We are an independent, advertising-supported comparison service. Our goal is to help you make smarter financial decisions by providing you with interactive tools and financial calculators, publishing original and objective content, by enabling you to conduct research and compare information for free - so that you can make financial decisions with confidence.
Our content is backed by Coverage.com, LLC, a licensed insurance producer (NPN: 19966249). Coverage.com services are only available in states where it is licensed . Coverage.com may not offer insurance coverage in all states or scenarios. All insurance products are governed by the terms in the applicable insurance policy, and all related decisions (such as approval for coverage, premiums, commissions and fees) and policy obligations are the sole responsibility of the underwriting insurer. The information on this site does not modify any insurance policy terms in any way.
The offers that appear on this site are from companies that compensate us. This compensation may impact how and where products appear on this site, including, for example, the order in which they may appear within the listing categories, except where prohibited by law for our mortgage, home equity and other home lending products. But this compensation does not influence the information we publish, or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be available to you.
Checkmark Expert verified
Bankrate logoHow is this page expert verified?
At Bankrate, we take the accuracy of our content seriously.
“Expert verified” means that our Financial Review Board thoroughly evaluated the article for accuracy and clarity. The Review Board comprises a panel of financial experts whose objective is to ensure that our content is always objective and balanced.
Their reviews hold us accountable for publishing high-quality and trustworthy content.
Quick citation guide Select a citation to automatically copy to clipboard.APA: Van Keuren, M. (2024, April 05). Collateral assignment of life insurance. Bankrate. Retrieved September 04, 2024, from https://www.bankrate.com/insurance/life-insurance/collateral-assignment/
Copied to clipboard!MLA: Van Keuren, Mary. "Collateral assignment of life insurance." Bankrate. 05 April 2024, https://www.bankrate.com/insurance/life-insurance/collateral-assignment/.
Copied to clipboard!Chicago: Van Keuren, Mary. "Collateral assignment of life insurance." Bankrate. April 05, 2024. https://www.bankrate.com/insurance/life-insurance/collateral-assignment/.
Copied to clipboard!
Written by
Mary Van Keuren
Mary Van Keuren has written for insurance domains such as Bankrate, Coverage.com, and The Simple Dollar for the past five years, specializing in home and auto insurance. She has also written extensively for consumer websites including Reviews.com and Slumber Yard. Prior to that, she worked as a writer in academia for several decades.
Edited by
Natasha Cornelius, CLU
Natasha Cornelius, CLU, is an insurance editor for Bankrate, specializing in auto, home and life insurance.
Reviewed by
Thomas Brock
Thomas is a well-rounded financial professional, with over 20 years of experience in investments, corporate finance, and accounting. His investment experience includes oversight of a $4 billion portfolio for an insurance group. Varied finance and accounting work includes the preparation of financial statements and budgets, the development of multiyear financial forecasts, credit analyses, and the evaluation of capital budgeting proposals. In a consulting capacity, he has assisted individuals and businesses of all sizes with accounting, financial planning and investing matters; lent his financial expertise to a few well-known websites; and tutored students via a few virtual forums.
Bankrate logoAt Bankrate we strive to help you make smarter financial decisions. While we adhere to strict editorial integrity , this post may contain references to products from our partners. Here's an explanation for how we make money . This content is powered by HomeInsurance.com (NPN: 8781838). For more information, please see our Insurance Disclosure .
Bankrate logoFounded in 1976, Bankrate has a long track record of helping people make smart financial choices. We’ve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next.
Bankrate follows a strict editorial policy, so you can trust that we’re putting your interests first. All of our content is authored by highly qualified professionals and edited by subject matter experts, who ensure everything we publish is objective, accurate and trustworthy.
Our banking reporters and editors focus on the points consumers care about most — the best banks, latest rates, different types of accounts, money-saving tips and more — so you can feel confident as you’re managing your money.
Bankrate logoBankrate follows a strict editorial policy, so you can trust that we’re putting your interests first. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions.
We value your trust. Our mission is to provide readers with accurate and unbiased information, and we have editorial standards in place to ensure that happens. Our editors and reporters thoroughly fact-check editorial content to ensure the information you’re reading is accurate. We maintain a firewall between our advertisers and our editorial team. Our editorial team does not receive direct compensation from our advertisers.
Bankrate’s editorial team writes on behalf of YOU – the reader. Our goal is to give you the best advice to help you make smart personal finance decisions. We follow strict guidelines to ensure that our editorial content is not influenced by advertisers. Our editorial team receives no direct compensation from advertisers, and our content is thoroughly fact-checked to ensure accuracy. So, whether you’re reading an article or a review, you can trust that you’re getting credible and dependable information.
Bankrate logoYou have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey.
Bankrate follows a strict editorial policy, so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers.
We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money.
Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories, except where prohibited by law for our mortgage, home equity and other home lending products. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range, can also impact how and where products appear on this site. While we strive to provide a wide range of offers, Bankrate does not include information about every financial or credit product or service.
Bankrate logoThis content is powered by HomeInsurance.com, a licensed insurance producer (NPN: 8781838) and a corporate affiliate of Bankrate.com. HomeInsurance.com LLC services are only available in states where it is licensed and insurance coverage through HomeInsurance.com may not be available in all states. All insurance products are governed by the terms in the applicable insurance policy, and all related decisions (such as approval for coverage, premiums, commissions and fees) and policy obligations are the sole responsibility of the underwriting insurer. The information on this site does not modify any insurance policy terms in any way.
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.
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).
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.
If you are considering collateral assignment, here are some pros and cons of this type of financial arrangement.
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.
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.
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.
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.
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.
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.
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.
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.
