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Collateral Assignment of Life Insurance

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.

What is the collateral assignment of life insurance?

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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How to apply for collateral assignment of life insurance

Here’s how to apply for collateral assignment of life insurance:

1. Know the requirements

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.

2. Fill out a life insurance application

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.

3. Fill out a collateral assignment form

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.

4. Sign and submit the form

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.

5. Apply for a loan

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.

How collateral assignment of life insurance may affect your beneficiaries

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.

Alternatives to the collateral assignment of life insurance

Here are some alternatives to the collateral assignment of life insurance2:

Borrow from your life insurance policy

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.

Withdraw from your policy

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.

Surrender your policy

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.

Consider a different type of loan

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.

Is collateral assignment of life insurance right for me?

Collateral assignment of life insurance may make sense in a few situations:

  • Business loans: If you’re a business owner and have a substantial death benefit, you could borrow against a large amount of it to fund your business.
  • Medical expenses: The average cost of a hospital stay is 13,262.3 If you have medical expenses insurance doesn’t cover, securing a loan with your life insurance could help you pay for them.
  • Debt refinancing or consolidation: Borrowing against your death benefit could help you consolidate and refinance higher-interest debts, like personal loans and credit cards. This can save you money on interest and streamline your monthly payments.

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.

Get a life insurance quote

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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