Secured loans let you borrow money using one of your assets as collateral to get easier approval and better rates and terms. Life insurance may not be the first asset to come to mind when getting a secured loan, but you can use your policy as collateral through a process called collateral assignment of life insurance. This article will explain how collateral assignment of life insurance works and how to apply for it, then review some alternatives to using life insurance as collateral.
Collateral assignment of life insurance involves using your life insurance policy’s death benefit as loan collateral.1 This means that if you can’t repay what you owe, the lender has the right to collect the collateral amount from your policy.
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Here’s how to apply for collateral assignment of life insurance:
Knowing life insurance collateral requirements is vital before applying for collateral assignment. Lenders generally require an active life insurance policy with cash value. This means that a term life insurance policy may not qualify. However, exact requirements vary by lender. If you need to get a new life insurance policy in order to get a collateral assignment, research and gather quotes from several insurance companies to choose the right option for you.
Once you’ve found a policy that will meet a lender’s loan requirements, you can apply for life insurance. As mentioned, you will likely need life insurance with cash value. Check with the lender to see if the policy you’re approved for qualifies for a life insurance collateral assignment before signing the contract.
Once you sign your life insurance contract and pay your first premiums, complete a collateral assignment form with your insurer. You’ll fill out your lender’s contact details so your insurer can designate them as a collateral assignee while your loan is outstanding.
After completing the collateral assignment form, you and your lender must sign it. Your insurer may be able to provide electronic versions of the documents and e-signature capabilities to streamline the process.
Wait for your bank to confirm that your insurer has made them the collateral assignee. Then, apply for your chosen loan and fill out any relevant life insurance policy information on the application.
Using your life insurance policy as collateral may impact your beneficiaries if you default on the loan or pass away with an outstanding balance.2 Either event could reduce the death benefit payout your beneficiaries receive.
For example, if you take out a $50,000 loan using your $500,000 policy as collateral but pass away with a $40,000 loan balance, your lender can collect a portion of your death benefit. That can leave your beneficiaries with less money to cover expenses in your absence.
Here are some alternatives to the collateral assignment of life insurance2:
Permanent life insurance policies, such as whole life insurance, let you build cash value with each premium payment. Once your policy grows large enough, you can borrow against it. Policy loans offer favorable rates and no fixed repayment deadline. Accrued interest is added to your loan balance.
You can keep the loan outstanding as long as you want. However, your policy can lapse if the balance grows larger than your cash value.
You can withdraw money from your life insurance policy once you have accumulated enough cash value. However, this may reduce your death benefit. Withdrawing may also trigger tax consequences.
You can surrender life insurance if you no longer need your coverage. The insurer pays you the cash value minus surrender charges, letting you access your wealth. If you decide to go this route, your policy will be cancelled, and you’ll stop paying premiums.
You can get other loans, depending on your financial circumstances. For example, if you have significant equity in your home, you could get a home equity loan or line of credit. You could also apply for an unsecured personal loan to avoid risking your assets as collateral.
Collateral assignment of life insurance may make sense in a few situations:
Remember the risks of a life insurance collateral assignment before using it for these or other situations. If you’re not sure whether it’s the best choice for you, consider speaking with a financial advisor to explore your options.
Collateral assignment of life insurance can be a good option for borrowing a significant amount of money at favorable rates and terms. However, it’s important to remember that defaulting on the loan or passing away with an outstanding balance could reduce the death benefit payout your beneficiaries receive.
If you need a way to help protect your loved ones for your entire life and receive a significant asset you could borrow against, Aflac’s whole life insurance policies with cash value can be a great option. Start chatting with an agent today to learn more.
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1 The Balance – What is a Collateral Assignment (of a Life Insurance Policy)? Updated November 10, 2021. https://www.thebalancemoney.com/what-is-collateral-assignment-5176411. Accessed May 8, 2023.
2 Investopedia – What is a Collateral Assignment of Life Insurance? Updated April 30, 2023. https://www.investopedia.com/ask/answers/111714/what-collateral-assignment-life-insurance.asp. Accessed May 8, 2023.
3 Debt.org – Hospital and Surgery Costs. Updated March 30, 2023. https://www.debt.org/medical/hospital-surgery-costs/. Accessed May 8, 2023.
Coverage is underwritten by American Family Life Assurance Company of Columbus. In New York, coverage is underwritten by American Family Life Assurance Company of New York.
68000 series: In Arkansas, Idaho, Oklahoma, Oregon, Pennsylvania, Texas, & Virginia, Policies: ICC1368100, ICC1368200, ICC1368300, ICC1368400. In Delaware, Policies A68100-A68400. In New York, NY68100-NY68400.65000 series: In Virginia, Policies ICC0965JTO & ICC0965JWO. B61000 series: In Arkansas, Idaho, Oklahoma, Oregon, Pennsylvania, Texas, & Virginia, Policies: ICC18B61JWO & ICC18B61JTO. In Delaware, Policies B61JWO, B61JTO. B60000 series: In Arkansas, Idaho, Oklahoma, Pennsylvania, Texas, & Virginia, Policies: ICC18B60C10, ICC18B60100, ICC18B60200, ICC18B60300, & ICC18B60400. Q60000 series: Whole: In Arkansas, Delaware & Oregon, Policy Q60100M. In Idaho Policy Q60100MID. In Oklahoma, Policy Q60100MOK. In Texas, Policy Q60100MTX.Q60000 series: Term: In Delaware, Policies Q60200CM. In Arkansas, Idaho, Oklahoma, Oregon, Texas, Policies ICC18Q60200C, ICC18Q60300C, ICC18Q60400C.
Final Expense insurance coverage is underwritten by Tier One Insurance Company.
The life insurance policy described herein contains an optional Accelerated Death Benefits Rider that is intended for favorable tax treatment under Section 101(g) of the Internal Revenue Code. Aflac does not give legal or tax advice. Please consult with a qualified legal, tax, and accounting advisor before engaging in any transaction. In AR, AZ, ID, OK, OR, PA, TX and VA: Policies ICC21-AFLLBL21 and ICC21-AFLRPL21; and Riders ICC21-AFLABR22, ICC21-AFLADB22, and ICC21-AFLCDR22. Tier One Insurance Company is part of the Aflac family of insurers. In California, Tier One Insurance Company does business as Tier One Life Insurance Company (Tier One NAIC 92908).
This is a brief product overview only. Coverage may not be available in all states, including but not limited to DE, ID, NJ, NM, NY or VA. Benefits/premium rates may vary based on state and plan levels. Optional riders may be available at an additional cost. Policies and riders may also contain a waiting period. Refer to the exact policy and rider forms for benefit details, definitions, limitations and exclusions. For complete details, including availability and costs, please contact your local Aflac agent.
Content within this article is provided for general informational purposes and is not provided as tax, legal, health, or financial advice for any person or for any specific situation. Employers, employees, and other individuals should contact their own advisers about their situations. For complete details, including availability and costs of Aflac insurance, please contact your local Aflac agent.
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