Collateral Assignment of Life Insurance Policy

Sometimes, you run out of options for collateral for a loan, yet the situation is dire. Collateral assignment of life insurance policy is a loaning security option developed to provide a solution in such cases.

It provides you with a chance to leverage your life insurance policy with your loan application. Your life insurance policy secures the loan for you.

The loaner becomes the beneficiary of the life insurance, wholly or partly, if it is not paid before you die.

The arrangement is regarded as secure because of the guaranteed payment of life insurance plans. It has a high rating as collateral in the US. However, there is a lot you need to learn about the assignment.

What Is Collateral Assignment Of Life Insurance?

sign between policyholder and insurerIn the collateral assignment, a lender becomes the primary beneficiary of a life insurance policy.

In other words, your life insurance is taken as the collateral for the loan you take. The benefit is assigned to the lender at the death of the policyholder.

The lender may benefit in part or wholly, depending on the amount that had been paid. Any remaining monies will be directed to the other beneficiaries listed by the policyholder.

Businesses are known to accept life insurance as collateral because the funds are guaranteed.

The lender receives payment of the loan if the borrower dies before full repayment. The assignment comes with some requirements and provisions.

For instance, the borrower must be the owner of the policy. Such a borrower may not, necessarily, be the one insured. Further, the collateral may capture all or just part of the value of the policy. If any amounts remain, then they are directed to the other beneficiaries listed by the policy owner.

Once you repay the loan in full, the assignment lapses. Then, your end of life insurance policy will be paid in full to the other beneficiaries. Other requirements include that the policy must be current for the period that the loan will last.

The policy owner, the loanee, is expected to keep paying the premiums as agreed with the lender. Since life insurance policies are guaranteed, many types of such insurance qualify for collateral assignment.

The only condition is that the insurance company must allow the assignment of the policy for a collateral purpose. If your life insurance is permanent and has a cash value ascribed, it is suitable collateral.

Usually, lenders will be reluctant to accept term life insurance because they don’t accumulate sufficient cash value. Also, the term of the policy could be too short to align with the loan repayment period.

Suitable Life Insurance for Collateral Assignment

Some types of life insurance are suitable for collateral assignments while others are not. The following life policies can be used for collateral assignment.

Term Insurance

Term life insurance provides insurance for a specified duration. The proceeds can only be paid after the death of the policyholder. This type of policy does not have equity or surrender value. It is one of the most affordable types and is preferred by a large number of people, learn more.

Whole Life Insurance

Whole life insurance gives you the freedom to design your policy the way you prefer. The proceeds of this type are released when the policyholder dies.

Whole life insurance is ideal for people looking for a permanent policy. It does not expire until you die. Coverage continues for your lifespan, so long as the premiums are paid, find more details here.

Second to Die

This type insures spouses. The beneficiary only gets proceeds after the spouse dies. Either of the spouses gets it depending on who of the two survives the other. The above life insurance types attract different premiums.

Read Also: How to Borrow Against Cash Value?

Types Of Collateral Life Insurance

There are two types of collateral life insurance.

Absolute Assignment

In the Absolute Assignment arrangement, the lender takes all the rights to the life insurance policy.

Exercise caution when signing the Absolute Assignment because then you are giving the lender a blank check. The lender with such a contract assumes the right to change the policy at any time.

Such a lender controls all activities surrounding your policy. They even control the premium repayment. While you remain insured by the policy, remember that the lender can remove and add beneficiaries.

Conditional Collateral Assignment

Conditional collateral assignment runs opposite to the absolute assignment. In this case, the assignment is ascribed restrictions. The policy owner remains the primary controller.

The lender will only be paid specified figures in the collateral assignment. In the Conditional assignment, when the repayment is made, the rights of the policy are immediately restored to the policyholder.

You will meet the requirements of the lender using an existing life insurance policy. This will only succeed if the death benefits are sufficient to cater for the loan amount.

How to Apply For Collateral Assignment

There are two options available to you for use when applying for a collateral assignment of life insurance. The bank is a common and convenient channel for some applicants.

You could also use the insurance company. Here are the details about the options.

Applying Through the Bank

Some lenders may accept your existing life insurance policy as collateral for a loan. Others may not. They may ask you to take another policy for the loan.

Either way, the tendency for people to use their life insurance as collateral is increasingly common. You start the process by requesting and securing the loan from your bank. The bank will provide you with all the information regarding the loan.

You will get to learn the restrictions, requirements, and limitations of either side. They will also highlight the merits and demerits of the collateral assignment of life insurance. Note that different lenders come with different policies.

What works with one lender may not work with another. The bank will advise you on what to do to help your collateral assignment succeed in securing a loan for you.

Applying Through the Insurer

After identifying a loan that suits your purpose, fill the form for collateral assignment. The forms can be downloaded from the websites of many life insurance providers. You could also get them directly from the insurance company offices.

All parties involved in the transaction, i.e. you, your lender, and the insurer must fill out the form. The applicant has the liberty to sign the forms at the point of application or when the policy has finally been issued.

However, it is best to sign the forms at the point of application, especially if you are applying for a life insurance policy for the first time. Different insurance companies provide varying window periods between filling out the forms and the issuance of the assignment policy.

However, the time generally ranges between 24 and 48 hours. Sometimes, it could take a couple of days but never too long. Some banks could ask you to notarize the form.

The latter could lead to a little delay between the application and the issuance of the assignment.

The following is a highlight of the whole collateral assignment process:

  • Apply for life insurance coverage. State your beneficiaries such as a spouse, children, or whoever else you choose.
  • Once the policy has been issued, a collateral assignment form will be provided for you to fill and sign. Usually, the process of setting a life insurance collateral, acknowledgment, and filing, takes between seven and ten days for most companies. However, applicants are free to request faster processing if the collateral assignment is urgently required. If you are applying for life insurance when you are assigning collateral, submit both forms together
  • The collateral assignment is usually signed. Some firms may demand notarization before processing.
  • Wait a couple of days for your insurer to acknowledge the collateral assignment. Some firms do it faster than others.
  • Upon full loan repayment, the assignment is lifted from the policy immediately. A release form is sent to the insurer by the lender. Once the insurer receives the release form, the insurer cancels the assignment. The policy rights to the owner of the policy are restored.

The purpose of a collateral assignment is to allow your insurance company to repay your SBA. It only pays what you owe. The remainder is directed to your listed beneficiary.

By law, it is evident that the amount of money available for coverage is more than needed. The collateral assignment form is crafted to protect your money. It ensures that only the amount you owe is paid to the lender.

If you cited the lender and the beneficiary, they would receive the full payment upon your death. This will happen even if you had paid the loan already. If you entered such an agreement, the insurance company would not provide the full coverage amount required.

Generally, in such situations, they issue 80% of the amount of the loan taken. Therefore, a collateral assignment is necessary.

Stay Cautious About the Company

Note that some insurance companies do not have collateral assignment options, or they simply disallow. Make sure that you do your background check accurately, to avoid wasting your time.

A lot of people have gone through the pain of securing life insurance that cannot be used for collateral assignment. Some life insurance companies help you to process your collateral assignment.

They could, for instance, have your collateral assignment notarized by their legal department. The sooner you fill your collateral assignment successfully, the sooner you secure your loan.

Therefore, it is best to shop around sufficiently. Read, research, and consult experts where need be. Evidently, an agent who helps you to process your collateral assignment form makes life easier for you.

Apply Though Bank Or Insurer – Which Is Better?

It would be best to apply through your insurer. They are required to approve your collateral assignment. In any case, they are the recipients of the premiums.

Life insurance policies come with a host of requirements. The insurance firm is best placed to analyze your policy and advise you on related issues. Insurance firms typically impose stringent rules on collateral assignments.

They must be informed of plans to use your policy for collateral. They are the ones who forward the filled forms of assignment to the lender. Lenders will readily accept assignment requests already approved by your insurer because it means you are up to date with your premiums.

The bank also checks whether the policy has been used as collateral for any other loan. In short, most of the checks regarding the status of your life insurance have to do with the insurer.

So, what better way to apply than to start from your life insurance provider? Once your insurer providers the necessary information to the lender, the rest will be easier to handle.

Benefits of Collateral Assignments

One of the benefits of using collateral assignments is that it provides a safeguard for the amount payable to the lender. In other words, the lender only gets what’s due to them.

Only the amount that was loaned out will be recovered from the policy proceeds. This aspect of the collateral assignment arrangement is useful because all the stipulations are stated in the collateral assignment forms.

It declares that in the event of death, the lender will recover the balance of the loan. The remainder will be given to the beneficiaries listed by the policyholder.

Here are other benefits of collateral assignment, at a glance.

Interest of the Lender is Protected

 The lender’s interest is protected, apart from helping a borrower to secure a loan. Once the insurer receives the collateral assignment application, it should seek to protect the interest of the lender.

Sometimes, the borrower is not allowed to make any alterations in the policy. They may also be prevented from withdrawing any cash value element or use the same policy for another loan.

In general, the collateral assignment imposes restrictions on the borrower until they settle the loan in full. Once the debt is settled, the restrictions are lifted and the assignment removed.

Provides Flexibility

When you use personal property to secure a loan, you could lose it to the lender. Two things could happen if you use personal property to secure a loan. When you default payments, you could lose the property in its entirety.

Secondly, the property listed could expose you to far-reaching implications when it’s up for sale. The above are the factors that inform borrowers to prefer using their life insurance policy as collateral.

The collateral assignment provides borrowers with the liberty to sell their property only when they wish.


Life insurance is an affordable way to pay back your loan. Some policies allow borrowers to pay small amounts as premiums for major coverage. The insurance holder is cushioned against excessive expenditures on premiums.


It is elegant to pay off your loan with your life insurance. Imagine having to pay off your loan even after you have passed on. Your survivors are also left with peace of mind.

No one has to worry about property foreclosures because of loans you left behind. Moreover, the remainder of the proceeds will benefit the listed beneficiaries.

Disadvantages of Using Collateral Assignment

As they say, every coin has two sides. Collateral Assignment offers excellent gains but also comes with a set of disadvantages.

Death Benefit is Limited

Owing to the debt obligation, the benefits paid to one’s beneficiaries upon death are limited. It is not exciting to save premiums for so long, only to get peanuts after debt deductions.

Therefore, you are advised to only apportion part of your life savings as a collateral assignment but never the whole death benefits package.

You certainly do not want ugly scenarios that entail the lender claiming all the benefits to repay the debt. You are also asked t consider a separate insurance policy for debt repayment in place of your death benefits.

Hard to Get

It is not easy to get an affordable insurance policy with low premiums these days. The two operate like night and day. You either get the one or the other, not both.

The procedure for securing the policies can be daunting too. You have to be subjected to a host of medical examinations. The loan could also take days on end to be approved and hit your account.

These bureaucratic procedures can be highly inconvenient if you need the load urgently. The cash may arrive when it has outlived the purpose it was meant to serve.

You Lose Control of Your Policy

If you do not pay the premiums for your policy, you will encounter unpleasant implications. You could lose control of your policy in the long run. Your lender could go on and purchase a different policy for you.

The consequence is increased premiums on the principal loan amount. These situations could leave you helpless and vulnerable.

Restricted Use of Cash Value

You cannot use the cash value of your policy as you want. The collateral assignment restricts it.

Risk of Losing the Whole Policy

We advise that you never list your lender as a beneficiary. Making a mistake like this could cost you the whole of your life savings.

The lender will claim all your benefits, even if you will have repaid the loan fully. The moment you list your lender as a beneficiary, you sign your end time policy payments away. Your survivors will have no recourse in the law to reclaim the monies.

Therefore, exercise extreme caution before you concede any provisions in the contract.


You do not have to struggle to set up a collateral assignment of the life insurance policy. It is best to secure a life policy first, and then go for the collateral assignment.

You do not need a third party to apply for a collateral assignment. You can do it on your own and wait for a couple of days. However, remember never to list your lender as a beneficiary.

Linda Chavez

I'm a burial & senior life insurance expert, independent agent, Founder & CEO of Seniors Life Insurance Finder. I have been working in this sector since 2004 and established my own company in 2014. I have a team of seven members, and we are trying hard to share the knowledge we've gathered. We know how difficult often it is to find an affordable policy. Hence, we are doing our best to help you.