If you want to use your life insurance policy to get a loan, you’re not alone. Many people and business owners find themselves in a position where they need to access funds but prefer not to liquidate their assets.
This is where using your life insurance as collateral comes into play. This method allows you to assign your life insurance policy as security for the loan, giving the lenders access to the policy’s death benefit as a form of repayment should you default. This arrangement can provide a win-win situation: you can access the needed funds while keeping your life insurance policy active.
That said, it’s essential to understand that not all banks accept life insurance as collateral. It’s also vital to realize that even if they do, there are specific criteria that must be met. These criteria often include the type of life insurance policy you have, its cash value, the insurer’s creditworthiness, and your financial standing.
In this article, we’re going to go over the benefits of using your life insurance as collateral, key aspects you need to know about using life insurance as collateral for a loan, including which banks are likely to accept life insurance as collateral, the process involved in setting up the collateral assignment, and important considerations to keep in mind.
The Benefits Of Using Your Life Insurance As Collateral
Before we give you all the information in regards to banks and using your life insurance as collateral, let’s go over all of the different benefits that you can reap from this type of arrangement.
Access To Funds Without Selling Assets
First off, using life insurance as collateral is great because it allows you to have access to funds without having to sell or liquidate other assets in the meantime. You can keep your valuable possessions while still keeping the capital you need.
Lower Interest Rates
When you take out a loan using collateral from your life insurance, it’s less risky for the lender. Because of this, the lender may offer you a lower interest rate compared to an unsecured loan. This can save you a significant amount of money in the long run, especially if you’re borrowing a large sum of money.
Potential Tax Benefits
In some cases, the interest paid on loans that are secured by life insurance policies may be tax-deductible.
Cash Value Growth While Collateralized
Whole and universal life insurance policies have the potential for continued cash value growth even when used as collateral. This ongoing accumulation of funds within the policy can work to counteract interest expenses incurred. Over time, the sustained expansion of the cash value itself can add to the long-term value of the entire insurance policy. This benefit makes your policy more advantageous to leverage.
Conditions Under Which Banks Accept Life Insurance As Collateral
Not all banks are the same in terms of what they accept and don’t accept. Let’s go over what those things may be.
Policy Type And Value
The first thing to consider is that not all life insurance policies are accepted as collateral. Typically, a whole or universal life insurance policy is acceptable, while term life insurance isn’t. This is because whole and universal life insurance policies attach a cash value component to them, whereas term policies do not.
Underwriting Process
The second aspect is the underwriting process. The bank will need to make sure that the policy holds enough cash value to cover the loan amount in case of default. On top of that, they also need to make sure the life insurance company you’re insured under is financially stable.
How Old You Are
Depending on the bank, they may have an age limit for accepting your life insurance as collateral because the older you are, the higher your risk of passing away and defaulting on the loan. It’s not uncommon for banks to have an age limit of 65 or 70 years old.
Policy Ownership And Beneficiaries
You have to be the outright owner of your policy and have the authority to assign it as collateral. On top of that, banks may review the beneficiaries you put in place to make sure that they are properly structured and don’t conflict with the loan.
History Of On-Time Payments
Lastly, they usually take into consideration how consistent you are in your ability to make payments on time. If you have a history of late or missed payments, this may be a red flag for the bank and could affect their decision to accept your life insurance policy as collateral.
So, before you consider going to a lender to use your life insurance as collateral, make sure you review the ins and outs of your policy to make sure you’ll even be able to use it at all. You may need to make certain changes or adjustments to meet the bank’s requirements and ensure a smooth borrowing process. Consider opening a new, separate policy to use as collateral instead of risking your current policy. This will ensure that your beneficiaries are protected and your current policy stays in place.
Banks That Are More Likely To Accept Life Insurance As Collateral
Local Banks
If you want a better chance of using your life insurance policy as collateral, your best bet is to use a local bank. This is because they have closer ties to the community and a better understanding of local market conditions and rules when using life insurance as collateral. Additionally, local banks may also be more willing to work with you and make accommodations if necessary. In contrast, larger national banks may have strict policies that could prevent them from accepting your policy as collateral.
Consider Going For An SBA Loan
Another option is going to get an SBA loan. This increases your chances of using your life insurance policy as collateral because the Small Business Administration guarantees a portion of the loan, making it less risky for the bank. On top of that, the SBA may have more flexible terms, which gives you a much better chance of having your policy accepted as collateral.
Take Advantage of Credit Unions
The last thing you may want to take into consideration is credit unions. Not all credit unions will accept life insurance as collateral, but it’s worth exploring. Credit unions tend to have more flexible policies and are often more willing to work with their members to find solutions that meet their needs.
Make Sure You Do Things Right: Work With Us At Financial Liberty Group
As you can see above, a lot goes into using life insurance as collateral. The process can be overwhelming and time-consuming, but with the help of us (Liberty Financial Group), it doesn’t have to be. Our team of experienced professionals can guide you through the process step-by-step, ensuring everything is done correctly and efficiently. Here’s why we’re your best option in terms of being able to take your life insurance policy and use it as collateral for a loan:
Knowledge and Experience in Complex Policies
Our dedicated team has accumulated decades of in-depth knowledge and hands-on experience in using life insurance policies as collateral. We are uniquely equipped to provide skilled guidance.
Tailored Solutions for Your Finances
We take the time to understand the nuances of your financial position and goals. This allows us to develop tailored solutions that align with your specific needs and priorities when using your policy’s cash value.
Extensive Network of Carriers and Policies
Through solid partnerships with over 50 highly-rated insurance carriers nationwide, we open the door to diverse policy options. This extensive network helps ensure you get ideal coverage at the best possible rate.
Guidance Today and Tomorrow
From your initial consultation to policy management and optimization, we are with you every step of the way. Our guidance and support provide expertise and reassurance as you leverage your policy’s financial potential.
Navigating Complexities Made Simple
Navigating the ins and outs of policy collateralization can be confusing. We simplify the process by using proven frameworks refined over years of specialty experience. This saves you substantial amounts of time while bringing clarity to complex processes.
Flexibility As Your Needs Evolve
Your financial landscape is always evolving. We recognize insurance solutions are only effective when flexible enough to adapt accordingly. Our long list of carrier relationships and policy knowledge equips us to adjust your approach over time.
If you’re interested in working with us and want to know more, contact us here or call 888-414-3873
