Assignment of life insurance as collateral

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If you need to borrow money, using your life insurance as collateral could be a useful tool to help you get financing.

There are many types of loans to choose from when large expenses arise, but they generally fall into two categories: secured and unsecured loans. While secured loans can come with benefits like better rates and a higher chance of getting approved, there is one major condition that you will need to provide collateral. You can choose to use your vehicle or even your house as collateral, but that comes with a risk: if you can’t pay off the loan, you could lose your car or your house.

Life insurance can be a good choice as collateral if your lender accepts it.

What is the collateralization of a life insurance policy?

A life insurance collateral assignment is a method of securing a loan by using a life insurance policy as collateral. If you die before the loan is paid off, 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 go to the named beneficiary of the policy.

Why use life insurance as collateral?

There are many reasons why you might want to use life insurance as collateral for a loan. Here are a few :

  • It can be affordable. Depending on your age, health, type of policy, and policy value, life insurance costs vary. However, life insurance premiums can be lower than what you would pay for an unsecured loan with higher interest rates.
  • Your personal belongings are more secure. By using life insurance as collateral, you may be able to take out a secured loan without putting your home or vehicle at risk. If you die before the loan is paid off, the lender will use the death benefit from your life insurance policy to pay off the loan.
  • It can be of interest to lenders. Many lenders see life insurance as a good collateral option, knowing that they will most likely have the cash to pay off your loan in the event of death.

Of course, there are also situations in which a collateral assignment of a life insurance policy is not the best option. Some people are unable to obtain affordable life insurance due to age or health complications. It can also be difficult to use an existing life insurance policy as collateral for a loan; a lender may require you to purchase a new policy, specifically for the purpose of the assignment of collateral.

Alternatives to collateralized life insurance

If you are considering an assignment of life insurance as collateral, there are a few alternative financing options that may be worth exploring. Since there are many factors that go into each option, working with a financial advisor can be the best way to find the perfect fit 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 kind of collateral. There are many types of unsecured loans including credit cards and personal loans.

Life insurance with cash value

Some life insurance policies build up a 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 out a loan against your cash value. Using the cash value of your life insurance policy has implications, so be sure to discuss this solution with a life insurance agent before making a decision.

Home Equity Line of Credit (HELOC)

A Home Equity Line of Credit, or HELOC, is a more flexible way to access funds than a standard secured loan. While HELOCs have the downside of risking your home as collateral, you still have more control over how much you borrow. Instead of receiving a lump sum, you’ll have access to a line of credit that you can withdraw as needed. You will only have to pay interest on the amount actually borrowed.

Frequently Asked Questions

How to take out a loan as collateral for life insurance?

If you want to take out a loan with life insurance as collateral, you must first find a lender who is willing to issue this type of loan. Once you confirm the lender’s requirements, you will need to decide whether you will use an existing life insurance policy (if the lender allows it) or purchase a new one.

If you buy a new policy, the purchase process is the same as for any other type of life insurance. Once you have the policy, you will need to ask the insurance company for an assignment of collateral form and complete the paperwork indicating your lender as the assignee. Typically, a lender will not be listed as a beneficiary. The beneficiary will be the person you wish to receive with the remaining benefits not claimed by the lender.

What types of life insurance can I use as collateral for a loan?

Any type of life insurance policy can be used to secure a loan. However, each lender will likely have different requirements. Be sure to discuss these requirements with your lender before purchasing life insurance with the intention of using it as collateral. If more than one option is available, you may want to compare the cost of premiums for each type of policy.


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