Skip to main content

Life insurance policies provide financial protection for families and beneficiaries in the event of the insured’s death. One way some policyholders leverage their life insurance is through a collateral assignment, which allows them to access funds from the policy before death. A collateral assignment on a life insurance policy works as security for a loan, allowing the policyholder to borrow money they pay back over time. If the policyholder stops making payments on the loan or passes away, the creditor has a right to receive a portion or all of the death benefit to repay the outstanding loan amount. Though not ideal for all situations, collateral assignments allow policyholders increased financial flexibility during their lifetime. 

In this post, we’ll look closer at how collateral assignments on life insurance contracts work, their pros and cons, and things to consider before pursuing a collateral assignment.

Understanding Collateral Assignments

If you need money for a large purchase or expense, consider borrowing against your life insurance policy. This is called a collateral assignment. It allows you to access funds from your policy before you pass away. Here’s how it works.

A collateral assignment means using your life insurance policy as collateral or security for a loan. So you (the policy owner) borrow money from a lender. In return, that lender has a claim on some or all of the death benefits from your life insurance when you die. Their claim is equal to the amount you still owe on the loan.

To set up a collateral assignment, you must complete a form with your life insurance company naming the lender. Both you and the lender must sign this form. Your insurance company then confirms to the lender that they are the collateral assignee. This gives the lender rights to the death benefit if the loan is not fully paid off.

One significant advantage of a collateral assignment is the lender can only take the unpaid loan balance. They do not get the total death benefit amount. Any remaining death benefit goes to the beneficiaries you named.

Nonetheless, collateral assignments also have downsides to think about. For example, they may limit your ability to withdraw cash value from a whole life or universal policy. And they reduce what your beneficiaries would collect from the death benefit.

It’s wise to be sure you have enough life insurance for final expenses before doing a collateral assignment. You also want to consider if you have other assets to leave beneficiaries. If not, review your coverage to see if buying more insurance makes sense.

When you fully repay the loan, the collateral assignment ends. Your policy is no longer used as collateral, so you regain all the advantages of having life insurance.

What Are The Steps For Using Your Life Insurance As Collateral Assignment?

If you want to utilize collateral assignment through their life insurance policy, here’s what you need to do.

Understand What’s Required

Before applying, learn what lenders typically require for a collateral assignment:

  • An active life insurance policy with cash value. Term life policies usually don’t qualify (unless you’re looking to get an SBA loan).
  • Enough death benefits to cover the loan amount.
  • Your commitment to keep paying policy premiums.

If you don’t have a qualifying policy, you must buy one first.

Get a Life Insurance Policy

Since most life insurers require health underwriting, buying a policy is not guaranteed. The insurer will:

  • Ask for your medical history
  • Have you take a health exam
  • Consider your lifestyle risks

If you have health conditions, coverage may cost more or be denied. Once approved, you must pay ongoing premiums to keep the policy active.

Complete the Collateral Assignment Form

This crucial form goes to your life insurer. It names the lender secured by your policy. Details needed include:

  • Your personal information
  • Life insurance policy number
  • Lender’s contact information
  • Loan amount

You and the lender must both sign this form. Some insurers allow e-signatures to speed processing.

Submit the Signed Form

Send the finished, signed collateral assignment form to your life insurance company. Confirm they received it and monitor processing time. Filing and approval can often take up to 7-10 days.

Get Confirmation

Your lender must get confirmation from the insurer that the assignment is in force. This gives the lender rights to the death benefit if unpaid loan balances remain when you pass away.

Apply for the Loan

With the collateral assignment confirmed, you can formally apply for the loan you need. The lender will explain repayment terms, interest rates, and other details.

Common Mistakes People Make When Using Collateral Assignments Through Their Life Insurance

Now that we’ve covered the basics of how collateral assignments work and the steps to apply for one let’s explore some key areas where mistakes are often made. Awareness of these common errors can help you avoid pitfalls if you pursue a collateral assignment through your life insurance policy.

The good news is that collateral assignments can provide accurate financial benefits. However, there are a few key things people often get wrong or overlook.

Assigning The Lender As The Beneficiary

The first mistake people make in this process is assigning the lender as the policy beneficiary. This can end in the lender receiving the death benefit, leaving nothing for your family. The policy’s beneficiaries should always be those you want to protect and support, such as your family members or loved ones. Instead of naming the lender as the beneficiary, the correct approach is to assign collateral to the lender.

Insufficient Coverage For Beneficiaries 

Using a collateral assignment can reduce the life insurance death benefit for other beneficiaries. So, if possible, you may want to consider taking out a separate policy to cover the needs of your beneficiaries adequately. This separate policy would ensure that in the event of your passing, your loved ones are not financially disadvantaged due to the loan repayment.

Not Checking Lenders Requirements

The first thing you should do, which many people fail to do, is check the lender’s specific requirements before setting up a collateral assignment. The reason is that some lenders may only accept certain types of insurance policies, and not verifying this beforehand can result in delays and additional processes.

Failing to Review the Policy Regularly

Once a collateral assignment is in place, a frequent mistake is failing to review the policy regularly. Life circumstances and financial situations can change, and it’s vital to ensure that your life insurance policy continues to meet your needs. A regular review could help if you need to someday make an adjustment to your policy.

Lack Of Guidance From a Reputable Company

A common problem people have when setting up a collateral assignment is not seeking guidance from a reputable financial advisor or insurance professional. Many individuals attempt to do this complicated process independently, leading to misunderstandings about the terms, risks, and implications of the collateral assignment. Professional advice is essential to ensure that you make informed decisions that align with your financial goals and protect your beneficiaries’ interests.

Get The Right Guidance With Liberty Financial Group

At Liberty Financial Group, we provide a comprehensive range of insurance services, with a special focus on life insurance policies that are essential for those considering collateral assignments. Our approach is meticulously tailored to meet the unique needs and budget constraints of each client, ensuring that you receive the most suitable policy at the most competitive price.

Our Services in Relation to Collateral Assignments

Customized Life Insurance Plans: We understand life insurance’s critical role in financial planning, primarily when used for collateral assignments. We specialize in offering policies that meet your immediate financial needs and align with your long-term objectives. Our expertise lies in identifying and customizing policies that are perfect for securing loans through collateral assignments.

Expert Guidance: Going through the intricacies of collateral assignments can be challenging. That’s why our team of experienced insurance professionals is dedicated to providing honest, unbiased advice. We’ll guide you through each step of the process, helping you understand the implications and benefits of using your life insurance as collateral. We aim to ensure that you make informed decisions that safeguard your financial future.

Access to a Wide Range of Insurance Carriers: Our partnership with over 50 top insurance carriers empowers you with a comprehensive selection of insurance options. This variety is vital when choosing a policy for a collateral assignment, as it allows you to compare and select the best fit based on your specific requirements and circumstances.

How We Can Assist You

If you’re considering using your life insurance for a collateral assignment, Liberty Financial Group is here to assist you. We’ll help you find the right policy, provide expert advice on the intricacies of collateral assignments, and ensure that your decision supports both your immediate financial needs and long-term family security. Trust us to be your companion in navigating this critical financial decision.

Close Menu

Our Location

500 S Australian Avenue, Suite 600
West Palm Beach, Florida 33401