What is a collateral assignment of life insurance?

Life Insurance
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July 2018

A collateral assignment of life insurance is a conditional assignment appointing a lender as the primary beneficiary of a death benefit to use as collateral for a loan. If the borrower is unable to pay, the lender can cash in the life insurance policy and recover what is owed.

Businesses readily accept life insurance as collateral due to the guarantee of funds if the borrower were to die or default. In the event of the borrower's death before the loan's repayment, the lender receives the amount owed through the death benefit and the remaining balance is then directed to other listed beneficiaries.

Collateral Assignment Requirements

The borrower must be the owner of the policy, but not necessarily the insured, and the policy must remain current for the life of the loan with the owner continuing to pay all necessary premiums. Any type of life insurance policy is acceptable for collateral assignment, provided the insurance company allows assignment for the particular policy. A permanent life insurance policy with a cash value allows the lender access to the cash value to use as loan payment if the borrower were to default.

Alternately, the policy owner's access to the cash value is restricted in an effort to protect the collateral. If the loan is repaid before the borrower's death, the assignment is removed and the lender is no longer the beneficiary of the death benefit. Insurance companies must be notified of collateral assignment of a policy, but other than their obligation to meet the terms of the contract, they remain disinterested in the agreement.

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