Collateral Assignment

 

If you have a life insurance policy and find yourself in the process of taking out a loan or mortgage, you may have heard the term “collateral assignment” when it comes to financing or paying off your loan. At which point, you may find yourself asking: What is collateral assignment, anyway?

Collateral assignment is a process where, if you take out a loan, you assign the lender as  a beneficiary to your life insurance policy. What this means is if you are unable to pay back the loan, the lender can cash in your death benefit and use it to pay off your loan. Arrangements such as these can vary from lender to lender, but generally they all have the same basic guidelines: you must own and be the insured of the policy you are offering as collateral; the loan in question may be the entirety of or only partial to the death benefit, in which case the beneficiaries receive the difference after the lender has sufficiently received your outstanding difference; and if the loan is paid back in full, the assignment of collateral to the lender is terminated immediately. Additionally, while you have your policy assigned as collateral, it is absolutely necessary to make sure you are consistently up-to-date on your insurance premiums. 

Knowing this, what makes collateral assignment a good idea? For one, collateral assignment is a good way to help secure your loan. This is because if you attach a life insurance benefit to your contract with the lender, the lender is more secure because the policy will guarantee them a return on their investment if you are unable to pay. What’s more, some banks often will require you to partake in collateral assignment of your life insurance to secure your loan. As mentioned before, however, if you have an outstanding debt on your loan and the full amount of your death benefit covers more than what debt is owed, then the difference is paid to your beneficiaries after the debt is paid. 

That being said, there are some important things to remember when using an insurance policy as collateral for a loan. For one, you should be careful when you assign the bank or lender as a beneficiary as part of the agreement. When doing so, any of the remaining balance, regardless of how much of the debt is paid back and difference is left over, will be given to the lender with the difference going back into the estate. If a lender asks you to list them as a beneficiary on your policy, you should start running. Another thing to remember is that it doesn’t matter whether or not you use a term or whole life policy as collateral on a loan. As long as the term lasts for the timetable of the loan payments, you can leverage your insurance as collateral and continue the term after the loan is paid off or get another policy based on your needs.

If you are thinking about taking out a life insurance policy to use as collateral on a loan or just need help with finding a policy that works best for you, don’t hesitate to contact Pacific Insurance Group. Our team of insurance specialists will treat you like family, keep you in the know, and help you get the best policy for you, regardless of your financial goals. If you’d like to get in touch with us, call us at (425)-246-4222 or get a quote and schedule an appointment on www.pacificinsurancegroup.com. We can’t wait to work with you.