If you’ve ever applied for a loan, you know that you can use different assets as collateral. But did you know one of your options is to use your life insurance policy?Collateral assignment of life insurance refers to the use of your life insurance policy toward collateral on a loan. Basically, the lender has a claim to some (or all) of your life insurance benefits until you fully repay the loan. In this article, we’ll help you understand how collateral assignment of life insurance works, the benefits of it, how to apply for it and the types of life insurance you can use.
Benefits of Using Life Insurance as Collateral
The main benefit of using life insurance as collateral is that you can specify how much the lender is entitled to; for example, an amount equal to your outstanding balance on the loan. This ensures that if you pass away before the loan is repaid, your beneficiaries will still receive the remaining portion of your death benefit.Using life insurance as collateral may also be preferable to using assets like your home or vehicle, because if you pass away before your loan is repaid, your dependents will not be at risk of losing those assets to the lender. It’s also beneficial to the lender, as it essentially guarantees repayment of the loan.
Collateral Assignment vs. Naming the Lender as Beneficiary
If you don’t want to proceed with collateral assignment, you also have the option to name your lender as a beneficiary as on your policy. Keep in mind that with collateral assignment, the lender is only entitled to an amount determined by you. If you name them as the only beneficiary, they’re entitled to your full death benefits.
How do you apply for collateral assignment of life insurance?
The process of applying for collateral assignment is simple.
Find a lender that accepts life insurance as collateral. Not all lenders will, so it’s important to confirm.
Pick a policy. You can use your existing policy if it meets the lender’s requirements. If not, you may need to open a new policy. If you do need to apply for a new policy, the process will be the same as applying for life insurance in any other scenario. You’ll be able to apply for collateral assignment once you’ve paid the first premium on your policy.
Complete the collateral assignment agreement. You’ll work with your insurance carrier to do this. Once that is done, you can proceed with the loan process.
Types of Life Insurance You Can Use as Collateral
There are two main types of life insurance you can use for collateral assignment: term or permanent. Term life insurance offers coverage for a certain length of time, while permanent life insurance covers you for your entire lifetime. Permanent life insurance also has a cash value component that accumulates over time. Requirements will vary by lender, so make sure they accept the type of life insurance you want to use before offering it as collateral. Keep in mind that if you use a permanent policy, your access to the cash value will be restricted to protect the collateral.
Have questions about collateral assignment of life insurance? Let SelectQuote help.
Collateral assignment can be a beneficial option for many, but it can be confusing to know where to start. SelectQuote has nearly 40 years of industry experience helping people make decisions about life insurance. If you need to apply for a new policy for collateral assignment, we can make the process easier by searching life insurance carriers on your behalf in just minutes, finding you the right policy for your needs and saving you time along the way.
