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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.

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.

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What Is Collateral Assignment of Life Insurance?

Updated: December 14, 2023

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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.

About Nathan Paulus

Nathan Paulus is the Head of Content Marketing at MoneyGeek, with nearly 10 years of experience researching and creating content related to personal finance and financial literacy.

Paulus has a bachelor's degree in English from the University of St. Thomas, Houston. He enjoys helping people from all walks of life build stronger financial foundations.

Policygenius does not allow the submission of personal information by users located within the EU or the UK. If you believe this action is in error, or have any questions, please contact us at [email protected]

Collateral Assignment

What does collateral assignment mean.

Collateral assignment is the transferring of an asset’s right of ownership from the borrower to the lender up until the loan gets fully paid. The transferred asset can be the borrower’s life insurance.

Insuranceopedia Explains Collateral Assignment

A borrower’s asset may be one of the requirements for taking out a loan. That asset should be of considerable value, like a house or a car. The borrower yields the ownership right to the lender, which gives the latter a sense of security to back the loan.

The borrower gets their right to the asset once again after the loan is fully paid. However, if the borrower is unable to pay the loan, the lender becomes the ultimate owner of the asset.

When insurance is used as the collateral assignment, the lender is assigned as the beneficiary and may remain as such if the borrower is unable to pay the loan, thereby receiving the benefits paid out by the policy.

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Collateral assignment of life insurance

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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, related articles.

What is collateral insurance and how does it work?

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What does life insurance cover?

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Life insurance death benefits

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.

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.

The Law Dictionary

Your Free Online Legal Dictionary • Featuring Black’s Law Dictionary, 2nd Ed.

COLLATERAL ASSIGNMENT Definition & Legal Meaning

Definition & citations:.

Assigning an asset whose ownership rights are moving only as an additional security for a loan. These rights will revert to the assignor when the loan is repaid. Refer also to assignment and absolute assignment .

This article contains general legal information but does not constitute professional legal advice for your particular situation. The Law Dictionary is not a law firm, and this page does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.

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Home > Finance > What Is Collateral Assignment Of Life Insurance

What Is Collateral Assignment Of Life Insurance

Published: November 22, 2023

Discover the benefits of collateral assignment of life insurance and how it can impact your finance. Gain valuable insights into this powerful financial strategy.

(Many of the links in this article redirect to a specific reviewed product. Your purchase of these products through affiliate links helps to generate commission for LiveWell, at no extra cost. Learn more )

Introduction, definition of collateral assignment of life insurance, how collateral assignment works, reasons for using collateral assignment of life insurance, benefits and drawbacks of collateral assignment of life insurance, comparison with other forms of collateral, examples of collateral assignment of life insurance, important considerations before using collateral assignment.

When it comes to securing a loan, financial institutions often require borrowers to provide collateral as a form of security. Collateral helps mitigate the lender’s risk by providing an asset that can be seized and sold in the event of default. While real estate and vehicles are common forms of collateral, there is another valuable asset that can be used – life insurance.

In the world of finance, the collateral assignment of life insurance has gained popularity as a means of securing loans. This unique strategy allows borrowers to use the cash value or death benefit of their life insurance policy as collateral. By assigning the policy to the lender, the borrower can provide an additional layer of security while retaining ownership and control of the policy.

In this article, we will delve into the concept of collateral assignment of life insurance, understanding how it works, the reasons for using it, the benefits and drawbacks, as well as important considerations to keep in mind.

Additionally, we will compare collateral assignment with other forms of collateral and provide real-life examples to illustrate its practical application in various scenarios.

Before we proceed, it’s important to note that the details of collateral assignment can vary depending on the jurisdiction and terms of the insurance policy. It’s crucial for borrowers and policyholders to consult with their financial advisors and insurance providers to ensure they fully understand the implications and requirements of utilizing collateral assignment of life insurance.

Collateral assignment of life insurance refers to the process of using a life insurance policy as collateral for a loan or other financial obligation. When a borrower assigns their life insurance policy as collateral, they transfer a portion or all of their rights and benefits from the policy to the lender. This arrangement provides the lender with a form of security in case the borrower defaults on the loan.

Under a collateral assignment, the policyholder retains ownership of the policy and continues to pay the premiums. The assignee, typically the lender, receives the right to the policy’s cash value or death benefit as a means of recovering the outstanding debt in the event of default.

To create a collateral assignment, a written agreement known as a collateral assignment agreement is usually required. This agreement outlines the specifics of the assignment, including the amount of coverage assigned, the rights of the assignee, and the conditions for release of the collateral upon repayment of the loan.

It’s important to note that the collateral assignment of life insurance does not cancel or terminate the policy. The policy remains in force, and the beneficiary designation typically remains unchanged. In the event of the policyholder’s death, the death benefit is paid out as specified in the original policy contract.

It’s also worth mentioning that there are two types of collateral assignments for life insurance: outright assignment and conditional assignment. An outright assignment transfers all the policy rights and benefits to the assignee for the duration of the loan, while a conditional assignment only grants the assignee access to the policy’s value or death benefit if certain conditions, such as default on the loan, occur.

Now that we have a clear understanding of collateral assignment of life insurance, let’s explore how this process works in practice.

The process of collateral assignment of life insurance involves several steps and considerations. Here’s how it generally works:

Evaluation of Loan Eligibility: The borrower applies for a loan and undergoes the usual evaluation process. The lender assesses the borrower’s creditworthiness, income, and other factors to determine loan eligibility.
Identification of Collateral Options: If the lender requires collateral to secure the loan, the borrower explores different options. Life insurance policies with cash value or death benefits can be considered as potential collateral.
Insurance Policy Examination: The borrower reviews their life insurance policy to determine the available cash value and death benefit. This information helps both the borrower and the lender assess the suitability of collateral assignment.
Collateral Assignment Agreement: Once both parties agree to move forward with collateral assignment, a collateral assignment agreement is drafted. This agreement outlines the details of the assignment, including the amount of coverage assigned, the rights and obligations of the parties involved, and the conditions for release of the collateral.
Notification to the Insurance Company: The borrower notifies their insurance company about the collateral assignment. The insurance company updates their records to reflect the assignee’s rights to the policy’s cash value or death benefit, as stipulated in the collateral assignment agreement.
Ongoing Premium Payments: The borrower continues to pay the premiums on the life insurance policy to keep it active. Failure to do so could lead to policy termination and potentially affect the collateral assignment.
Loan Repayment: The borrower is responsible for repaying the loan according to the terms and conditions set by the lender. If the borrower defaults on the loan, the lender has the right to access the assigned cash value or death benefit to recover the outstanding debt.
Release of Collateral: Once the loan is fully repaid, the lender releases the collateral back to the borrower. At this point, the borrower regains full control and ownership of the life insurance policy.

It’s important to note that the process may vary slightly depending on the specific requirements of the lender and the insurance company. Additionally, the terms of the collateral assignment agreement will play a crucial role in determining the rights and obligations of both parties involved.

Now that we understand how collateral assignment works, let’s explore the reasons why individuals opt for this strategy.

Collateral assignment of life insurance can be a valuable tool for borrowers and lenders alike. Here are some reasons why individuals choose to use this strategy:

Access to Financing: Collateral assignment allows individuals who may not have traditional forms of collateral, such as real estate or valuable assets, to access financing. By utilizing the cash value or death benefit of their life insurance policy, borrowers can secure loans for various purposes, such as business expansion, education expenses, or medical bills.
Lower Interest Rates: Lenders may offer lower interest rates for loans secured by collateral. The added security provided by the life insurance policy reduces the lender’s risk exposure, resulting in more favorable terms for the borrower.
Easier Loan Approval: Collateral assignment can make loan approval easier for borrowers with less-than-perfect credit or limited income. The presence of collateral can mitigate some of the perceived risks for lenders, increasing the chances of loan approval.
Retention of Policy Ownership and Control: Unlike other forms of collateral, such as selling an asset outright, collateral assignment of life insurance allows borrowers to retain ownership and control over their policy. They can continue to name beneficiaries, make changes to the policy, and access the policy’s cash value as needed, as long as the loan obligations are being met.
Preservation of Policy Benefits: Assigning collateral does not cancel the life insurance policy. The original policy benefits, such as death benefit payouts, remain intact for the beneficiaries. This ensures that loved ones are financially protected in case of the policyholder’s untimely passing.
Flexibility and Versatility: Collateral assignment can be used with various types of life insurance policies, including both permanent (whole life, universal life) and term life insurance. This provides borrowers with the flexibility to choose a policy that aligns with their financial goals and needs.

It’s important for borrowers to carefully evaluate their financial situation and assess whether collateral assignment is the right option for their needs. Taking into account the benefits and drawbacks of collateral assignment, as well as comparing it with alternative forms of collateral, can help borrowers make informed decisions.

Next, let’s explore the advantages and disadvantages of collateral assignment of life insurance.

Collateral assignment of life insurance offers several benefits and drawbacks for borrowers and lenders. Understanding these advantages and disadvantages can help individuals make informed decisions about utilizing this strategy. Let’s explore them:

Improved Loan Terms: By offering collateral in the form of a life insurance policy, borrowers can often secure loans with better interest rates and terms compared to unsecured loans.
Access to Higher Loan Amounts: Collateral assignment can help borrowers access higher loan amounts based on the value of their life insurance policy. This can be particularly beneficial for larger expenses or investments.
Retain Policy Ownership: Collateral assignment allows borrowers to retain ownership and control of their life insurance policy. They can continue to make changes to the policy and access its benefits, such as cash value, while meeting loan obligations.
Preservation of Policy Benefits: The life insurance policy’s original benefits, such as death benefit payouts, remain intact for the beneficiaries. This ensures that loved ones are financially protected, even if the policy is assigned as collateral.
Flexibility and Versatility: Collateral assignment can be used with different types of life insurance policies, providing borrowers with flexibility in choosing a policy that suits their needs and financial goals.
Reduced Cash Value and Benefit: Assigning collateral may restrict access to the policy’s cash value and limit the death benefit available to the policyholder during the loan term.
Policy Termination Risk: If the borrower fails to meet the loan obligations or defaults, the policy may be terminated, leading to loss of coverage and potential financial consequences.
Potential Loan Default Consequences: In the event of loan default, the lender can access the assigned cash value or death benefit, potentially impacting the financial protection for the borrower’s beneficiaries.
Complexity and Administrative Requirements: Collateral assignment involves paperwork and administrative tasks, including drafting and executing a collateral assignment agreement, notifying the insurance company, and ensuring ongoing premium payments.
Limitations on Policy Modifications: Depending on the terms of the collateral assignment agreement, borrowers may have restrictions on making changes to the policy, such as reducing coverage or surrendering the policy.

It’s essential for borrowers to carefully consider these benefits and drawbacks in the context of their specific financial situation and goals. Consulting with financial advisors and insurance professionals can provide valuable guidance to make an informed decision.

Next, let’s compare collateral assignment of life insurance with other forms of collateral to better understand its advantages and limitations.

Collateral assignment of life insurance offers distinct advantages and considerations compared to other forms of collateral. Let’s compare it to some common forms of collateral:

Real Estate:

Real estate is a traditional form of collateral widely used in lending. While real estate offers the potential for long-term appreciation, it can be financially burdensome due to property taxes, maintenance costs, and market fluctuations. Moreover, using real estate as collateral may involve complex legal processes and lengthy evaluation periods. In contrast, collateral assignment of life insurance provides a quicker and more straightforward solution, especially for those without real estate assets.

Vehicles are another common form of collateral. While they are easily identifiable and possess monetary value, vehicles depreciate over time. Additionally, vehicles require ongoing maintenance and are subject to wear and tear. Unlike vehicles, a life insurance policy’s value is not dependent on physical assets, making it an attractive option for those who do not own valuable vehicles or wish to preserve their vehicle’s daily utility.

Securities:

Securities, such as stocks or bonds, can be used as collateral. However, they are subject to market volatility, and their value can fluctuate considerably. Additionally, using securities as collateral may require transferring ownership or creating a margin account, which can involve additional fees and restrictions. Collateral assignment of life insurance offers stability, as the policy’s cash value remains relatively secure, regardless of market conditions.

Savings Accounts:

Savings accounts or certificates of deposit (CDs) can be used as collateral, providing a low-risk option for lenders. However, tying up savings in collateral may limit accessibility to those funds and reduce financial flexibility. Collateral assignment of life insurance can offer an alternative solution, allowing borrowers to access funds while keeping their savings intact.

It’s important to note that the suitability of collateral assignment versus other forms of collateral may depend on an individual’s unique circumstances and preferences. Assessing the advantages, drawbacks, and requirements of different collateral options is crucial in determining the best choice for a particular situation.

Next, let’s explore some practical examples of collateral assignment of life insurance to illustrate its application in real-life scenarios.

Collateral assignment of life insurance can be used in various real-life situations to secure loans and meet financial obligations. Here are a few examples:

1. Small Business Loan: A small business owner requires capital to expand their operations. Instead of offering personal assets or seeking a business loan without collateral, they choose to assign the cash value of their life insurance policy as collateral. This allows them to access favorable loan terms and maintain ownership of their life insurance policy while growing their business.

2. Education Financing: A parent wants to fund their child’s college education but does not have sufficient savings or assets to provide as collateral. By assigning the death benefit of their life insurance policy as collateral, the parent can secure a loan to cover tuition and other educational expenses. This approach allows them to borrow at lower interest rates and preserve their other assets for future needs.

3. Medical Expenses: A borrower faces unexpected medical expenses that are not fully covered by insurance. They assign the cash value of their life insurance policy as collateral to secure a loan and cover the medical bills. This enables them to get the necessary treatment without depleting their savings or incurring high-interest debt.

4. Estate Planning: An individual wants to ensure their loved ones are adequately provided for in case of their untimely passing. They assign the death benefit of their life insurance policy as collateral to secure a loan and establish an estate plan. This allows them to create a tax-efficient strategy while providing immediate financial support to their beneficiaries.

5. Debt Consolidation: A borrower has multiple outstanding debts with high-interest rates. They decide to assign the cash value of their life insurance policy as collateral to secure a consolidation loan. This allows them to combine their debts into a single loan with more favorable terms, such as lower interest rates and manageable monthly payments.

These examples demonstrate the versatility and practicality of collateral assignment of life insurance in various financial scenarios. It provides a viable option for individuals and businesses to access funds, manage expenses, and meet financial goals while leveraging the financial protection provided by their life insurance policies.

Before pursuing collateral assignment, it’s crucial to thoroughly understand the terms and conditions of the loan and collateral assignment agreement. Seeking guidance from financial advisors and insurance professionals can help borrowers make informed decisions and ensure the best outcome for their specific circumstances.

In the next section, we will explore important considerations that individuals should keep in mind before using collateral assignment of life insurance.

Before deciding to use collateral assignment of life insurance, it is essential to consider the following factors:

Loan Terms and Repayment:

Thoroughly review the terms and conditions of the loan, including the interest rate, repayment period, and any associated fees. Determine if the loan terms align with your financial capabilities and goals. It’s crucial to have a clear understanding of the repayment schedule and ensure it is manageable within your budget.

Impact on Policy Benefits:

Understand how assigning collateral will affect your life insurance policy. Evaluate the potential impact on the policy’s cash value, death benefit, and other policy features. Determine if the reduction in benefits is acceptable in relation to the loan amount and the financial protection provided to your beneficiaries.

Insurance Policy Review:

Review your life insurance policy in detail to understand its provisions, restrictions, and rights. Familiarize yourself with the policy’s cash value accumulation, surrender charges, and any other contractual obligations. Ensure that the policy is eligible for collateral assignment and that you comply with all requirements set by the insurance company.

Risk of Policy Termination:

Be aware that failing to meet loan obligations can result in policy termination, potentially leaving you without coverage and potential financial consequences. Consider your ability to meet the loan payments and have a contingency plan in case of unforeseen circumstances to mitigate this risk.

Professional Guidance:

Seek advice from financial advisors and insurance professionals who can provide insight into the pros and cons of collateral assignment of life insurance. They can help you evaluate your specific needs, assess the impact on your financial situation, and explore alternative options that may better suit your circumstances.

Legal and Tax Implications:

Understand the legal and tax implications associated with collateral assignment based on your jurisdiction. Consult with legal and tax professionals to ensure compliance with applicable laws and regulations. Be aware of any potential tax consequences, such as potential taxable events or changes in the insurance policy’s tax status.

By carefully considering these factors, you can make an informed decision about whether collateral assignment of life insurance is the right strategy for your financial needs. It’s important to conduct thorough research, weigh the benefits and drawbacks, and consult with professionals to ensure you are making the best choice for your individual circumstances.

In the concluding section, we will summarize the key points and emphasize the significance of due diligence when utilizing collateral assignment of life insurance.

Collateral assignment of life insurance can be a valuable tool for borrowers and lenders seeking to secure loans and meet financial obligations. By leveraging the cash value or death benefit of a life insurance policy, individuals can access financing with favorable terms and retain ownership and control over their policy.

However, utilizing collateral assignment requires careful consideration and due diligence. It is essential to assess the benefits and drawbacks, compare it with alternative forms of collateral, and evaluate its impact on policy benefits and repayment obligations. Seeking guidance from financial advisors and insurance professionals is crucial to ensure informed decision-making and a thorough understanding of the process and implications.

Understanding the terms and conditions of the loan, the collateral assignment agreement, and the policy itself is paramount. Regular reviews of the insurance policy and ongoing premium payments are necessary to maintain coverage and prevent policy termination. Additionally, individuals should stay aware of legal, tax, and compliance requirements associated with collateral assignment based on their jurisdiction.

By responsibly utilizing collateral assignment, individuals can access financing for various purposes while protecting their loved ones through the preservation of policy benefits. This strategy offers flexibility and versatility, allowing borrowers to meet their financial goals without sacrificing ownership and control of their life insurance policies.

Ultimately, the decision to use collateral assignment of life insurance should align with individual financial goals and risk tolerance. With careful planning, proper guidance, and a thorough understanding of the process, collateral assignment can be a valuable tool in managing finances and achieving financial objectives.

It’s important to always consult with professionals and conduct thorough research before proceeding with collateral assignment of life insurance to ensure the best outcome for your specific circumstances.

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Collateral Assignment

What is a collateral assignment.

With regards to life insurance , a collateral assignment is a loan agreement between a borrower and a lender in which the borrower uses a life insurance policy they own as collateral for the loan.

How collateral assignment works

When you need a loan, you can choose between unsecured and secured financing. Secured loans come with lower rates, but they require you to present collateral. The lender can collect that collateral if you default on the loan.

A collateral assignment allows you to put a life insurance policy that you own up as collateral for a loan. Many lenders like this option because it essentially guarantees that if you’re unable to pay back what you owe due to premature death, they can collect it from the life insurance company .

When you have fully repaid the loan, the collateral assignment terminates. At that point, the beneficiaries named in your policy will get the full death benefit distributed to them.

The benefits of collateral assignment

A collateral assignment gives you a way to make sure that the lender only gets repaid for what you still owe. With this agreement in place, they will receive whatever portion of your death benefit is necessary to cover the outstanding loan amount. But any leftover monies will get distributed to your beneficiaries.

If you simply name the lender as a beneficiary rather than establishing a collateral assignment, the lender gets the death benefit in full, regardless of how much of the loan you’ve already paid off. In other words, the collateral assignment allows you to repay your debts while leaving as much money as possible for your beneficiaries.

Collateral assignment with types of life insurance

Not all life insurance policies are eligible for collateral assignment. Many lenders only accept permanent life insurance policies because these policies will stay in force for the insured’s lifetime (provided the policy owner continues making premium payments). With term insurance , on the other hand, there’s no guarantee that the policy owner will want or be able to cover the inflated premiums that arise at the end of the policy term.

That said, if the loan you want comes with a term that’s shorter than the term on the life insurance policy you want to use as collateral, the lender may consider it.

Get an instant online quote for life insurance.

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?

Why use life insurance as collateral?

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?

How do I take out a loan using a collateral assignment of life insurance?

Alternatives to life insurance as collateral

Unsecured loan

Secured loan

Life insurance loan

Home equity line of credit (HELOC)

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.

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What Is Collateral?

How collateral works, types of collateral, examples of collateral loans.

Frequently Asked Questions (FAQs)

The Bottom Line

Personal Finance

Collateral Definition, Types, & Examples

Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia.

Investopedia / Zoe Hansen

Collateral in the financial world is a valuable asset that a borrower pledges as security for a loan.

For example, when a homebuyer obtains a mortgage, the home serves as the collateral for the loan. For a car loan, the vehicle is the collateral. A business that obtains financing from a bank may pledge valuable equipment or real estate owned by the business as collateral for the loan. In the event of a default, the lender can seize the collateral and sell it to recoup the loss.

Other nonspecific personal loans can be collateralized by other assets. For instance, a secured credit card may be secured by a cash deposit for the same amount of the credit limit—$500 for a $500 credit limit.

Key Takeaways

Collateral is an item of value pledged to secure a loan.
Collateral reduces the risk for lenders.
If a borrower defaults on the loan, the lender can seize the collateral and sell it to recoup its losses.
Mortgages and car loans are two types of collateralized loans.
Other personal assets, such as a savings or investment account, can be used to secure a collateralized personal loan.

Before a lender issues you a loan, it wants to know that you have the ability to repay it. That's why many of them require some form of security. This security is called collateral, which minimizes the risk for lenders by ensuring that the borrower keeps up with their financial obligation . The borrower has a compelling reason to repay the loan on time because if they default, they stand to lose their home or other assets pledged as collateral.

Loans secured by collateral are typically available at substantially lower interest rates than unsecured loans. A lender's claim to a borrower's collateral is called a lien —a legal right or claim against an asset to satisfy a debt.

In the event that the borrower does default, the lender can seize the collateral and sell it, applying the money it gets to the unpaid portion of the loan. The lender can choose to pursue legal action against the borrower to recoup any remaining balance.

The nature of the collateral is often predetermined by the loan type . When you take out a mortgage, your home becomes the collateral. If you take out a car loan, then the car is the collateral for the loan. The types of collateral that lenders commonly accept include cars—only if they are paid off in full—bank savings deposits, and investment accounts. Retirement accounts are not usually accepted as collateral.

You also may use future paychecks as collateral for very short-term loans, and not just from payday lenders . Traditional banks offer such loans, usually for terms no longer than a couple of weeks. These short-term loans are an option in a genuine emergency, but even then, you should read the fine print carefully and compare rates.

Collateralized Personal Loans

Another type of borrowing is the collateralized personal loan, in which the borrower offers an item of value as security for a loan . The value of the collateral must meet or exceed the amount being loaned. Lenders will typically lend only a percentage of the collateral's value , not 100% of its value. If you are considering a collateralized personal loan, your best choice for a lender is probably a financial institution that you already do business with, especially if your collateral is your savings account. If you already have a relationship with the bank, that bank would be more inclined to approve the loan, and you are more apt to get a decent rate for it.

Use a financial institution with which you already have a relationship if you're considering a collateralized personal loan.

Residential Mortgages

A mortgage is a loan in which the house is the collateral. If the homeowner stops paying the mortgage for at least 120 days, the loan servicer can begin legal proceedings, which can lead to the lender eventually taking possession of the house through foreclosure . Once the property is transferred to the lender , it can be sold to repay the remaining principal on the loan.

Home Equity Loans

A home may also function as collateral on a second mortgage or home equity line of credit (HELOC) . In this case, the amount of the loan will not exceed the available equity. For example, if a home is valued at $200,000, and $125,000 remains on the primary mortgage, a second mortgage or HELOC will be available only for as much as $75,000.

Margin Trading

Collateralized loans are also a factor in margin trading. An investor borrows money from a broker to buy shares, using the balance in the investor's brokerage account as collateral. The loan increases the number of shares the investor can buy, thus multiplying the potential gains if the shares increase in value. But the risks are also multiplied. If the shares decrease in value, the broker demands payment of the difference. In that case, the account serves as collateral if the borrower fails to cover the loss.

Is Collateral Property?

Collateral guarantees a loan, so it needs to be an item of value. For example, it can be a piece of property, such as a car or a home, or even cash that the lender can seize if the borrower does not pay.

What Loans Do not Use an Asset as Collateral?

If you don't have any collateral necessary to secure a certain type of loan, you may want to consider looking into unsecured loans, such as a personal loan or credit card (both of which don't use an asset as collateral), as an alternative.

Do I Get Back My Collateral?

If you have any assets being used as collateral on a loan and don't miss any payments, you won't lose your collateral. However, if you fail to make payments on time and ultimately default on your loan, the collateral can then be seized and sold, with the profits being used to pay off the remainder of the loan.

You risk losing your collateral if you fail to pay back your debt. So to ensure you keep your car, home, or any other valuable asset being used as collateral on a loan, always make your payments on time to minimize any possibility of defaulting on your debt.

Consumer Financial Protection Bureau. " 1024.41 Loss Mitigation Procedures ."

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Assignment Of Loan

Jump to section, what is an assignment of loan.

Under an assignment of loan, a lender (the assignor) assigns its rights relating to a loan agreement to a new lender (the assignee). Only the assignor's rights under the loan agreement are assigned. The assignor will still have to perform any obligations it has under the facility agreement.

The debtor, the recipient of the loan, must be notified when a debt is assigned. When there is an assignment of a loan, a Notice of Assignment (NOA) is sent out to the debtor informing them that a new party is now responsible for collecting any outstanding amount.

Assignment Of Loan Sample

Reference : Security Exchange Commission - Edgar Database, EX-10.14 5 dex1014.htm ASSIGNMENT OF LOAN DOCUMENTS , Viewed October 21, 2021, View Source on SEC .

Who Helps With Assignment Of Loans?

Lawyers with backgrounds working on assignment of loans work with clients to help. Do you need help with an assignment of loan?

Post a project in ContractsCounsel's marketplace to get free bids from lawyers to draft, review, or negotiate assignment of loans. All lawyers are vetted by our team and peer reviewed by our customers for you to explore before hiring.

Meet some of our Assignment Of Loan Lawyers

Travis counsels individuals and businesses on a broad range of complex topics. His practice centers on producing efficient, client-driven results. He concentrates his practice on real estate, construction, and general business matters with an emphasis on assisting clients both before and after problems occur by drafting contracts designed to best position clients to avoid disputes and litigating matters to a final resolution if problems emerge. Born and raised in Oklahoma, Travis is a triple graduate of the University of Oklahoma, having obtained his Bachelor of Arts, Master of Business Administration, and Juris Doctor degrees from OU. Prior to practicing law, Travis managed the finances and business operations of a successful construction supply company for several years. This insight into sophisticated business dealings, contractual issues, and strategic planning makes him uniquely qualified to handle a wide range of legal matters. Travis lives in Norman with his wife, Haley, dogs, Walter and Poppy, and cat, Ernest. Outside of the office, Travis enjoys playing golf and reading.

Justin Camper is a small business and trademark attorney, entrepreneur, public speaker, and writer. Justin has been practicing law close to 5 years and has done various areas of law from criminal work as a Prosecutor, to business and civil litigation at private law firms.

I am a corporate attorney with offices in Rock Hill, SC, and Lavonia, GA. My practice is focused on contracts, tax, and asset protection planning. I act as a fractional outside general counsel to over 20 businesses in 6 countries. When not practicing law, I can usually be found training my bird dogs.

Williamson Health Law is an established and trusted law firm focused on representing hospitals, health plans, physician groups, physicians, physical therapy businesses, psychologists and other health care providers and businesses in all aspects of health law. including the Stark law, the Anti-Kickback Statute (“AKS”), the Health Insurance Portability and Accountability Act (“HIPAA”), regulatory compliance, Medicare and Blue Cross audits and overpayment appeals, payer departicipation and disaffiliation appeals, payer and provider disputes, reimbursement and billing, compliance plans, health care industry contracts and professional licensure. We represent clients throughout Michigan and the U.S. with certain federal matters such as federal regulatory analysis and Medicare audits.

Bolaji O. Okunnu is an entertainment lawyer and founder of the Okunnu Law Group, PLLC based in New York, New York. His practice includes work in the area of copyright, trademark, contract, intellectual property and business law. As an entertainment attorney, Bolaji represents a diverse roster of celebrities, record labels, music publishers, artists, bands, entrepreneurs, authors, songwriters, artist managers, record producers and entertainment executives concerning their intellectual property, business affairs and creative assets. He is an expert at solving complex and sophisticated legal and business issues relating to contracts, copyrights and trademarks. With his background in both the law and the music business, he brings a broad perspective to problem-solving and business plan strategies. He also has an extraordinary ability to speak to the hearts of creatives while helping them discover their voice and clarify their creative dreams and assignments.

I love to learn, and I love solving problems. That's why I became a lawyer, and learned to solve legal problems for individuals and businesses and help them fix things when there's a snag. Touch base if you think I could have something to offer for you or your company. Experienced, results-oriented legal professional whose background and education have established him as a valuable resource in areas of corporate law, franchising, litigation, compliance, mortgages and banking, and more. Practice Areas Include: Corporate law, Franchising, Litigation, real estate, corporate law, civil disputes, insurance representation, corporate counseling, dispute resolution, risk management, regulatory counsel, compliance. Experience involves sophisticated as well as routine corporate structuring and transactions, simple and complex litigation, and written and oral advocacy such as depositions, mediated settlement conferences, trials, appeals, written pleadings and discovery, and case strategy and analysis. Experience managing and litigating disputes between parties and negotiating settlements across the spectrum of civil litigation, including probative discovery, successful motions practice, legal research and writing, appellate practice, and legal consultation to individuals and business entities. Further experience includes digesting and monitoring updates to the legal landscape to advise clients or departments and successfully adapt policies and procedures to assure compliance with applicable laws and regulations as well as to manage risk effectively. For those needing a skilled commercial or corporate lawyer, or for individuals whose rights need persuasive advocacy, I am a valuable resource. Representative work also has involved success on the appellate level, as in Baker Construction Company, Inc. v. City of Burlington and Hawthorne, LLC, North Carolina COA09-13.

Madeline P.

I am the CEO and attorney at my law firm that I started in June 2020 (as other businesses were shuttering due to Covid-19). I am currently seeking contract work to supplement my case load as I recently finalized numerous family law cases within a short timeframe.

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IMAGES

Collateral Definition, Types, & Examples
Guidelines for Collateral Assignment of Life Insurance
5 Examples of Collateral for a Secured Loan
What is collateral? Definition and examples
What Is Collateral, and How Does It Fund a Business Loan?
What Is Collateral Assignment Life Insurance, And Why Do Borrowers Need

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COMMENTS

What Is Collateral Assignment?
Definition and Examples of Collateral Assignment . 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. ... you could use that life insurance policy to collateralize the loan. Via collateral assignment of your policy, you ...
Collateral Assignment: All You Need to Know
A collateral assignment involves granting a security interest in the asset or property to a lender. It is a lawful arrangement where the borrower promises an asset or property to the lender to guarantee the debt repayment or meet a financial obligation. Moreover, in a collateral assignment, the borrower maintains asset ownership, the lender ...
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 ...
What Is Collateral Assignment of Life Insurance?
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 ...
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 ...
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 money you need.
What is Collateral Assignment?
This definition explains the meaning of Collateral Assignment and why it matters. ... Collateral assignment is the transferring of an asset's right of ownership from the borrower to the lender up until the loan gets fully paid. The transferred asset can be the borrower's life insurance.
What Is Collateral Assignment?
Collateral assignment uses your life insurance policy as collateral. The lender is assigned as the primary beneficiary to insure they don't lose money on a loan. If the borrower can't pay, the lender sells the life insurance policy to cover the loan. If the borrower dies before paying off the loan, the lender takes what is owed from the ...
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 ...
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 ...
What Is Collateral Assignment of Life Insurance?
Collateral assignment allows you to use a life insurance policy as assurance for a loan. The lender gets first claim on the death benefit if you default. Permanent life insurance policies like whole life and universal life are commonly used since they don't expire. Term life may also be accepted.
What Is A Collateral Assignment Of Life Insurance?
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.
How Is A Collateral Assignment Used In A Life Insurance Contract?
1. Access to Funds. One of the primary benefits of a collateral assignment is the ability to access funds without surrendering the life insurance policy. By using the death benefit as collateral, the policyholder can secure a loan or obtain financing for personal or business purposes.
COLLATERAL ASSIGNMENT Definition & Legal Meaning
Definition & Citations: Assigning an asset whose ownership rights are moving only as an additional security for a loan. These rights will revert to the assignor when the loan is repaid. Refer also to assignment and absolute assignment. Find the legal definition of COLLATERAL ASSIGNMENT from Black's Law Dictionary, 2nd Edition.
What Is Collateral Assignment Of Life Insurance
Definition of Collateral Assignment of Life Insurance. Collateral assignment of life insurance refers to the process of using a life insurance policy as collateral for a loan or other financial obligation. When a borrower assigns their life insurance policy as collateral, they transfer a portion or all of their rights and benefits from the ...
Collateral Assignment
A collateral assignment allows you to put a life insurance policy that you own up as collateral for a loan. Many lenders like this option because it essentially guarantees that if you're unable to pay back what you owe due to premature death, they can collect it from the life insurance company. When you have fully repaid the loan, the ...
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 ...
Collateral
Collateral is a property or other asset that a borrower offers as a way for a lender to secure the loan. If the borrower stops making the promised loan payments, the lender can seize the ...
Collateral Assignment Of Lease: Definition & Sample
A collateral assignment of lease is a legal contract that transfers the rights to rental payments from the asset's owner to a lender to secure funding. In this contract, the lease's rentals are like a loan from the funder to the lessor and the lease acts as security. Collateral assignment of lease agreements are often used in commercial real ...
Collateral Assignment of Mortgage Definition
definition. Collateral Assignment of Mortgage means, that certain Collateral Assignment of Leasehold Mortgage dated as of the date hereof, made by the Issuer in favor of the Trustee, as the same may be amended or supplemented from time to time. Collateral Assignment of Mortgage means the collateral assignment of mortgage made by the Borrower in ...
What Are Collateral Loans?
A collateral loan — also called a secured loan — is backed by something you own. Some of the most common types of collateral loans are auto loans and mortgages, though other forms of collateral that can be used include: A collateral loan can offer lower interest rates or larger loan amounts.
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 life insurance is a common requirement for ...
Assignment Of Loan: Definition & Sample
Under an assignment of loan, a lender (the assignor) assigns its rights relating to a loan agreement to a new lender (the assignee). Only the assignor's rights under the loan agreement are assigned. The assignor will still have to perform any obligations it has under the facility agreement. The debtor, the recipient of the loan, must be ...
What Is A Collateral Loan And How Can I Get One?
A collateral loan is a secured loan that requires the borrower to provide an asset as security for repayment. With these loans, a lender can take possession of your property—the loan collateral ...

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

Definition and Examples of Collateral Assignment

Types of Life Insurance Collateral

A Note on Annuities

The Process

Lenders Get Paid First

Key Takeaways

What Is Collateral Assignment of Life Insurance?

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How Collateral Assignment of Life Insurance Works

Applying for Collateral Assignment

Obtain a Collateral Assignment Form

Fill Out the Form Correctly

Signed by Both Policyholder and Lender

Submit Completed Form

Await Approval or Rejection From Insurance Company

Receive a Letter of Acknowledgment

Obtaining Required Documentation

Pros and Cons of Collateral Assignment

Impact of Collateral Assignment on Beneficiaries

Your Lender Will Be Paid First

Any Remaining Death Benefit Will Be Disbursed to Your Beneficiaries

Alternatives to Collateral Assignment

How does collateral assignment differ from naming a beneficiary?

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

Can the policyholder still change beneficiaries after a collateral assignment?

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

Collateral Assignment

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What is collateral assignment of life insurance?

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How do I take out a loan using a collateral assignment of life insurance?

Alternatives to life insurance as collateral

Unsecured loan

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Home equity line of credit (HELOC)

Frequently asked questions

What Is A Collateral Assignment Of Life Insurance?

What Is Collateral Assignment?

What Is a death benefit?

Secured Loans vs. Unsecured Loans

How Does Applying for Collateral Assignment Work?

What about Missed Payments and Cash Value Life Insurance?

Who Can You Add as a Collateral Assignee?

Common Collateral Assignees Include:

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

Tips to Make Sure Your Life Policy Is Paid Out Quickly

The Benefits of Using Collateral Assignment of Life Insurance

What Are Some Alternatives to Collateral Assignment?

What Is Term Life?

What Is Cash Value?

Our Verdict on Collateral Assignment

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COLLATERAL ASSIGNMENT Definition & Legal Meaning

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What Is Collateral Assignment Of Life Insurance

Table of Contents

Real Estate:

Securities:

Savings Accounts:

Loan Terms and Repayment:

Impact on Policy Benefits:

Insurance Policy Review:

Risk of Policy Termination:

Professional Guidance: