The phrase “Collateral Assignment Life Insurance” is an often used term in the life insurance industry.
This article will cover the basics as well as important details that you’ll need to know before you secure a business loan by buying life insurance.
Table of Contents
- 1 Collateral Assignment Life Insurance
- 2 Securing a Business Loan by Purchasing Life Insurance
- 3 Collateral Assignment of Life Insurance Definition
- 4 Conditional versus Absolute Assignments
- 5 The Bank Shouldn’t Be Assigned as the Beneficiary
- 6 What Kinds of Life Insurance Policies are Used for Collateral Assignment?
- 7 A Basic Example
- 8 A Real Collateral Assignment Example
- 9 Lenders that Accept Collateral Assignment?
Collateral Assignment Life Insurance
If you’re reading this article, chances are you’ve been informed that you may need to buy a life insurance policy to assist you in securing a loan. We’ll provide you what you need know to make an informed life insurance purchase.
Securing a Business Loan by Purchasing Life Insurance
Receiving approval for a loan is contingent on several aspects.
One of which is how you plan to repay the loan in the event of your death. This is where assigning a life insurance policy is useful.
It’s a practical feature that promises payback of the borrowed funds to the lender. Therefore, a lender is more inclined to approve your request for a loan.
You’re welcome to assign your life insurance policy – Just as long as there aren’t any restrictions in your contract that doesn’t allow it.
You can also have the same policy assigned to more than one bank to have multiple loans secured.
Assume you have a $2 million dollar life insurance policy. You can have portions of the loan assigned to 2 different banks.
An assignment can be used to have the rights to some or all the policy’s proceeds transferred to an assignee. Fundamentally, the assignment is contingent on the agreement and negotiations between the lender and the borrower.
Collateral Assignment of Life Insurance Definition
A collateral assignment is a typical transaction that will involve financial institutions as well as private lenders.
A life insurance policy’s collateral assignment is conditional. In the event of death, the loan is secured through a term policy, and it is necessary for several kinds of bank loans.
The cash value of a permanent life insurance policy is the collateral and can include either universal or whole life policies. However, cash value not applicable to term policies.
In comparison to an absolute assignment — which essentially assigns the policy as is, without any way of reversing it – the collateral assignment acts as more of a restricted kind of transfer.
If you were to pass away prior to the repayment of a loan, the lender acquires the balance that is owed via the death benefit.
The outstanding balance is then sent to the remaining beneficiaries specified. The policy must remain current, so you must stay on top of keeping the premiums paid throughout the loan’s lifetime.
Further, you won’t be able to access the cash value (assuming you have a universal or whole life policy) in order to safeguard the collateral.
If the loan is repaid prior to your death, the lender won’t be the beneficiary anymore and will not receive the death benefit. Cash value assignments are alluring to lenders since the finances can be re-obtained without the borrower passing away.
The insurance company must be kept informed of a policy’s collateral assignment, but aside from keeping the contract terms updated, they hardly have any authority or involvement in the agreement.
Conditional versus Absolute Assignments
Conditional and Absolute are the two categories of a policy assignment.
With an absolute assignment, you transfer all of the rights of the life insurance policy to the designated assignee. This includes the responsibility that any premiums that remain get paid by the assignee.
In essence, you’re transferring the ownership of the policy to the new party.
With a conditional assignment, this arrangement is temporary. The ownership interest and rights of the life insurance policy are limited and transferred based on the terms of the agreement. An example of the conditional assignment is with a repayment of a loan. The assignment is terminated once the conditions of the agreement have been met.
The Bank Shouldn’t Be Assigned as the Beneficiary
If you receive a request from the bank to assign them as the beneficiary, refrain from doing so.
If you pass away and only have a portion of the loan paid back, the bank will acquire the outstanding balance since they are the beneficiary, and no will can take precedence over that contract.
Don’t allow this to occur.
Banks only need a collateral assignment.
As such, if the balance owing on your loan goes down, so, too, does the amount that the bank gets.
If a $750,000 dollar loan is taken out on a collateral assignment and half the loan is repaid, the collateral assignment will only give the bank what’s left over from the loan. The remainder will go to the primary beneficiary.
If no other beneficiaries are listed, it will be sent to your estate. Don’t give the bank all that money. The collateral assignment minimizes the benefit to be in sync with your loan.
What Kinds of Life Insurance Policies are Used for Collateral Assignment?
Any kind of life insurance policy will work for a collateral assignment, assuming the insurance company permits an assignment for that specific type of life insurance policy.
Specified cash value on a permanent life insurance policy lets the lender access those funds as a loan repayment if the borrower defaults. The policy owner has limited access to the cash value to protect the collateral.
If the loan is repaid prior to the death of the borrower, the assignment is taken away, and the lender doesn’t have any access to the life insurance death benefit.
Another affordable option is a term life insurance policy.
Several lenders only need the loan for a set duration of time that matches the loan’s terms – 1, 5, and even 10 year term life insurance policies work.
After the loan is repaid, the policy can be canceled or kept going for the sake of keeping your family protected.
A Basic Example
Assuming you’ve bought a $1 million term life insurance policy.
At some point, you’ll need to research banks that accept life insurance as collateral for a $500,000 loan – the loan secured by life insurance policy.
Life Insurance Blog Tip: You will need to find banks or lender that accept collateral assignment. Life insurance brokers do not provide this service. Once you find your lender, we will assist you in buying the best life insurance policy available to beet your goals.
For partial collateral, you will use a collateral assignment on the policy. Your spouse is listed as the life insurance policy’s primary beneficiary.
Once you are deceased, both your wife and the bank file claims for the death benefit with the insurance company. The bank does have money owed to them, and that takes precedence over what your spouse would get. The bank (aka the collateral assignee) has priority.
As such, they’ll be paid back before the remainder of the death benefit is sent to the beneficiaries (your spouse, in this instance).
A Real Collateral Assignment Example
We recently were contacted by someone who was purchasing a business in just over a month.
The bank required a $2 million life insurance policy to cover her bank loan. We researched the company who provided the best rate and processed her application. Time was a factor and we were able to get the medical exam setup quickly and the underwriting process was underway.
However, the client was nervous about cutting it too close and wanted to get coverage in place as soon as possible even though it wasn’t the best rate. We simply pivoted to the fastest collateral assignment company and had the policy approved in less then 1 week.
Lenders that Accept Collateral Assignment?
For an assignment, several lenders may allow a current life insurance policy.
Others might ask for a new life insurance policy to suit their demands.
Regardless, securing a loan by using life insurance as collateral is standard protocol for just about all insurance companies.
To start with, secure your loan.
Visit your bank and learn what their requirements are, as well as the types of loans they issue.
Loans tend to be backed by the Small Business Administration and sold by big banks like Chase, Wells Fargo, or Bank of America. Of course, small banks are also available.
Ready To Get Coverage Quickly?
Please contact us if you have any questions about collateral assignment life insurance or about how to buy the best and most affordable policy.
If you are in need of a collateral assignment of life insurance, we can help.
We’ll be happy to answer all of your questions to make sure you get your policy as quickly as possible at the best rate available.
Life Insurance Blog has access to over 40 of the best life insurance companies and will find the one that meets your goals.
Call us at 888-411-1329 for a customized quote or use our INSTANT LIFE INSURANCE QUOTER on this page.
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