documents before signing any agreements.

When Is Collateral Assignment Used?

Although life insurance collateral can be used for many types of lending agreements, collateral assignments are commonly used for mortgages and business loans rather than for student loans or credit card debt. They are also not used for unsecured loans, as these types of loans do not require collateral. 

It’s fairly common for a lender to request collateral assignment of whole life insurance and other types of permanent life insurance policies since they have a cash value that’s accessible at any time. This may allow the lender to access the cash value upon your default instead of only having protection when you die.

How Life Insurance Collateral Works

When you take out a loan with an assignment of life insurance, the application process is similar to the process for other types of loans. The main difference lies in the assignment of the insurance policy, which you can do by contacting the insurance carrier and requesting the required paperwork. 

If you and your spouse co-own a life insurance policy, you must both agree to the assignment and be listed as co-assignors. If your spouse does not agree, you cannot use that policy as collateral. It’s also important to note that lenders generally limit the amount of your policy value that you can use for collateral. For example, you may only be able to use 50% to 90% of the policy’s cash value when you collateralize your loan. Each lender and insurance carrier may have different rules, so it’s important to confirm this before completing your application.  

In some cases, you may also need to get permission from the life insurance company to use the policy as collateral. Once the request is approved and the paperwork completed, the lender can move forward with the underwriting process and either approve or deny your loan request.

When you’ve paid off your debt, you can contact your insurance carrier and let them know you need to release the collateral assignee for your life insurance. As long as your loan has been paid, the lender cannot make a claim against your policy, even if you forget to take this step. However, collateral assignments must be settled before funds are distributed to your beneficiaries, so completing this process can help your beneficiaries avoid unnecessary delays.

Term vs. Permanent Life Policies

Lenders generally prefer permanent policies for collateral assignment, but some may accept a term life policy as long as the insurance coverage term lasts at least as long as your loan term. Each lender is different, so you need to confirm the requirements when applying for your loan.

The lender may also prefer a permanent policy because it can provide access to its cash value. Since term policies have no cash value, there’s no recourse for the lender until you die and they’re able to access the policy’s death benefit.

Current vs. New Policies

Some lenders allow you to collaterally assign a life insurance policy you already have in place, while others may require you to take out a new policy. Your ability to use an existing policy also depends on whether the insurance company allows collateral assignment. 

Some insurance companies also do not allow you to complete a collateral assignment during the application process. In this case, you need to finish the process of setting up your policy, then file paperwork to complete the life insurance assignment. Keep this in mind when determining your timeline to complete the required steps. 

Assignees vs. Beneficiaries

When assigning a lender to our policy, you do not name the lender as your beneficiary . Instead, you name the lender as an assignee and designate your beneficiaries in the same way you would with a non-assigned life insurance policy.

If you die before you finish repaying your loan, the lender receives the outstanding loan balance. Your beneficiaries then receive the remainder of the death benefit. If you’ve named multiple beneficiaries, they each receive their designated percentage of the remaining balance.

Should You Consider Using Your Life Insurance as Collateral?

While using your life insurance as collateral may be an option for you, it’s important to carefully consider the pros and cons of doing so. This can help you determine whether it’s a good option for you or if you may want to consider an alternative.

Pros  

If your bank requests a life insurance collateral assignment, you may consider agreeing based on the following advantages: 

  • Improved loan approval odds:  Assigning your life insurance policy as collateral may help you get approved for a loan so you can reach your financial goals, such as starting a business or buying a home.
  • Asset protection:  When you use a life insurance policy as collateral, you’re not risking other assets, such as your home or retirement account.
  • Affordable rates:  Due to the certainty collateral assignment adds to a loan application, lenders may be willing to offer lower interest rates on collateralized loans.
  • Tax benefits:  When you use a life insurance policy as collateral, there are no tax implications. This may not be the case if you take out a policy loan or a withdrawal. 

Cons  

While collateral assignment may initially seem like a great idea, there are some potential drawbacks to consider before making your decision:

  • Estate planning issues:  If you die before your loan is paid off, the collection of collateral could throw off your estate plan and leave your beneficiaries without the financial security you originally planned to provide.
  • Loss of control:  When you use an insurance policy as collateral, you’re required to keep it in place until the loan is paid off. Otherwise, the lender could take out another policy on your behalf and add the premiums to the principal of your loan. 
  • Limited access to cash value:  Some forms of collateral assignment may limit your ability to access your policy’s cash value, which reduces your financial flexibility.
  • May require a new policy:  Some lenders do not allow borrowers to use existing policies as collateral, and taking out a new policy requires time, effort, and additional expense. 

Alternatives to Collateral Assignment

If you’re not sure that collateral assignment is the right option for you, then you might consider exploring some alternatives. Here are a few options that may help you get the cash you need. 

Utilize a Life Insurance Cash Value Loan  

Rather than assigning your policy to the lender, you could directly tap into your cash value by taking out a life insurance loan. However, to take advantage of this option, you need to have your policy in place long enough to build up sufficient cash value, which can take several years. When you die, your unpaid loan balance and interest charges are also deducted from the death benefit.

Cash Surrender

You may consider giving up your permanent life insurance policy and taking the cash surrender value . Before choosing this option, keep in mind that it requires canceling your policy, potentially leaving you without coverage or in need of a replacement policy. You may also be subject to penalties if your policy is still in the surrender period when you initiate the cancelation.

Take Out a Home Equity Loan

If you’re not comfortable using your life insurance policy as collateral, you may consider taking out a home equity loan instead. This type of loan uses your home as collateral rather than your life insurance policy. This may also be an option if you do not already have a life insurance policy in place or your lender requires you to take out a new policy and you have health issues that prevent you from being approved for life insurance coverage.

Take Out an Unsecured Loan

Unsecured loans are not backed by collateral. This could be an option if you do not want to take the chance of losing your current assets. However, keep in mind that unsecured loans may be harder to get and typically have higher interest rates than collateralized loans.

Take Out a Term Life Insurance Policy  

In some cases, the lender may not require collateral assignment, but borrowers want to ensure their debts are paid upon their death. You can accomplish this by purchasing a term life insurance policy with a term that is equal to your loan term. This allows you to sidestep the collateral assignment process while still providing your heirs with the funds needed to pay off your remaining debt. The beneficiaries can also use any remaining death benefit as they see fit.

As you weigh your options, consider how each alternative fits with your current needs, risk tolerance, and comfort level.

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Best life insurance companies that allow assignment of collateral (2024), life insurance companies that allow assignment of collateral allow you to take out a loan against the value of your life insurance policy. collateral assignment means the lender of your loan will become the temporary beneficiary of your death benefit. once your loan is repaid, the lender is removed from your policy., free life insurance comparison.

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Dorothea Hudson has been professionally writing in many spheres since 2013. She has written on entertainment, insurance, finance, travel, technology, AI, renewable energy, crypto, fundraising, and real estate for many websites. Her work has been published for British retailer Marks and Spencer, Kroger Magazine, the Vision Group, and more. Her passions include writing, music, running, travel, te...

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Jimmy McMillan is an entrepreneur and the founder of HeartLifeInsurance.com, an independent life insurance brokerage. His company specializes in life insurance for people with heart problems. He knows personally how difficult it is to secure health and life insurance after a heart attack. Jimmy is a licensed insurance agent from coast to coast who has been featured on ValientCEO and the podcast...

UPDATED: Nov 27, 2023

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  • Many lenders allow you to use your life insurance policy as collateral for a loan
  • The lender becomes the temporary beneficiary of the death benefit on your loan
  • Once the loan is repaid, the lender is removed from your policy
  • If you die before the loan is paid off, the lender is repaid whatever they’re owed

When you first consider getting life insurance, it’s usually from a desire to provide financial security for your loved ones after your death. However, many people don’t realize that their policies can be used as collateral for a loan.

Companies are often excited to use a life insurance policy for collateral on a loan because they know their loan is guaranteed to be paid.

The most common type of insurance that can be used as collateral is whole life insurance. Companies often include a cash accumulation with their whole life plan.

If you’re interested in life insurance companies that allow assignment of collateral,  enter your ZIP code in our free tool above to compare life insurance quotes from local companies. Read More: Types of Life Insurance

Table of Contents

Which life insurance companies allow assignment of collateral?

People have been using their life insurance policy as collateral for a long time. For many people, the use of a whole life policy for collateral is a key reason they purchase coverage.

The process is simple: a borrower offers a portion of their death benefit as a collateral assignment for a loan. This is a conditional assignment — as soon as the loan is paid, the lender is removed from the policy.

Lenders prefer using a policy as collateral because the loan is guaranteed to be repaid, one way or another. If you pass away during the term of the loan, they’ll be paid out. If you default on the loan, they can lay claim to the cash value of your policy.

Because of the nature of using your policy as collateral, most life insurance companies pay little attention to what you borrow.

Most lenders accept whole life policies as collateral, so a good place to start looking is the average life insurance rates with the best whole life insurance companies.

Here is a list of rates for $100,000 in whole life insurance for men:

Here is a list of rates for $100,000 in whole life insurance for women:

As you can see, the younger you sign up for a policy, the cheaper your monthly rates will be.

What is considered the collateral on a life insurance policy loan?

The collateral of a life insurance policy loan is the simple process of assigning a lender as the temporary primary beneficiary of your insurance, making them the beneficiary of your death benefit.

The only person that can use their policy to take out a loan is the owner of the policy. That might not be the person who is insured.

For example, a husband can own a life insurance policy for his wife. In this case, the husband — not the wife — is the only person who can use it for a loan.

If you die before your loan is paid off, the lender will receive as much of your life insurance death benefit as they need to cover your loan. After the loan is paid off, the rest of your life insurance benefit goes to the original beneficiary or beneficiaries.

Once the loan is repaid in full, the lender is removed from your policy.

How to Use Your Policy as Collateral

The process of using your life insurance as collateral is surprisingly simple. Most of the paperwork is done between borrower and lender, mostly leaving the insurance company out of the process.

Once you and a lender agree on using your policy for collateral, you need to notify your insurance company. It’ll help you set the lender up as a conditional beneficiary.

That is where your insurance company’s involvement is likely to end.

Other than that, the requirements are simple. Your policy needs to stay current. Some lenders may want you to sign up for a new policy that would start at the same time as your loan, while some will work with a plan you currently have.

While there aren’t many life insurance companies that don’t allow assignment of collateral, some lending companies won’t work with a term policy.

Often, term policies don’t last as long as the loan and don’t accumulate a cash value like whole life does, which means it can’t be used in case of default.

However, if you end up buying term life, you can probably find a lender that will work with you no matter what your policy looks like.

Is using your life insurance for collateral safe?

For the most part, using your life insurance for collateral is perfectly safe. However, there is one major thing you should watch for.

Take this collateral assignment of life insurance sample as a cautionary tale:

When you go to a bank to use your policy as collateral to secure a loan, they will ask you to make them the primary beneficiary. Since that is why you’re there, you agree. The paperwork is signed, and you’ve secured your loan.

If you were to die before the loan was paid off, your entire death benefit would be paid to the bank — none would go to the people you bought the policy for in the first place.

It’s critical that you use a conditional collateral assignment. If you die before the loan is paid off with the lender as conditional and not the primary beneficiary, they are only entitled to as much money as is needed to pay off the loan.

How to Find Life Insurance Companies That Allow Assignment of Collateral

It’s exciting to know you can use your life insurance policy to secure a loan, especially since your intended beneficiaries are still protected in the future.

Affordable life insurance companies that allow assignment of collateral can provide you with the funds you need. If you’re ready to explore possible quotes, enter your ZIP code below to get started.

Case Studies: Best Life Insurance Companies That Allow Assignment of Collateral 

Case Study 1: Building a Business

Jack, a small business owner, needed funds to expand his business operations. Rather than opting for a traditional loan with high-interest rates, he explored the option of using his whole life insurance policy as collateral.

After conducting research and comparing rates, Jack found a reputable life insurance company that allowed assignment of collateral. By using his policy as collateral, Jack secured a loan with favorable terms and lower interest rates, allowing him to grow his business without compromising his family’s financial security.

Case Study 2: Debt Consolidation

Emily had accumulated several high-interest debts that were becoming overwhelming. She was concerned about her financial stability and wanted to find a solution to manage her debt effectively. After learning about the possibility of using her whole life insurance policy as collateral, Emily decided to explore this option further.

She connected with a life insurance company that allowed collateral assignment and obtained a loan against her policy’s cash value. With the loan proceeds, Emily successfully consolidated her debts and improved her overall financial situation.

Case Study 3: Financing Home Renovation

John and Susan wanted to renovate their home to accommodate their growing family. However, they were hesitant about taking on additional debt through traditional home improvement loans. Instead, they discovered that their whole life insurance policies could be used as collateral to secure a loan for the renovation project.

With the help of a reliable life insurance company, John and Susan accessed the cash value of their policies and obtained a loan with favorable terms to fund their home renovation, ensuring that their family’s financial future remained protected.

Frequently Asked Questions

What does it mean to assign collateral on a life insurance policy loan.

Assigning collateral on a life insurance policy loan means using your life insurance policy as security for a loan. The lender becomes the temporary beneficiary of the death benefit, and once the loan is repaid, the lender is removed from your policy.

Can I use the cash value of my policy as collateral?

Yes, the cash value of a whole life insurance policy can be used as collateral for a loan. However, the loan amount will typically be a percentage of the cash value rather than the full amount.

Are there any restrictions on how I can use the loan obtained through collateral assignment?

In most cases, there are no restrictions on how you can use the loan obtained through collateral assignment. You can use it for any purpose, such as paying off debts, covering medical expenses, or financing a business.

Can I assign collateral on multiple life insurance policies?

Yes, you can assign collateral on multiple life insurance policies if they meet the requirements of the lender. However, keep in mind that the total loan amount will depend on the combined cash values and death benefits of all the policies.

Can I assign collateral on a life insurance policy that I don’t own?

No, you can only assign collateral on a life insurance policy that you own. If you are the insured person but not the policy owner, you will need the policy owner’s consent to use it as collateral.

Will the lender have access to my policy information?

The lender will have access to the necessary policy information for the collateral assignment process. However, they typically do not have access to your policy details beyond what is required for the loan arrangement.

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What is collateral assignment.

Collateral assignment of life insurance allows policyholders to use the death benefit as loan collateral. The policyholder appoints a lender as the primary beneficiary of the insurance policy in the event the borrower passes away unexpectedly before repaying the loan. This lets the lender cash in the life insurance policy and recover what is owed if the policyholder dies. 

Collateral assignment of life insurance guarantees funds to the business if the borrower defaults or dies. Many businesses accept life insurance as a form of collateral to protect against financial losses. If the policyholder dies before the loan is paid off, the lender receives the amount owed through the death benefit, and the remaining balance goes to the other listed beneficiaries. The collateral assignment is terminated as soon as the loan is paid in full. 

Apply for Life Insurance for Collateral Assignment

The process to apply for life insurance for collateral assignment purposes is the same as applying for personal life insurance. You can use either a term or whole life insurance policy for collateral assignment. Applicants undergo an application review, a medical exam and a four- to six-week underwriting process. Applicants can also buy a no-medical exam life insurance policy that guarantees coverage they can use for collateral assignment, but they are more expensive, and the death benefit amounts tap out around $25,000. 

Typically, whole life insurance policies are used for loan collateral because of their cash value. Although term insurance can help pay off a debt if the policyholder passes away, the account has no real value while the insured is alive. If the policyholder lapses on making payments on a whole or permanent life policy, they can just cash it in and collect the remaining cash value after paying off the loan and any other fees. 

How to Name Your Beneficiaries on a Collateral Assignment Life Insurance Policy

When you purchase your collateral assignment life insurance policy, you list your beneficiaries not the bank or lender you are borrowing from. After the policy becomes active, the lender or bank is added as the assignee on the collateral assignment life insurance documents. Once that step is complete, the collateral assignment overrides your beneficiaries’ rights to the death benefit payout. 

Collateral Assignment Life Insurance Policy Owner

The policyholder is the owner of the life insurance plan and is responsible for the monthly or annual premiums. Some lenders may require policyholders to submit proof of premium payments to ensure the account is active and in good standing. If the policy lapses or is canceled before the debt is paid off, the lender could consider that a violation of your financial agreement. 

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Collateral assignment of life insurance

S ecured 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

Finding the best life insurance company is important for you and your family. What works well for others might not fit your needs or current budget. First, find out how much life insurance you need by speaking with a financial advisor and using this life insurance calculator as a starting point. Similar to shopping for car insurance, you might want to look at customer service and claim reviews and the company’s financial stability ratings, then get quotes from several providers and ask for recommendations from people you trust.

Life insurance can be used as collateral for auto or home loans, but it is also commonly used for small business loans . Often small business owners have to use most of their private money to fund their businesses. When it is time to expand, upgrade technology or maybe hire more staff, they may need a loan to invest in their business that won’t put their remaining personal finances at risk.

It is typical for borrowers to put up their real estate or vehicles as collateral since they are usually our most valuable assets. Some loan companies may accept cash in the form of money market accounts or certificates of deposit (CD) , investments or valuable items such as jewelry, art and collectibles. Valuables are usually subject to an appraisal before they are accepted.

Although we have talked above about collateral assignment of your life insurance policy to secure a loan, there is another type of assignment called absolute assignment. With collateral assignment, you still exercise control over the policy, and the assignment only exists as long as the loan is active. Absolute assignment, however, transfers all policy rights to the lender, who becomes the new owner of the policy. The original policyholder gives up their right to name beneficiaries or access the policy’s cash value. This arrangement is more like a sale of the policy , with the new owner assuming all rights and responsibilities over it.

Collateral assignment of life insurance

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What Is Split-Dollar Life Insurance?

Split-dollar life insurance refers to a permanent life insurance policy held by two parties, usually an employer and employee, who split the premiums and the proceeds of the policy.

Table of Contents

What Is a Split-Dollar Life Insurance Policy?

How does split-dollar life insurance work.

  • How Much Does It Cost?

Key Takeaways:

  • With a split-dollar life insurance policy, two parties split the cost of the premiums and share the policy benefits.
  • Employers may use a split-dollar life insurance policy to attract and retain employees.
  • Individuals with high-value estates can purchase a split-dollar life insurance policy to help reduce estate taxes for their beneficiaries.

A split-dollar life insurance policy is a policy wherein two parties share the premium costs as well as the policy benefits. Most often, a split-dollar insurance policy is held between an employer and an employee. Employers sometimes purchase these policies as part of a benefits package to attract and retain high-value employees.

However, they also could provide valuable funds in the event the employee dies. For instance, the funds could add much-needed capital to business operations if a CEO dies, leading to a decrease in stock prices. At the same time, the employee’s portion of the death benefit could aid their family following the loss of their income.

Not as common following a 2003 IRS ruling that said only privately owned companies can loan money to their executives, a split-dollar life insurance policy works in two different ways with regard to the purchase, premiums, any cash value, and the beneficiaries.

Collateral Assignment/Loan Regime

With a collateral assignment/loan regime, the employee owns the policy. This is also sometimes referred to as a leveraged split-dollar plan. The employer loans the premium amount to the employee to pay the premiums. Depending on the terms of the loan, the employee has to pay on taxable income derived from the premium loan. If the employee departs the company or the work agreement expires, the employee repays the loan for the premium costs and owns the policy in its entirety. If the employee dies, the employer receives the loan balance from the death benefit with the remaining going to the beneficiary.

Not all companies can participate in this type of split-dollar life insurance structure as the Sarbanes-Oxley Act made it illegal for a public company to loan money to its executives.

Endorsement Agreement

With an endorsement agreement, the employer owns the policy and the employee chooses the beneficiary. The employer pays the premiums, which are considered taxable income for the employee as is any of the employee’s interest in the policy’s cash value. If the employee leaves the company, the employer can transfer the policy to them or give them the option to purchase it. In the event of the employee’s death, the employer receives either the amount equal to the premiums paid or the policy’s cash value, whichever is greater. The employee’s beneficiary receives the remaining balance of the death benefit.

How Much Does a Split-Dollar Life Insurance Policy Insurance Cost?

As with all insurance policies, there are several factors that determine the cost of a split-dollar life insurance policy. These include:

  • Type and amount of coverage. The more purchased, the higher the premiums are.
  • The health, age, and gender of the insured . In general, if you are relatively young and healthy you will pay less for the same amount of coverage than someone older and with health issues. Women also typically pay less for life insurance than men.
  • Amount of any deferred compensation the employer includes with the policy . 
  • The cash value potential of the policy . If the policy allows you to add the cash value to the death benefit, the premiums will be higher than if the cash value is separate from the death benefit.

Find the best life insurance for you

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How Do I Buy Split-Dollar Life Insurance?

When purchasing a split-dollar life insurance policy through an agreement between an employer and employee, both parties need to agree on the type of policy they want. Next, they need to agree on the terms, such as who will own the policy, how long the agreement will last, and who the beneficiaries are. These terms need to be outlined in a written document and signed by both parties.

The employer and employee will complete and sign an application for the life insurance policy. If necessary, the employee will undergo a medical exam. Once the insurance policy application is approved, both parties follow the agreement for payment and management of the split-dollar life insurance policy.

Individuals also have the option to purchase a split-dollar life insurance policy as part of their estate planning. Wealthy individuals can purchase a private split-dollar life insurance policy with the benefits going into a tax-advantaged trust known as an irrevocable life insurance trust (ILIT). Because an ILIT is not considered part of the estate, taxes will not have to be paid on the funds.

When considering a split-dollar life insurance policy, it’s important to speak to a financial advisor or estate planner to determine if it’s the right choice for your financial future.

Between employers and employees, there are three ways for a split-dollar life insurance agreement to end. The first is if the employee leaves the company, the employer could terminate the agreement. The second is if there is a specified termination date in the agreement. The third is if the employee dies, and the death benefit is disbursed as agreed.

Whether employee-owned or employer-owned, the employee can name the beneficiary of the life insurance policy under a split-dollar life insurance agreement. However, the beneficiaries likely will not receive the entire death benefit of the policy. Under a collateral agreement, the death benefit is first used to repay the loan to the employer for the premiums, with the remaining balance going to the beneficiaries. Under an endorsement agreement, the death benefit is first used to repay the policy premiums or cash value, whichever is greater, to the employer. The remaining balance goes to the beneficiary or beneficiaries.

Both the employer and employee can benefit from a split-dollar life insurance agreement. Employer benefits could include:

  • Protecting the company’s finances in the event it loses a high-value employee
  • Attracting and retaining quality employees
  • Low costs to purchase and maintain 
  • Can recoup investment when agreement ends
  • Flexibility in plan design to meet employer needs

Potential employee benefits include:

  • Employer pays for life insurance premiums
  • Employer may pay income tax expenses through a bonus 
  • Could receive tax-free income through withdrawals and loans of cash value
  • Beneficiaries won’t pay taxes on the death benefit 
  • Flexibility in the plan design to tailor to employee needs

The policyholder of a split-dollar insurance agreement depends on the type of agreement made between the employer and the employee. For a collateral agreement, the employee is the policyholder of the agreement. For an endorsement agreement, the employer is the policyholder.

Other Life Insurance Companies

  • Banner Life
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  • Corebridge Financial
  • Guardian Life
  • John Hancock
  • Lincoln Financial Group
  • Mutual of Omaha
  • New York Life
  • Northwestern Mutual
  • Pacific Life
  • Principal Financial
  • Transamerica

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Why You Can Trust Us: 28 Life Insurance Companies Researched

Collateral Assignment of Life Insurance to a Lender

Written By Doug Mitchell

  • Doug Mitchell, CLU

Doug Mitchell, CLU holds a BA degree in Finance from Auburn University as well as having obtained a Chartered Life Underwriter (CLU) designation from The American College in Bryn Mahr, PA.  Doug has spent close to 30 years in the insurance and financial planning industry and has held licenses to sell securities, long-term care insurance, health.  Doug is also a financial blogger addressing the topics of life insurance, annuities and retirement income planning.

  • Fact Checked by

Holly Mitchell   &

  • Holly Mitchell

Holly Mitchell’s background in life insurance insurance goes back to 1985 when she worked for her father who was a New York Life agent. Holly has a marketing degree from Auburn University and has had a life insurance license since 2008. In addition to advising life insurance for customers all around the country, Holly is our website fact checker.

Rob Pinner     &

Rob Pinner is the founder and CEO of Pinner Financial Services servicing all 50 states. Rob started his insurance career in 2002.

Louis LaBash

  • Louis G. LaBash

Results-driven and innovative life insurance professional with 30 plus years of life insurance industry sales and marketing experience. Recognized as a pioneer in the field, leveraging phone and internet channels to exceed personal sales of over $100 million during the first decade of the 21st century. Creator of a highly effective intuitive IUL life insurance sales software that facilitated the sale of millions of dollars of indexed universal policies by numerous life insurance agents. Proven track record as a Managing General Agent (MGA), Life Agent, IUL Life Insurance Sales Software developer, and leading-edge creator of insurance marketing tools, educational content, and delivery systems.

  • Updated on December 11, 2022

When most people think of life insurance benefits, they think of providing financial protection for their loved ones or using the cash value as an emergency cash fund.

Another purpose or solution that life insurance provides is helping the policyholder obtain financing for a loan. This process is called a collateral assignment and provides for the lender to receive a portion of the death benefit if you die while having a loan balance.

How Does Collateral Assignment Work?

Table of Contents

First of all, it’s important to mention that any type of life insurance policy except for accidental death policies can be used for collateral assignment to a lender. It does not have to be permanent insurance but if it’s a term policy , the term should be for at least the length of the loan you are seeking.

For example, a 10-year term life insurance policy will not be adequate or accepted by a lender if the loan is for more than 10 years. In many cases, a borrower will choose cash value life insurance like universal life or indexed universal life as collateral because the cash value in the policy will continue to grow even though the death benefit has been collateralized.

It’s a simple process to assign the death benefit in your life insurance as collateral:

  • You have a life insurance policy that you pay for and you are the named insured on the policy.
  • You will apply for the collateral assignment with your insurance company and the lender who is asking for it.
  • When your insurance company has approved the assignment of your death benefit, you should notify the lender and provide written proof of the collateral assignment.  This is usually handled by the insurance company.

Most lenders will allow you to use an existing policy if the following conditions apply:

  • The policy will remain in force for the duration of the term of the loan
  • The death benefit of the policy is sufficient to cover the loan
  • The policy is in your name and you are the owner
  • The insurance company is acceptable to the lender.

Some lenders may require a new policy (typically purchased through them) instead of allowing you to use a policy that you already have in force. Various lenders do life insurance collateral assignments differently but in most cases, it’s pretty straightforward.

Can the Death Benefit in My Policy be More than the Loan?

When your insurance company endorses your policy for the collateral assignment, they will add the following condition to the endorsement – “As their interest may appear.” This means that if your policy’s death benefit is $300,000 but the balance on your loan when you die is $225,000, the lender would receive the balance of the loan ($225,000) and your beneficiary would receive the balance. Additionally, the collateral assignment of your life insurance policy will survive if you default on your loan. So if your loan is in default when you pass away, the lender will receive the outstanding amount of the loan from your death benefit.

What Happens if I pay off the Loan Early?

As we mentioned earlier, your policy’s death benefit is assigned to the lender as their interest appears. This means when your loan is paid off, the lender will no longer have an interest and the death benefit will revert back to your beneficiaries in the full amount. Typically, the lender will notify your insurance company that they no longer have an interest in your death benefit or you can notify the insurer by sending them a copy of the statement showing your loan is paid in full.

Can I just add the Lender as a Beneficiary?

You can, but you should never do that. The collateral assignment to the lender is only as their interest appears. If you add them as a beneficiary, then they will be entitled to whatever share of the death benefit you have listed. This means that you would have to change their share each time the amount of your loan is reduced.

How will a Collateral Assignment Affect My Beneficiary?

If you die while your loan is outstanding, the lender with the collateral assignment would be paid first and then any remaining death benefit would go to your beneficiary or beneficiaries on a pro-rata basis.

Here’s an example of how your beneficiary or beneficiaries would be affected. Let’s say you have a life insurance policy with a $500,000 death benefit that you have listed your 3 children as beneficiaries to share and share alike. When you do a collateral assignment, the lender will be first in line for the death benefit if you die before your loan has been paid in full.

Your policy’s death benefit: $500,000

Loan balance when you die: $200,000

Balance to Beneficiaries to share and share alike: $300,000

Which Companies should I Use for Collateral Assignment Life Insurance?

It’s important that the insurance company you use for a collateral assignment to a bank or other lender is a highly-rated insurance company and acceptable to your lender. We recommend the companies listed below because of their financial ratings and competitively priced insurance products.

Lincoln Financial

North american company, midland national life, allianz life, the bottom line for life insurance collateral assignment.

Although we find the collateral assignment of life insurance to a bank as a fairly simple process, you should choose an experienced and reputable independent insurance agent to handle this essential process to help you make certain your lender will accept the policy you have purchased. Our insurance professionals are very familiar with the collateral assignment process and will walk you through it every step of the way.

Frequently asked Questions

Which companies are best to use for a collateral assignment.

Most every company will allow you to assign YOUR life insurance policy as collateral, however, the following carriers offer the best assistance and make it a very easy process: Lincoln National North American Midland National Allianz

How does the collateral assignment of life insurance work?

It’s a simple process to assign the death benefit in your life insurance as collateral: >You have a life insurance policy that you pay for and you are the named insured on the policy. >You will apply for the collateral assignment with your insurance company and the lender who is asking for it. >When your insurance company has approved the assignment of your death benefit, you should notify the lender and provide written proof of the collateral assignment.  This is usually handled by the insurance company.

What if my policy's death benefit is more than the loan?

When your insurance company endorses your policy for the collateral assignment , they will add the following condition to the endorsement – “As their interest may appear.” This means that if your policy’s death benefit is $300,000 but the balance on your loan when you die is $225,000, the lender would receive the balance of the loan ($225,000) and your beneficiary would receive the balance.

4 Responses

I have a life cover that I want to provide as collateral for a loan, please. Kindly let me know if you can help.

Gabriel, Should be easy for you to add the collateral assignment to your life insurance policy. Can you call us so that we can coordinate with your insurance company?

Can you still get a collateral assignment loan on a newly purchased policy?

yes you can

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Using Life Insurance For Collateral Assignment

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Fact Checker - Licensed Life Insurance Agent

The most common way that life insurance policy protects you and your loved ones is by providing financial support to your family in the event of your untimely death.

In some situations, life insurance serves to replace lost income with death benefits, in others, life insurance can be used to pay off remaining debts and death expenses. 

Life insurance can also be used as a very helpful tool in order to obtain financing for a loan .

This process of using a life insurance policy to take out a loan is called “ collateral assignment ” of life insurance.

Before we discuss everything you need to know about the collateral assignment of life insurance, let’s take a quick peek at what we will be covering in this article:

What you will learn in this article (click to go to section):

  • What is Collateral Assignment of Life Insurance?

How Does Collateral Assignment of Life Insurance Work?

  • Can I Apply for Multiple Loans With Life Insurance as Collateral?
  • How to Apply for Collateral Assignment of Life Insurance
  • Requirements, Limitations, and Restrictions 
  • What Happens in the Event of Default or Death?
  • What if I Pay Off my Loan While Using Life Insurance as Collateral?
  • Who Qualifies for Collateral Assignment of Life Insurance?
  • Choosing a Beneficiary for Your Policy
  • Best Life Insurance Companies for Collateral Assignment
  • Finding a Life Insurance Policy to Use for Collateral Assignment

What is a Collateral Assignment of Life Insurance?

The collateral assignment of life insurance is a legal way for you to assign your life insurance policy as a form of collateral for a loan to banks.

With this, you can be far more likely to receive financing for loans you may not otherwise be able to secure because the bank knows they will get their money back no matter what.

The way collateral assignment of life insurance works is like this:

  • You have a life insurance policy that is in your name. This coverage is paid for by you just like any regular life insurance policy.
  • Once you have this coverage, you must apply for a collateral assignment of life insurance with both your life insurance company and the bank. (Below we describe how to apply for a collateral assignment of life insurance in detail.)
  • Once the life insurance company clears you to use the policy as collateral for the loan, you must then specify to your lender that this is what you intend to do.
  • From there, you simply wait for the bank to get back to you on your application, and if they approve, you have successfully used life insurance as collateral assignment on a loan from the bank!

Can I Apply For Multiple Loans With Life Insurance As Collateral?

You can apply to as many loans as you please using your life insurance policy as collateral, as long as the policy has a large enough death benefit to cover the total amount owed on the loans you are applying for.

How to Apply For Collateral Assignment Of Life Insurance

Applying through your bank.

There are some lenders who will consider using your existing life insurance policy for collateral assignment if you request it, but others might require you to take out a brand new policy specific for that purpose.

In either case, using life insurance for collateral assignment when applying for loans is a fairly common practice that almost every life insurance company and the bank is equipped to handle.

You start off the application for assignment by securing the loan with the bank in question. This is where you will discover the limitations and regulations the bank has regarding the collateral assignment of life insurance. Each lender has different policies.

Applying Through Your Insurer

Once you have found the right loan, you must fill out the collateral assignment form . Your insurer will be able to provide you with this form easily.

The form has to be filled out by every party involved, including yourself, the lender, and the insurance company. You can sign the forms at the time of your loan application or you can sign them after your policy has been issued.

If you are taking out a brand new life insurance policy, you are better off signing all of the documents for this at the beginning of the application. The time frame to request a collateral assignment and be accepted for it ranges between 24 hours and 48 hours.

Some banks might require that you notarize the form, which can add some time to the application and acceptance process.

Collateral Assignment Of Life Insurance Requirements, Limitations, & Restrictions

When it comes to applying for and using life insurance as collateral assignment for a loan, there are a few common requirements to keep in mind to make sure that you get the most out of your policy, and also to make sure that you can be accepted quickly and easily .

1. Beneficiary and Policyowner Requirements

Policyowners of a life insurance policy that qualifies for collateral assignment must be the owner of the policy . They do not necessarily need to be the insured or the beneficiary, but they must be the owner of the policy.

The policy owner must maintain payment of all premiums in order for this policy to remain in place as collateral.

2. Types of Life insurance policies that qualify for collateral assignment

Any type of life insurance policy is capable of being used as collateral assignment for loans, as long as the company that issues it does not have any rules against it being used as such.

Term Life Insurance

Term life insurance policies used as a collateral assignment for loans must have terms longer than the length of the loan . Additionally, if the loan is paid off prior to the expiration of the policy, the policy is no longer payable to the bank.

Be sure to notify your insurer in the event that you pay off a loan which used your life insurance policy as the collateral assignment. You can then assign a new beneficiary to the life insurance policy with their help.

Permanent Life Insurance

Permanent life insurance policies  can also be used as collateral assignment for loans from banks. In this case, any cash value accumulated by the policy is only accessible by the bank in order to maintain collateral in the case of a loan default.

3. Lender Rights

If you default on your loan , the bank reserves all rights to utilize your life insurance policy’s death benefit as a form of repayment for your defaulted payments.

On top of this, they reserve the right to take from your cash value on permanent life insurance policies, as mentioned above.

What Happens If You Die Or Default With Your Life Insurance Policy Being Used As Collateral Assignment?

A collateral assignment is a form of limited transfer, unlike an absolute assignment which gives over all of your policy with no chance of reversing it.

If you were to pass away before your loan is repaid the lender will receive whatever amount is still owed from your death benefit. The remaining balance will be given to your beneficiaries .

As long as you pay your premiums on time and your policy is current you can use this to secure any type of loan with any bank that will accept it.

The same goes for defaulting on your loan.  If you default, the bank only has access to the amount of death benefit that is owed to them. The rest is secure and still under your policy, to be paid out to beneficiaries in the event of your death.

What If I Pay Off My Loan While Using My Life Insurance Policy As Collateral?

If you pay off the loan entirely before you pass away, or before the end of your policy, then the lender is no longer entitled to any of your death benefit and the full death benefit continues into the hands of your beneficiary.

At this point with permanent life insurance policies, your access to cash value is reinstated as well.

Who Qualifies For Collateral Assignment Of Life Insurance?

Any policyholder that has a permanent or term life insurance policy can qualify for collateral assignment.

Not every company allows collateral assignment of life insurance policies, and therefore it is best that you speak with your life insurance provider to see what their limits are with regard to Collateral Assignment.

However, most life insurance companies are equipped to handle this easily.

Many life insurance providers do not care how you use the policy, as long as it is in a legal fashion, and they will likely sign your application for collateral assignment quickly and with minimal friction.

Choosing A Beneficiary For Your Life Insurance Policy With Collateral Assignment

If you are attempting a collateral assignment, your bank might ask you to assign them as the beneficiary.

DO NOT ASSIGN YOUR BANK AS THE BENEFICIARY OF YOUR LIFE INSURANCE POLICY! 

If you die and you only paid off half of your loan and you made the bank your beneficiary, the bank will receive the remaining balance of your entire death benefit.

If you were to take out a $100,000 loan and you assigned the bank as your beneficiary they would receive the entire amount even if the amount owed to the bank at the time of your passing was only $20,000.

You do not want this to happen.

Banks only require a collateral assignment and that means they are only entitled to the amount owed on your loan, an amount which theoretically decreases with time.

If you have no beneficiaries listed, the remaining amount will theoretically go to your estate. But there may not be anyone around to enforce this. 

You can choose whomever you please as your beneficiary on your life insurance policy, as long as it is not yourself. Just be sure the beneficiary you choose is not your bank, regardless of what they tell you .

Best Life Insurance Companies For Collateral Assignment Of Life Insurance 

SBLI Life Insurance is also known as Mutual insurance company and they provide affordable policies to smokers and non-smokers.  They were founded in 1907 and since they are a mutual company they are owned by the policyholders and not by the stockholders.

As such their primary objective is to show allegiance to the clients rather than to their investors. This particular company is popular because they help customers blend different term life insurance policies with whole life insurance policies.

They have an A , excellent, rating from A.M. Best. They have an A+ rating from the BBB. Their financial history has remained level and strong since their inception.

Sagicor is rated A- by A.M. Best with a financial rating of A- . They have been in business for over 60 years offering products across 45 states. Without undergoing a medical exam you can still qualify for coverage up to $500,000 .

If you don’t want to answer any medical questions you can still get covered under $250,000 with this particular company.

They are not favorable toward individuals with diabetes or people who want a 30-year term plan but they are perfectly suited for individuals who are looking for whole life insurance policies that offer collateral assignment options.

North American Company

The North American company has a solid financial strength rating. They are given a superior rating which is the second highest rating you can get, from A.M. Best.

They also have an A+ from the S&P rating and Fitch rating.  This company is also privately owned so they are able to invest in Secure assets rather than things like government bonds.

North American has an array of whole life insurance policies that are offered it to anyone 85 or younger and they have favorable terms for collateral assignment options.

Banner Life

Banner Life Insurance Company Offers an array of inexpensive universal life insurance products. However, they do not have a whole life insurance policy.

They are licensed to conduct business in every state but New York. If you are a New York resident you can still get coverage but you have to go through William Penn. They have a financial strength rating of excellent.

Finding A Life Insurance Policy To Use For Collateral Assignment

If you are looking for life insurance coverage which you can also use as collateral on a loan, then you want to take some time to make sure that you understand the stipulations of your bank and insurance provider.

On top of this, you want to be sure that the policy you choose offers great rates and is offered by a company with a history of paying out claims on time and when needed.

The easiest way to find the best life insurance coverage to use for collateral assignment is to speak with an independent life insurance agent who can help you compare life insurance policies and rates from dozens of the best life insurance companies on the market.

We are very experienced in this area and have the knowledge necessary about life insurance providers and collateral assignment with banks to ensure that you find the best coverage for your situation.

Give us a call today to speak with a professional, or get started online using our quoting tool for quick and easy life insurance quotes.

Ty Stewart

Ty Stewart is a founder and contributor of SimpleLifeInsure.com. He started researching and studying about life insurance when he got his first policy for his own family. He has been featured as a life insurance expert speaker at agent conventions and in top publications. As an independent licensed life insurance agent he has helped clients nationwide to secure affordable coverage while making the process simple.

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Bennett Bier

I’m Bennett Bier , owner, author and fact checker of Simple Life Insure. I believe working with a small independent broker offers consumers more personal attention and superior customer service. As an independent agent licensed in all 50 states and the District of Columbia I have access to many of the top A+ rated life insurance carriers. This lets me locate a plan that you will qualify for while saving you money at the same time. Over the years I have mastered the art of underwriting, getting approvals even for my highest risk clients. I’m also likely the person that will answer the phone when you call.

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Using life insurance as loan collateral

Your permanent life insurance policy accumulates a cash value over time. You can use this cash value as loan collateral, depending on how much value your policy accumulates. If you default on your loan and the policy value has to be used, this will cut into your death benefit, plus interest. You can also borrow money directly from your policy, but with interest.

collateral assignment of life insurance lenders

Can you use life insurance as collateral for a loan?

What kind of insurance can be used as collateral.

  • How does a life insurance policy loan work?

How much can you borrow from a life insurance policy?

Why use life insurance as loan collateral, is a life insurance policy loan dangerous.

You might only think of life insurance as a way to support your family after you pass away. When you pass away, your family may lose you as a significant income source, but life insurance is there to provide them with a death benefit to cover their cost of living, education, and more! But, that’s it, right? You may have the idea that life insurance is only beneficial after you die—but you can reap living benefits too! There are many ways life insurance, especially permanent life insurance, can be useful for you while you’re alive.  Business owners leverage life insurance to cover employees who are critical to their business operations or to facilitate buy-sell agreements . A corporation may even hold a life insurance policy to mitigate the financial risks associated if the primary shareholders or key management personnel pass away. However, even an individual policyholder can benefit from their policy during their lifetime, while they pay their premiums. Loan collateral is another way individuals and corporations use life insurance. Lenders provide a loan on the contingency that they receive your life insurance payout if you cannot repay the loan. This article explains the different ways you can borrow from your policy and, more specifically,  how collateralizing your policy works. It further details the types of life insurance you can use as collateral, how much you can borrow, in addition to the benefits and drawbacks of using life insurance as loan collateral.

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Yes! You can use certain types of life insurance policies as collateral for a loan. To initiate the loan, you usually first speak with a lender. This might be a major Canadian bank or another creditor. You should understand the standard loan terms affiliated with the loan, such as the interest rate and payment terms. You must further speak with your insurer to notify them that you’re using your policy as collateral. Generally, insurers are disinterested in how you use your policy as long as you meet the obligations of your life insurance contract — i.e., making timely premium payments.

Life insurance policies such as universal life and whole life insurance that have a cash value component are the most suitable for collateralized loans. ( Read more about whole vs. universal life insurance )

Most lenders won’t accept term life policies as loan collateral because they don’t accumulate cash value. Additionally, term policies may be too short to accommodate the life of the loan. Let’s assume a lender accepts a term life policy as collateral. The collateral would disappear once the term was up, turning the loan into unsecured debt. This creates significant risks for the lender. 

Instead, lenders almost always ask for permanent insurance policies as collateral in a life insurance-backed loan. These policies don’t have a set term and last as long as you maintain your premium obligations. Permanent policies ( excluding a term-to-100 ) build the cash value that is needed for the lenders to let you borrow against.

How does using my cash value as collateral work?

Collateral assignment of life insurance conditionally appoints your lender (the bank) as the primary beneficiary to the death benefit. To the lender, your life insurance is a source of guaranteed funds. 

If you’re unable to repay the loan, the lender can either cash in the insurance policy for the cash surrender value or wait until you pass away to receive your death benefit as repayment for the loan. 

Some borrowers intend only to repay the loan with their life insurance proceeds. However, if you repay the lender before your death, the death benefit assignment is removed, and the lender is no longer the beneficiary.

Generally, a lender allows you to borrow 50 to 90 percent of the cash value when you collateralize your life insurance policy. This percentage considers your credit score and how and if your insurance company invests your cash value amount. 

The lender may hold back from lending a high percentage of the cash value to riskier borrowers so that the policy retains a sufficient cash value to accommodate missed interest payments. 

Additionally, your policy may accumulate cash value at a slower or lower rate than the bank’s loan interest rate. This means there remains risk that the loan balance exceeds the cash surrender value. This might require the lender to ask you for additional collateral or partial loan repayment.

collateral assignment of life insurance lenders

Life insurance as loan collateral means your personal property and assets are safe. If you’re unable to pay back the loan, you’re not risking your home, car, or other belongings, which is the usual case with secured loans. 

Lenders also like life insurance policies as collateral because there’s a certainty. They know the policy’s cash surrender value and the death benefit’s value. In contrast, if you collateralize your car, your car’s value depreciates over time. You might also damage it and further reduce its value. And while homes appreciate over the long term, there’s no telling whether someone collateralizing their home will default in an up or down housing market. 

Lastly, life insurance collateralized loans can be even more affordable than an unsecured loan with a high-interest rate. Secured loans mean less risk to the lender, which means a lower interest rate for you. It’s possible for the sum of the life insurance premium and interest rate of a life insurance-backed loan to be lower than the interest rate of an unsecured loan.

Will loan proceeds from a life insurance policy be taxed?

When determining if loans will be taxed, regulatory bodies look at the policy’s adjusted cost base (ACB). In the case of the life insurance policy, the ACB is the policyholder’s cost of maintaining the policy, which includes all costs paid other than the net cost of pure insurance. For example, if the annual premium for a whole life policy is $5000, perhaps $1500 of this accounts for the cost of insurance, $3000 is invested to build cash value, and $500 is charged for maintaining the policy. In this case, the ACB for this policy would be $3500.

As mentioned above, the tax implications of your loan will depend on how you borrow from your life insurance policy.

Policy Withdrawals – Whenever the amount withdrawn exceeds the policy’s ACB, the whole loan will be taxed. 

Policy Loans – Only the amount over the ACB will be taxed. 

Policy as collateral – Loan proceeds can be received tax-free.

Using your life insurance as loan collateral comes with several risks:

  • Tax complications : Although life insurance proceeds are tax-free, the capital gains on your invested cash value account may create a tax liability. This liability can be an issue if left unchecked.
  • Outliving your projected death: When you get your policy loan, the bank will base the loan amount on the projected cash value at the time of your death date. While term coverage has a designated expiration date, permanent policies still have an estimated life expectancy date that is based on actuarial data from the insurance company. It considers your health and lifestyle data and predicts the date you may pass away. The maximum loan amount is then based on a percentage (usually 50-90%) of the projected accumulated cash value and projected returns. If you live past this projected death date,  which might require you to provide additional collateral or pay off a portion of the loan.
  • Assumptions about interest and return rates : Your bank considers its interest rate with respect to the rate of return on your cash-value account. If the interest increases and/or the rate of return decreases, the difference between these two rates widens. As a result, the loan balance may outpace the policy’s cash value faster than projected. This can also cause the lender to ask for additional collateral or early repayment. 

While these risks are present, the proper insurance, investment, and tax advice can prepare you for these issues. 

A collateral assignment of life insurance is one way to leverage your policy’s cash value during your lifetime. It’s a popular method to access cash for your personal or business needs. Such a loan can be better than traditional secured loans, which collateralize your personal assets. 

Speak to one of PolicyAdvisor’s expert insurance advisors today to learn how you can leverage your life insurance in a loan. Our team can explain the process and suggest steps to reach your financial goals. Book a call with one of our advisors today!

The information above is intended for informational purposes only and is based on PolicyAdvisor’s own views, which are subject to change without notice. This content is not intended and should not be construed to constitute financial or legal advice. PolicyAdvisor accepts no responsibility for the outcome of people choosing to act on the information contained on this website. PolicyAdvisor makes every effort to include updated, accurate information. The above content may not include all terms, conditions, limitations, exclusions, termination, and other provisions of the policies described, some of which may be material to the policy selection. Please refer to the actual policy documents for complete details. In case of any discrepancy, the language in the actual policy documents will prevail.  All rights reserved.

If something in this article needs to be corrected, updated, or removed, let us know. Email [email protected] .

  • Permanent policies allow you to utilize the policy’s cash value as a living benefit
  • You can borrow against this cash value when you need a bank or lender loan
  • You can also take a life insurance policy loan where you borrow some of your death benefit

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The information above is intended for informational purposes only and is based on PolicyAdvisor’s own views, which are subject to change without notice. This content is not intended and should not be construed to constitute financial or legal advice. PolicyAdvisor accepts no responsibility for the outcome of people choosing to act on the information contained on this website. PolicyAdvisor makes every effort to include updated, accurate information. The above content may not include all terms, conditions, limitations, exclusions, termination, and other provisions of the policies described, some of which may be material to the policy selection. Please refer to the actual policy documents for complete details. In case of any discrepancy, the language in the actual policy documents will prevail. All rights reserved.

If something in this article needs to be corrected, updated, or removed, let us know. Email  [email protected] .

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collateral assignment of life insurance lenders

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  1. A Collateral Assignment of Life Insurance

    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 ...

  2. 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 ...

  3. What Is Collateral Assignment of Life Insurance?

    Collateral assignment of life insurance is an arrangement where you agree to give a lender the first claim to the payout from your life insurance policy. This allows your life insurance to serve as the collateral that many loans — especially small business loans or Small Business Administration (SBA) loans — require before they can lend you ...

  4. Best Life Insurance Companies That Allow Assignment of Collateral (2022

    Most of the time, lenders won't accept a collateral assignment on a term life insurance policy because it may expire before the loan is paid. With a whole or permanent life insurance policy, a lender would be more likely to accept a collateral assignment as a potential payment. Once you pay off your loan, you can dissolve your collateral ...

  5. What Is Collateral Assignment of Life Insurance?

    Advertising & Editorial Disclosure. Collateral assignment of life insurance is an arrangement where a policyholder uses the face value of their life insurance policy, which can be a term or permanent life insurance policy, as collateral to secure a loan. If the policyholder dies before the loan is paid off, the lender is prioritized to receive ...

  6. Collateral Assignment of Life Insurance

    3. Fill out a collateral assignment form. Once you sign your life insurance contract and pay your first premiums, complete a collateral assignment form with your insurer. You'll fill out your lender's contact details so your insurer can designate them as a collateral assignee while your loan is outstanding. 4.

  7. What is a Collateral Assignment of Life Insurance?

    With collateral assignment of life insurance, ownership of an asset transfers from the borrower to the lender. This transfer only remains in place until the loan is paid in full. In this situation, the transferred asset is your life insurance policy. The goal is only to satisfy your loan obligation. Once that debt is repaid, you'll end the ...

  8. What Is a Collateral Assignment of Life Insurance?

    Collateral assignment of life insurance allows you to use your life insurance policy as collateral when applying for loans. This is especially common when applying for business loans. However, your insurer must allow this arrangement, and the policy must be sufficient to cover the collateral requirements. Using your life insurance policy comes ...

  9. Life Insurance Collateral Assignment [Pros and Cons]

    How the Life Insurance Collateral Assignment Process Works. If you plan to use a life insurance collateral assignment strategy when applying for a loan, you should go through the following steps in order: Understand the requirements. First, you should know the type of policy a lender will accept as collateral - or even if a lender will accept ...

  10. What Is Collateral Assignment?

    Collateral assignment of your life insurance policy can help you get approved for a loan. Learn how it works, how it impacts your policy, and alternatives to consider. ... To use life insurance as collateral, the lender must be willing to accept a collateral assignment. When that's the case, the policy owner, or "assignor," submits a form ...

  11. What Is A Collateral Assignment Of Life Insurance?

    The Benefits of Using Collateral Assignment of Life Insurance. While adding a collateral assignment to your current life insurance policy may require an application, paperwork, and time, there are benefits: Many lenders like it: Banks and financial institutions sometimes prefer it when applicants use their life insurance policy as collateral ...

  12. What Is A Collateral Assignment of Life Insurance?

    Collateral - something offered (in this case, life insurance) as a guarantee of loan repayment if you default on your loan. Conditional Assignment - your collateral assignment is conditional, meaning it is subject to specific conditions and terms, as opposed to an absolute assignment. In other words, your lender no longer qualifies for the ...

  13. The Complete Guide to Using Life Insurance as Collateral 2023

    1. Ensure the lender accepts life insurance as collateral. 2. Apply for the collateral assignment through the bank or directly with the insurer. 3. Fill out an "assignment of Life Insurance Policy as Collateral form" provided by your insurer. 4. Submit the form to the insurer, and wait for approval. 5.

  14. Collateral Assignment for Life Insurance: Benefits & More

    Collateral assignment of life insurance allows the lender to be the primary recipient of your life insurance policy's death benefit if you have an outstanding loan balance when you die. Some assignments also allow the lender to tap into the policy's cash value if you default on your loan. While using life insurance as collateral does not ...

  15. What Is Collateral Assignment of Life Insurance?

    In a collateral assignment of life insurance, you use a life insurance policy to secure a loan. You first set up coverage as usual by applying for and buying some type of life insurance policy with a death benefit. If you already have a policy, you could use that too. Then you fill out a collateral assignment form with the lender.

  16. Best Life Insurance Companies That Allow Assignment of Collateral (2024

    Here is a list of rates for $100,000 in whole life insurance for men: Average Whole Life Insurance Rates for a Male with $100,000 in Coverage. Companies. 50-Year Rates. 55-Year Rates. 60-Year Rates. 65-Year Rates. Foresters Financial. $15.31.

  17. What Is Collateral Assignment of Life Insurance?

    A collateral assignment for your life insurance coverage only allows the bank or lender to claim the amount of money still owed on an outstanding loan or debt. If you have a $500,000 life insurance policy and die while still owing $50,000 on a business loan, the lender could claim $50,000 of your death benefit — assuming, of course, that you ...

  18. Collateral Assignment

    Collateral assignment of life insurance allows policyholders to use the death benefit as loan collateral. The policyholder appoints a lender as the primary beneficiary of the insurance policy in the event the borrower passes away unexpectedly before repaying the loan. This lets the lender cash in the life insurance policy and recover what is ...

  19. 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 ...

  20. Life Insurance as Collateral

    Learn where collateral assignment helps the most. In theory, collateral assignment can be used for a car loan or mortgage, but there's often little need. With such lending, the home or car the loan helps to buy can become the collateral; if the borrower defaults, the lender can seize the asset to repay the loan.

  21. Collateral Assignment of Life Insurance

    Collateral assignment of life insurance is a method of providing a lender with collateral when you apply for a loan. In this case, the collateral is your life insurance policy's face value, which could be used to pay back the amount you owe in case you die while in debt. Collateral assignment of ...

  22. What is Split-Dollar Life Insurance?

    With a collateral assignment/loan regime, the employee owns the policy. This is also sometimes referred to as a leveraged split-dollar plan. The employer loans the premium amount to the employee ...

  23. Collateral Assignment of Life Insurance to a Lender

    When you do a collateral assignment, the lender will be first in line for the death benefit if you die before your loan has been paid in full. Your policy's death benefit: $500,000. ... Although we find the collateral assignment of life insurance to a bank as a fairly simple process, you should choose an experienced and reputable independent ...

  24. Life Insurance For Collateral Assignment [What No One Tells You]

    Permanent Life Insurance. Permanent life insurance policies can also be used as collateral assignment for loans from banks. In this case, any cash value accumulated by the policy is only accessible by the bank in order to maintain collateral in the case of a loan default. 3. Lender Rights.

  25. Using Life Insurance As Loan Collateral

    To the lender, your life insurance is a source of guaranteed funds. ... A collateral assignment of life insurance is one way to leverage your policy's cash value during your lifetime. It's a popular method to access cash for your personal or business needs. Such a loan can be better than traditional secured loans, which collateralize your ...