Quick answer
A collateral assignment of life insurance gives a lender a priority claim on your policy's death benefit until a loan is repaid. SBA lenders routinely require it when a business depends on its owner. If you die with a balance outstanding, the lender is repaid first and your beneficiaries receive the remainder, and once the loan is satisfied the assignment is released in full.
Did you know your life insurance policy can help you get a loan? Lenders widely accept life insurance as collateral because of the guaranteed funds, so if the worst happens, they’re still going to get repaid. Let’s take a look at the collateral assignment of a life insurance policy and see how it works.
Assigning Life Insurance to Secure a Loan
Getting approved for a loan depends on a number of different factors, one of which is how you intend to pay back the loan if you die. That’s where assigning a life insurance policy comes into play. It’s a useful feature that guarantees the money will be paid back, no matter what. Thus, a lender is more likely to approve your loan request.
You are free to assign your life insurance policy, granted there isn’t some kind of limitation in your contract that prevents it. You can even assign the same policy to multiple banks to secure more than one loan. Let’s say you have a $500,000 policy. You can assign one portion of it to one bank and another portion to another bank.
With an assignment, you can transfer the rights to all of or a portion of the policy’s proceeds to an assignee. Essentially, the assignment is subject to the negotiations and agreement between you and the lender.
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Collateral Assignment
The collateral assignment of a life insurance policy is conditional. A term policy secures the loan in the case of a death, and it is required for many types of bank loans. Collateral refers to the cash value in a life insurance policy, whole life or universal life policies that build up cash value, but it does not apply to term policies.
Unlike an absolute assignment, which pretty much assigns the policy lock, stock, and barrel with no possibility of reversal, the collateral assignment is a more limited type of transfer. If you die before the loan is paid back, the lender receives the amount that is still owed through the death benefit. The remaining balance is then directed to any other named beneficiaries. And the policy has to stay current, meaning you need to keep up with paying all the necessary premiums for the life of the loan.
Also, your access to the cash value (let’s say you have a whole or universal life policy) is restricted in an effort to protect the collateral. If the loan is paid off before your death, the lender will no longer be the beneficiary of the death benefit. Cash value assignments are more attractive to lenders because the funds can be recovered without the death of the borrower.
The insurance company has to be notified of the collateral assignment of a policy, but other than keeping up with the terms of the contract, they really don’t have any involvement or authority in the agreement.
Never Assign Your Bank as the Beneficiary
If your bank asks you to assign them as the beneficiary, don’t do it. If you die and have only paid off half your loan, the bank will get the remaining balance because they are the beneficiary, and that contract takes precedence over any will. Don’t let this happen.
Banks only require a collateral assignment, which means as the amount owed on your loan decreases, the amount that goes to the bank will decrease as well. If you take out a $100,000 loan on a collateral assignment and pay off half that loan, the collateral assignment will only pay the bank what’s left on the loan. The rest will go to the primary beneficiary. If there are no other listed beneficiaries, it will go to your estate. Never give the bank that full amount. The collateral assignment decreases the benefit to be in line with your loan.
What Types of Life Insurance Policies Work for a Collateral Assignment?
Any type of life insurance policy is acceptable for a collateral assignment, as long as the insurance company allows an assignment for that particular policy.
A permanent life insurance policy with a specific cash value allows the lender access to that amount as repayment of the loan if the borrower were to default. The policy owner’s access to the cash value is limited as a safeguard on the collateral. Again, as long as the loan is paid off before the borrower dies, the assignment is removed and the lender has no access to the death benefit. It’s as simple as that, really.
A term life insurance policy is a great (and inexpensive) option, too. Plus, some lenders only require the loan for a certain period of time that coincides with the term of the loan, five years, seven years, oftentimes a 10-year term policy works. Once the loan is paid off, you can cancel the policy or keep it going and continue to protect your family.
A Simple Example
Let’s say you purchase $300,000 of term life insurance coverage. Eventually, you go to your bank for a $150,000 loan and use a collateral assignment on the policy as partial collateral. Your children are named as the beneficiaries on your life insurance policy. After you die, both the bank and your children make claims with the insurance company for the death benefit. The bank would have the right to the money that is still owed to them above anything your children would receive. The collateral assignee (the bank) has priority. That means they will be paid before the rest of the death benefit is released to the beneficiaries (in this case, your children).
How Does It Work, and Where Do I Begin?
Some lenders will consider using an existing life insurance policy for an assignment. Others may say you need a new policy for their purposes. Either way, using life insurance as collateral to secure a loan is a fairly common practice that every insurance company can handle.
First, begin by securing your loan.
Go to your bank and find out what their requirements are and what kinds of loans they offer.
Loans are most often backed by the Small Business Administration and sold by larger banks like Wells Fargo, Chase, or Bank of America. Smaller banks are certainly an option as well.
Here is a list of the most active Lenders of SBA 7(a) General Small Business Loans.
Learn more about the Small Business Administration’s loan programs.
Insurancy Top 10 SBA Lenders
| Lender | Website | Phone Number |
 | Click To Learn More About Wells Fargo SBA Loan Program | 1-866-727-5363 |
 | Click To Learn More About Live Oak SBA Loan Program | 910-790-5867 |
 | Click To Learn More About Celtic Bank SBA Loan Program | 1-877-251-2873 |
 | Click To Learn More About Byline Bank SBA Loan Program | 773-244-7000 |
What Is the Process to Obtain a Collateral Assignment?
The collateral assignment is a simple form that needs to be filled out and signed by all parties involved: the lender, the insured, and the owner and payer, if different than the insured.
The forms can be signed at the time of application, or after the policy is issued. The time frame to process the request for the collateral assignment is typically 24 to 48 hours.
Some banks do require you get the form notarized at the time of signing (usually at the bank).
Here are some sample forms from three of our most popular companies that were used to get insurance policies for collateral assignments.
How to Get a Life Insurance Policy Quickly
If you do require a collateral assignment of life insurance, Insurancy can help.
Insurancy is an independent broker that represents over 60 life insurance companies. Based on your individual needs, we represent companies that can issue policies quickly, sometimes on the same day to within 1 week.
Do you need a policy right away? Get Same day Issue Life Insurance from the best term life insurance companies.
For a policy under $500,000 with no medical exam required, the typical time to approval is 7 to 14 days. Check out the No Medical Exam Life Insurance options.
For a term policy over $500,000 that requires a medical exam, the typical time to approval is 4 to 8 weeks.
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