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How use life insurance as collateral for a loan.
When you apply for a loan, particularly a small business loan or Small Business Administration (SBA) loan, many lenders require that borrowers use life insurance coverage as collateral for the loan. This is called collateral assignment, and it ensures that your lender will be paid any outstanding loan amount in the event of your death.
Collateral assignment is different from naming the bank as the beneficiary of the policy. Instead, collateral assignment ensures that if you die, the insurance company will use the death benefit to repay the loan. Any remaining funds will go to your named beneficiary or beneficiaries. You remain the policy owner.
If you already have a life insurance policy with a face value greater than the loan amount, you can collaterally assign that policy by requesting the paperwork from your insurer. If you don’t have a life insurance policy, or you need additional coverage, you will need to apply for life insurance and go through underwriting. Once the policy is in force, you can request collateral assignment paperwork from the insurer.
Term life insurance and whole life insurance, sometimes known as cash-value life insurance, can both be assigned as collateral. Group life insurance policies may or may not be able to be assigned as collateral. Talk to your benefits administrator to find out if your policy qualifies.
Whether you have a term life insurance policy or a whole life insurance policy, you will be the policy owner and responsible for the premium payments. Some lenders may require an escrow account for the life insurance premiums, others may require proof of premiums paid or prepaid. If you have a whole life policy that you use for collateral assignment, the lender will have access to the cash value of the policy if you default on the loan.
There are some insurance companies that will do collateral assignment for a loan from an individual as opposed to a financial institution. Others will not. If you want to use an insurance policy as collateral for a personal loan from an individual, talk to an insurance advisor about your options.
Read more about the difference between term life insurance and whole life insurance.
The process of applying for life insurance for collateral assignment is the same as applying for for a personal life insurance policy, because you need a personal policy in force before you can assign it as collateral.
The process can seem complicated, but in short: You get quotes online, choose a policy, apply online and share permission for the underwriters to access your medical records, chat with an advisor on the phone, take a medical exam, and wait for underwriters to review your application, and then receive your offer. The process can take four to eight weeks. Unfortunately there is no “instant” life insurance. There is a more expensive, non-medical exam product, like guaranteed-issue life insurance, that may have a faster process than term life, but depending on your age and health, your application may still have to go through underwriting. Talk to your life insurance advisor about your options.
You can get started with the application process by sharing just a few details.
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When you’re applying for life insurance for the purpose of collateral assignment, you will name your beneficiaries as you would for a personal policy. The lender is not your beneficiary; they will be the assignee on the collateral assignment after your policy is in force. On the form, you will be the assignor.
When you fill out a collateral assignment form, that assignment supersedes your beneficiaries’ rights to the death benefit. In the event of your death, the life insurance company will pay the lender, or assignee, the loan balance. The remainder of your death benefit (if there is one) will go to your beneficiaries.
After you’ve paid your first premium, signed your policy papers, and the insurer has confirmed that your policy in force, then you can ask for a collateral assignment form from the life insurance company or your life insurance broker.
You’ll need your loan officer’s name and number for the form, as well as your policy number, Social Security number, and other information.
Using life insurance as collateral assignment for a loan is different from taking out a life insurance loan, which is only possible with permanent life insurance policies with a built-up cash value. These policies include whole life, universal life, and variable life.
Insurance loans or policy loans are only available if your policy has built up a significant cash value, which could take 10 years or more from time of issue. These policy loans use the cash value of your insurance policy as collateral. You will be charged interest and your death benefit may be reduced until you pay back the loan. If your policy lapses, you could face a large tax burden.
Another option may be to withdraw cash from the cash value of the policy, called cash surrender.
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Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.
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Yes, we have to include some legalese down here. Read it larger on our legal page. Policygenius Inc. (“Policygenius”) is a licensed independent insurance broker. Policygenius does not underwrite any insurance policy described on this website. The information provided on this site has been developed by Policygenius for general informational and educational purposes. We do our best efforts to ensure that this information is up-to-date and accurate. Any insurance policy premium quotes or ranges displayed are non-binding. The final insurance policy premium for any policy is determined by the underwriting insurance company following application. Savings are estimated by comparing the highest and lowest price for a shopper in a given health class. For example: for a 30-year old non-smoker male in South Carolina with excellent health and a preferred plus health class, comparing quotes for a $500,000, 20-year term life policy, the price difference between the lowest and highest quotes is 60%. For that same shopper in New York, the price difference is 40%. Rates are subject to change and are valid as of 2/17/17.
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