What Is A Collateral Assignment Of Life Insurance?
Learn more about life insurance and collateral assignments with our article.
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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.
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.
Source: Pexels
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 help@policyscout.com.
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 help@policyscout.com to get in touch with a licensed life insurance agent for your state.