assignment as used in insurance

Financial Tips, Guides & Know-Hows

Home > Finance > How Is A Collateral Assignment Used In A Life Insurance Contract?

How Is A Collateral Assignment Used In A Life Insurance Contract?

Published: October 14, 2023

Discover how collateral assignments are utilized in life insurance contracts, providing financial security and peace of mind. Learn about the benefits and considerations involved in this strategic financial tool.

(Many of the links in this article redirect to a specific reviewed product. Your purchase of these products through affiliate links helps to generate commission for LiveWell, at no extra cost. Learn more )

Table of Contents

Introduction, what is a collateral assignment, understanding life insurance contracts, how a collateral assignment works, benefits and uses of collateral assignments, risks and considerations, limitations and restrictions, how to set up a collateral assignment.

When it comes to financial matters, having a solid understanding of various concepts and strategies is crucial. One such concept is a collateral assignment, which plays a significant role in the world of life insurance contracts. Understanding how a collateral assignment works can provide you with valuable insights into how to manage and leverage your life insurance policy to meet your financial needs.

A collateral assignment involves using your life insurance policy as collateral for a loan or other financial transaction. It allows you to borrow against the cash value of your policy without surrendering the policy itself. This strategy can be particularly useful if you need access to funds for a specific purpose, such as starting a business, financing education expenses, or facing unexpected medical bills.

In order to grasp the significance of collateral assignments, it’s important to have a solid understanding of life insurance contracts. Life insurance is a contractual agreement between a policyholder and an insurance company. The policyholder pays regular premium payments, and in return, the insurance company provides a death benefit to the policy’s beneficiaries upon the policyholder’s death. Additionally, certain types of life insurance policies, such as whole life or universal life insurance, accumulate a cash value over time.

The cash value in a life insurance policy can be used in various ways. One option is to surrender the policy and receive the accumulated cash value. However, this may result in the termination of the policy and the loss of its associated benefits. Another option is to take a policy loan against the cash value. This allows the policyholder to access funds while keeping the policy intact.

This is where a collateral assignment becomes relevant. Instead of taking a policy loan, a policyholder can use a collateral assignment to borrow money from a lender by assigning a portion of the life insurance policy’s death benefit as collateral. In this arrangement, the lender becomes the assignee of the policy and is entitled to receive a portion of the death benefit if the policyholder passes away before the loan is repaid. This arrangement provides security to the lender and allows the policyholder to access funds without surrendering the policy.

In the following sections, we will delve deeper into how a collateral assignment works, its benefits and uses, as well as the considerations, limitations, and steps involved in setting it up.

A collateral assignment is a legal agreement that allows a policyholder to assign a portion of the death benefit from a life insurance policy as collateral for a loan or other financial obligation. It serves as a way to secure the loan by providing the lender with a potential source of repayment in the event of the policyholder’s death. This arrangement allows the policyholder to access funds without surrendering the policy or disrupting its financial benefits.

With a collateral assignment, the policyholder remains the owner of the life insurance policy and retains control over other aspects of the policy, such as changing beneficiaries or making withdrawals from the cash value. The assigned portion of the death benefit serves as collateral for the loan or debt, and if the policyholder passes away before the loan is repaid, the lender has the right to receive the assigned portion of the death benefit to satisfy the outstanding debt.

It’s important to note that a collateral assignment does not transfer ownership of the policy to the lender. Instead, it grants the lender a limited interest in the policy specifically for the purpose of securing the loan. Once the loan is repaid, the collateral assignment is released, and the policy returns to the full control of the policyholder.

A collateral assignment can be used for various financial purposes, including personal loans, business financing, or even as a form of security for a surety bond. The flexibility of this arrangement allows policyholders to leverage the accumulated cash value and death benefit of their life insurance policy to meet their financial needs without sacrificing the long-term benefits of the policy.

It’s worth noting that the availability and terms of collateral assignment can vary depending on the insurance company and the specific policy. Some policies may have limitations on the amount that can be assigned or require approval from the insurance company before the assignment can be made. It’s important to review the policy terms and consult with the insurance provider or a financial advisor to understand the specific guidelines and implications of a collateral assignment.

In the next section, we will explore how a collateral assignment works within the context of a life insurance contract.

Before delving deeper into how a collateral assignment works, it’s essential to have a solid understanding of life insurance contracts. A life insurance contract is a legal agreement between a policyholder and an insurance company, wherein the policyholder pays regular premium payments in exchange for financial protection for their loved ones in the event of their death.

Life insurance contracts come in various forms, but the two main types are term life insurance and permanent life insurance. Term life insurance provides coverage for a specific period, typically 10, 20, or 30 years. If the policyholder passes away during the term, the insurance company pays out a death benefit to the beneficiaries named in the policy. Permanent life insurance, on the other hand, provides lifelong coverage and includes a cash value component that accumulates over time.

The cash value in a permanent life insurance policy, such as whole life or universal life insurance, grows gradually over the years through premium payments and potential investment gains. This cash value can be accessed by the policyholder through withdrawals or policy loans, providing a source of liquidity that can be utilized for various financial needs.

One of the key advantages of permanent life insurance policies is their ability to accumulate cash value on a tax-deferred basis. This means that any growth in the cash value is not subject to immediate taxation, allowing the policyholder to potentially build a substantial cash reserve over time.

Furthermore, permanent life insurance policies often provide additional benefits such as the ability to participate in the insurance company’s profits through dividends, the option to increase or decrease the death benefit, and even the flexibility to adjust premium payments.

Given the unique features and advantages offered by permanent life insurance policies, they are often the type of policy chosen for a collateral assignment. The combination of death benefit protection and cash value growth make permanent life insurance policies an ideal asset to use as collateral for loans or other financial obligations.

Now that we have a basic understanding of life insurance contracts and their various components, let’s explore how a collateral assignment works in conjunction with a life insurance policy in the next section.

Now that we understand the basics of life insurance contracts, let’s dive into how a collateral assignment works within the context of these policies. A collateral assignment involves assigning a portion of the death benefit from a life insurance policy as collateral for a loan or other financial obligation.

Here’s a step-by-step breakdown of how a collateral assignment typically works:

• The policyholder identifies a need for funds and seeks a loan or financing.
• The policyholder and the lender determine the amount of the loan and agree on the terms and conditions.
• A collateral assignment agreement is drafted, which outlines the terms of the assignment, including the assigned portion of the death benefit, the loan amount, and the repayment terms.
• The collateral assignment agreement is signed by the policyholder, the lender, and the insurance company, acknowledging the assignment and providing consent for the assignee to receive a portion of the death benefit in the event of the policyholder’s death.
• Upon the policyholder’s passing, the lender files a claim with the insurance company, providing necessary documentation to establish the validity of the claim.
• The insurance company verifies the claim and disburses the assigned portion of the death benefit to the lender to satisfy the outstanding debt.
• If there are remaining funds from the death benefit after repaying the loan, they are distributed to the designated beneficiaries of the policy.

It’s important to note that the policyholder remains the owner of the life insurance policy and retains control over other aspects of the policy, such as changing beneficiaries or making withdrawals from the cash value. The assigned portion of the death benefit is solely used as collateral for the loan, and the lender only has a claim to that specific portion.

It’s crucial for both the policyholder and the lender to understand the terms and conditions of the collateral assignment, including any limitations or restrictions set by the insurance company. Some common restrictions may include a maximum assignment amount, a requirement to maintain the policy in-force, or a provision for the policyholder to replace the collateral assignment with another form of security if requested by the insurance company.

By using a collateral assignment, the policyholder can access funds while keeping the life insurance policy intact. This can be particularly advantageous in situations where surrendering the policy would result in the loss of the accumulated cash value and other benefits.

In the next section, we will explore the various benefits and uses of collateral assignments within the realm of financial planning.

Collateral assignments offer several benefits and serve various uses within the realm of financial planning. Let’s explore some of the key advantages and common uses of collateral assignments:

1. Access to Funds

One of the primary benefits of a collateral assignment is the ability to access funds without surrendering the life insurance policy. By using the death benefit as collateral, the policyholder can secure a loan or obtain financing for personal or business purposes. This allows individuals to meet immediate financial needs without disrupting their long-term insurance coverage.

2. Retention of Policy Benefits

Unlike policy loans, which require repayment with interest, collateral assignments allow policyholders to retain the full benefits of their life insurance policies. These benefits can include the death benefit for beneficiaries, potential cash value growth, and the ability to participate in policy dividends. By using a collateral assignment, policyholders do not have to forfeit these valuable features.

3. Lower Interest Rates

When compared to other types of loans, collateral assignments often offer lower interest rates. This is because the loan is backed by the assigned portion of the life insurance policy’s death benefit, providing additional security for the lender. Lower interest rates can result in significant cost savings for the policyholder over the life of the loan.

4. Flexible Repayment Terms

Collateral assignments provide flexibility in terms of loan repayment. Policyholders and lenders can negotiate repayment terms that align with the borrower’s financial capacity, allowing for customized repayment schedules. This flexibility can help borrowers manage their cash flow effectively and repay the loan on terms that suit their specific needs.

5. Diverse Financial Uses

Collateral assignments can be used for a wide range of financial purposes. Common uses include funding education expenses, starting or expanding a business, purchasing or renovating a property, financing a major purchase, or covering unexpected medical expenses. The versatility of collateral assignments allows policyholders to leverage their life insurance policies to meet various financial goals.

6. Potential Tax Advantages

Collateral assignments may offer potential tax advantages depending on the specific circumstances. For example, if the loan proceeds are used for investment purposes or to generate income, the interest paid on the loan may be tax-deductible. It’s crucial to consult with a tax advisor or financial expert to understand the tax implications of a collateral assignment in your specific situation.

By leveraging the benefits and uses of collateral assignments, policyholders can maximize the value of their life insurance policies and utilize them as a valuable financial asset. However, it’s essential to consider the potential risks and limitations associated with collateral assignments, which we will explore in the next section.

While collateral assignments offer several advantages, it’s important to fully understand the potential risks and considerations before entering into such an arrangement. Here are some key factors to keep in mind:

1. Impact on Death Benefit

Assigning a portion of the death benefit as collateral can reduce the overall amount payable to beneficiaries upon the policyholder’s death. It’s crucial to assess the impact of this reduction on the intended financial protection for loved ones and ensure that the remaining portion of the death benefit is still sufficient to address their needs.

2. Default Risk

If the policyholder fails to repay the loan, the lender may have the right to claim the assigned portion of the death benefit, potentially leaving beneficiaries with a reduced payout. It’s important to have a robust repayment plan in place and make timely payments to avoid default and the potential loss of policy benefits.

3. Policy Lapse

If the policy lapses due to missed premium payments or other reasons, the collateral assignment may become void, and the lender loses their security interest in the life insurance policy. Policyholders should ensure they have a sufficient plan in place to maintain premiums and keep the policy in force to protect the collateral assignment.

4. Limited Flexibility

Once a collateral assignment is in place, it restricts the policyholder’s ability to make changes to the policy, such as increasing or decreasing coverage, accessing the cash value, or changing beneficiaries. It’s important to evaluate whether the potential benefits of a collateral assignment outweigh the loss of flexibility in managing the life insurance policy.

5. Complex Documentation

Collateral assignments involve drafting and signing complex legal documents, including the collateral assignment agreement. It’s crucial to fully understand the terms and conditions of the agreement and consider seeking professional advice to ensure that all parties involved are clear on their rights and obligations.

6. Insurance Company Regulations

Each insurance company may have specific regulations and requirements regarding collateral assignments. It’s important to review the policy terms and consult with the insurance provider to understand any restrictions, limitations, or approval processes associated with collateral assignments.

Considering these risks and considerations is essential to make informed decisions when considering a collateral assignment. Seeking guidance from a financial advisor or insurance professional can help assess the suitability of a collateral assignment and its potential impact on your overall financial plan.

In the next section, we will explore any limitations and restrictions that may apply to collateral assignments.

While collateral assignments can be valuable tools, there are certain limitations and restrictions that policyholders should be aware of. These limitations can vary depending on the insurance company and the specific policy. Here are some common limitations and restrictions to consider:

1. Assignment Limits

Insurance companies often impose limits on the amount that can be assigned from a life insurance policy. This limit is typically a percentage of the policy’s death benefit. It’s essential to review the policy terms to understand the maximum allowable assignment amount.

2. Policy Approval

In some cases, insurance companies require policyholder approval before a collateral assignment can be implemented. This approval process may involve submitting an application, providing financial information, or meeting certain criteria determined by the insurance company.

3. Maintaining Policy In-Force

To retain the collateral assignment, policyholders must keep the life insurance policy in force, which includes paying premiums on time. If the policy lapses or is terminated, the collateral assignment may become void, and the policyholder may lose the associated benefits.

4. Replacement of Collateral

In certain situations, insurance companies may require the policyholder to replace the collateral assignment with another form of security if requested. This requirement ensures that the insurance company is adequately protected against potential losses.

5. Removing the Collateral Assignment

If the policyholder wishes to remove the collateral assignment, they will need to follow the specified procedure outlined by the insurance company. This often involves submitting a formal request, providing necessary documentation, and obtaining the insurance company’s approval.

6. Financial Institution Requirements

Financial institutions, such as banks or lenders, may have their own specific requirements for collateral assignments. These requirements may include minimum loan amounts, credit checks, or additional documentation. It’s important to familiarize yourself with the lender’s guidelines to ensure a smooth collateral assignment process.

7. Legal and Financial Advice

Due to the complex nature of collateral assignments, it’s wise to seek advice from legal and financial professionals. They can provide guidance on the legal implications, tax considerations, and overall suitability of a collateral assignment based on your specific circumstances.

Understanding these limitations and restrictions is crucial when considering a collateral assignment. It’s important to review the policy documents, consult with the insurance company and relevant professionals, and ensure compliance with all applicable regulations to navigate the process successfully.

In the next section, we will outline the general steps involved in setting up a collateral assignment.

Setting up a collateral assignment requires careful consideration and following specific steps. While the exact process may vary depending on the insurance company and the lender, here are some general guidelines to help you navigate the setup process:

1. Assess Your Financial Needs

Determine the amount of funds you need and the purpose for which you require the loan or financing. Assess your financial situation and ensure that a collateral assignment aligns with your overall financial goals and needs.

2. Identify the Lender

Research potential lenders that offer collateral assignments and select one that best meets your requirements. Consider factors such as interest rates, loan terms, and reputation when making your decision.

3. Consult with professionals

Seek the advice of financial and legal professionals who specialize in life insurance policies and collateral assignments. They can guide you through the process, provide expert recommendations, and ensure that you fully understand the implications and obligations associated with a collateral assignment.

4. Review Policy Terms

Review the terms of your life insurance policy, paying particular attention to any provisions related to collateral assignments. Understand the limitations, restrictions, and requirements set by your insurance company.

5. Draft the Collateral Assignment Agreement

Work with legal professionals to draft a collateral assignment agreement that outlines the terms and conditions of the assignment. This agreement should clearly specify the assigned portion of the death benefit, the loan amount, the repayment terms, and any other relevant provisions.

6. Obtain Signatures and Consent

Ensure that all parties involved, including yourself, the lender, and the insurance company, sign the collateral assignment agreement. The insurance company’s consent is crucial to acknowledge and approve the assignment.

7. Submit Documentation

Provide the necessary documentation to the insurance company and the lender to establish the collateral assignment. This may include copies of the collateral assignment agreement, policy documents, and any other requested information.

8. Stay Informed and Compliant

Keep track of your loan repayments and stay informed about any updates or changes related to the collateral assignment. Comply with the terms and conditions stated in the collateral assignment agreement, including making timely payments to the lender and maintaining the life insurance policy in force.

Remember that these steps are general guidelines, and the specific process may vary based on your unique situation and the requirements set by the insurance company and the lender. Consulting with professionals experienced in collateral assignments will ensure a smooth and successful setup process.

In the final section, we will conclude our discussion on collateral assignments and summarize the key points to remember.

Collateral assignments serve as a valuable tool in leveraging the benefits of a life insurance policy while accessing funds for various financial needs. By assigning a portion of the death benefit as collateral, policyholders can secure loans or financing without surrendering their policies or disrupting the benefits associated with them.

We began by understanding the basics of collateral assignments and the concept of life insurance contracts. We then explored how a collateral assignment works within the context of a life insurance policy, outlining the steps involved in setting one up.

Collateral assignments offer several benefits, including access to funds, retention of policy benefits, lower interest rates, flexible repayment terms, and diverse financial uses. However, it’s important to consider the potential risks and limitations associated with collateral assignments, such as the impact on the death benefit, default risk, limited flexibility, and complex documentation.

It’s essential to carefully evaluate your financial needs, consult with professionals, review policy terms, and draft a well-structured collateral assignment agreement. By following these steps and staying compliant with the agreement, you can navigate the collateral assignment process successfully.

To ensure a smooth and efficient setup process, it’s advisable to seek guidance from financial advisors, insurance professionals, and legal experts who can provide personalized advice based on your specific circumstances.

In summary, a collateral assignment can be a powerful strategy to utilize the accumulated cash value and death benefit of a life insurance policy while addressing immediate financial needs. However, it’s crucial to conduct thorough research, seek professional advice, and fully understand the implications and obligations associated with collateral assignments.

By carefully weighing the benefits, risks, and considerations, you can make informed decisions and effectively use collateral assignments to enhance your financial plan and achieve your goals.

How Is Collateral Assignment Used In A Life Insurance Contract?

Our Review on The Credit One Credit Card

20 Quick Tips To Saving Your Way To A Million Dollars

Who Takes Auxiant Insurance

What Credit Score Do You Need To Get An Unsecured Card

Latest articles.

The Importance of Emergency Funds and How to Build Yours

Written By:

A Beginner’s Guide to Effective WhatsApp Marketing in 2024

Navigating Crypto Frontiers: Understanding Market Capitalization as the North Star

Financial Literacy Matters: Here’s How to Boost Yours

Unlocking Potential: How In-Person Tutoring Can Help Your Child Thrive

Related post.

By:  •  Finance

Please accept our Privacy Policy.

We uses cookies to improve your experience and to show you personalized ads. Please review our privacy policy by clicking here .

• https://livewell.com/finance/how-is-a-collateral-assignment-used-in-a-life-insurance-contract/

Policygenius does not allow the submission of personal information by users located within the EU or the UK. If you believe this action is in error, or have any questions, please contact us at [email protected]

• Search Search Please fill out this field.
• Life Insurance
• Definitions

What Is a Collateral Assignment of Life Insurance?

Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University.

A collateral assignment of life insurance is a conditional assignment appointing a lender as an assignee of a policy. Essentially, the lender has a claim to some or all of the death benefit until the loan is repaid. The death benefit is used as collateral for a loan.

The advantage to using a collateral assignee over naming the lender as a beneficiary is that you can specify that the lender is only entitled to a certain amount, namely the amount of the outstanding loan. That would allow your beneficiaries still be entitled to any remaining death benefit.

Lenders commonly require that life insurance serve as collateral for a business loan to guarantee repayment if the borrower dies or defaults. They may even require you to get a life insurance policy to be approved for a business loan.

Key Takeaways

• The borrower of a business loan using life insurance as collateral must be the policy owner, who may or may not be the insured.
• The collateral assignment helps you avoid naming a lender as a beneficiary.
• The collateral assignment may be against all or part of the policy's value.
• If any amount of the death benefit remains after the lender is paid, it is distributed to beneficiaries.
• Once the loan is fully repaid, the life insurance policy is no longer used as collateral.

How a Collateral Assignment of Life Insurance Works

Collateral assignments make sure the lender gets paid only what they are due. The borrower must be the owner of the policy, but they do not have to be the insured person. And the policy must remain current for the life of the loan, with the policy owner continuing to pay all premiums . You can use either term or whole life insurance policy as collateral, but the death benefit must meet the lender's terms.

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 defaults. Many lenders don't accept term life insurance policies as collateral because they do not accumulate cash value.

Alternately, the policy owner's access to the cash value is restricted 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 the collateral assignment of a policy. However, other than their obligation to meet the terms of the contract, they are not involved in the agreement.

Example of Collateral Assignment of Life Insurance

For example, say you have a business plan for a floral shop and need a $50,000 loan to get started. When you apply for the loan, the bank says you must have collateral in the form of a life insurance policy to back it up. You have a whole life insurance policy with a cash value of $65,000 and a death benefit of $300,000, which the bank accepts as collateral.

So, you then designate the bank as the policy's assignee until you repay the $50,000 loan. That way, the bank can ensure it will be repaid the funds it lent you, even if you died. In this case, because the cash value and death benefit is more than what you owe the lender, your beneficiaries would still inherit money.

Alternatives to Collateral Assignment of Life Insurance

Using a collateral assignment to secure a business loan can help you access the funds you need to start or grow your business. However, you would be at risk of losing your life insurance policy if you defaulted on the loan, meaning your beneficiaries may not receive the money you'd planned for them to inherit.

Consult with a financial advisor to discuss whether a collateral assignment or one of these alternatives may be most appropriate for your financial situation.

Life insurance loan (policy loan) : If you already have a life insurance policy with a cash value, you can likely borrow against it. Policy loans are not taxed and have less stringent requirements such as no credit or income checks. However, this option would not work if you do not already have a permanent life insurance policy because the cash value component takes time to build.

Surrendering your policy : You can also surrender your policy to access any cash value you've built up. However, your beneficiaries would no longer receive a death benefit.

Other loan types : Finally, you can apply for other loans, such as a personal loan, that do not require life insurance as collateral. You could use loans that rely on other types of collateral, such as a home equity loan that uses your home equity.

What Are the Benefits of Collateral Assignment of Life Insurance?

A collateral assignment of a life insurance policy may be required if you need a business loan. Lenders typically require life insurance as collateral for business loans because they guarantee repayment if the borrower dies. A policy with cash value can guarantee repayment if the borrower defaults.

What Kind of Life Insurance Can Be Used for Collateral?

You can typically use any type of life insurance policy as collateral for a business loan, depending on the lender's requirements. A permanent life insurance policy with a cash value allows the lender a source of funds to use if the borrower defaults. Some lenders may not accept term life insurance policies, which have no cash value. The lender will typically require the death benefit be a certain amount, depending on your loan size.

Is Collateral Assignment of Life Insurance Irrevocable?

A collateral assignment of life insurance is irrevocable. So, the policyholder may not use the cash value of a life insurance policy dedicated toward collateral for a loan until that loan has been repaid.

What is the Difference Between an Assignment and a Collateral Assignment?

With an absolute assignment , the entire ownership of the policy would be transferred to the assignee, or the lender. Then, the lender would be entitled to the full death benefit. With a collateral assignment, the lender is only entitled to the balance of the outstanding loan.

The Bottom Line

If you are applying for life insurance to secure your own business loan, remember you do not need to make the lender the beneficiary. Instead you can use a collateral assignment. Consult a financial advisor or insurance broker who can walk you through the process and explain its pros and cons as they apply to your situation.

Progressive. " Collateral Assignment of Life Insurance ."

Fidelity Life. " What Is a Collateral Assignment of a Life Insurance Policy? "

Kansas Legislative Research Department. " Collateral Assignment of Life Insurance Proceeds ."

• Terms of Service
• Editorial Policy
• Privacy Policy

Understanding Life Insurance Assignments: Your Complete Guide

A life insurance assignment allows you to transfer the rights of your policy, either temporarily or permanently.

Learn how collateral and absolute assignments can be used for loan collateral, estate planning, and other financial purposes.

Medicaid Planning

What is a collateral assignment.

Collateral assignments are used to secure a lender’s financial interest in your policy in exchange for lending you money.

If you die, the collateral assignment allows the lender to collect your policy’s death benefit up to the amount of the outstanding loan balance.

How Do Collateral Assignments Work?

A typical scenario involves taking out a business loan .

The lender may require a life insurance policy as collateral.

The type of life insurance policy used, whether a term, whole life, or universal life doesn’t matter.

The insurance policy will pay off the balance if you die while the loan is outstanding.

One of the most common uses for collateral assignments is with SBA loans , especially if you do not have other assets to post as collateral.

The collateral assignment applies to the entire policy, including any life insurance rider benefits that may be included.

The Collateral Assignment Process: A Step-by-Step Guide

The process is similar whether you are adding the assignment to an existing policy or buying new coverage.

There are two parties to a collateral assignment.

• Assignor – Is the owner of the life insurance policy
• Assignee – Is the lender

Life insurance companies have standardized forms used for this purpose.

• The owner completes the form and sends it to the lender for review and signature.
• Once completed by the lender, the form is sent to the insurance company.
• The insurance company records the assignment and confirms to the owner and lender that it is complete.

This may all seem confusing if you haven’t used an assignment before, but the reality is that most life insurers make it pretty easy to complete.

Releasing a Collateral Assignment

When you pay off your loan, you have the right to have the collateral assignment released.

It’s a simple process :

• The policy owner completes the form and sends it to the lender.
• The lender signs off on the release. Many companies require a notary as a witness. The lender may return the form to the owner or the insurance company.
• Once completed and returned to the insurance company, the release is recorded, and all parties are notified.

Companies typically complete this process in about a week, and it’s a good idea to confirm everything with the home office to avoid potential issues.

Your agent can help with this.

What Happens to a Collateral Assignment if You Die?

How do collateral assignments work when you die?

Your beneficiary will file a death claim with the life insurer at some point.

Collateral Assignment Tip # 1

If your beneficiary is a loved one, it’s a good idea to let them know that your policy has a collateral assignment so they are not surprised when they file the claim.

Here’s an example of how a death claim with a collateral assignment works:

• Policy Face Amount = $5,000,000
• Beneficiary = Your Spouse
• Original Bank Loan = $200,000
• Outstanding Loan Balance at Death = $100,000

What happens next?

• Your beneficiary will file the death claim with the life insurance company.
• The life insurance company will review the claim and see a collateral assignment attached to your policy.
• The life insurer contacts the lender for an updated payoff figure.
• Payoff amounts are sent directly to the lender.
• Your beneficiary receives the balance of the policy death benefit .

For the above example, your lender would receive $100,000, and your beneficiary would receive the remaining $4,900,000.

Collateral Assignment Tip # 2

NEVER name your lender directly as a beneficiary. If you do, the lender will receive the entire death benefit, and your intended beneficiary will have to go through the lender to receive their share.

Collateral Assignments and Health Issues

While lenders may want a life insurance policy as collateral, obtaining life insurance can sometimes be difficult if the insured has substantial health issues .

If you have an existing life insurance policy in effect, you can use that for the assignment.

Another option that exists in some states is contingent coverage.

Contingent coverage is a one-year policy that you can renew.

The policy will exclude death from the known health issue but provide coverage for new health issues that develop or from accidental deaths .

Many lenders accept this coverage when it’s the only option available. And we’ve also seen lenders waive the collateral assignment requirement at times.

What is an Absolute Assignment?

An absolute assignment is a change of ownership of the policy.

When you want to permanently relinquish your rights to the life insurance policy, an absolute assignment is used.

Examples where absolute assignments are used include:

Life Insurance Settlements

1035 exchange, gifting life insurance to charities, irrevocable life insurance trusts (ilit), business insurance planning.

With this transaction, you are selling your life insurance policy to a third party.

If it is a term policy, you would convert a term policy to permanent insurance before it is sold. In some cases, a company will buy the term policy.

Another example may involve admitting seniors to a nursing home, where the nursing home may take over the policy you have.

A 1035 exchange is a tax-free transfer of cash value from universal life or whole life policy to another similar policy.

You can use absolute assignments to transfer your policy to your favorite charity.

You use absolute assignments to transfer your policy to an ILIT permanently.

An example would be a survivorship policy you and your spouse own that you are transferring to the trust.

Many other potential issues may arise with transfers to an ILIT that are beyond the scope of this article.

If you purchase key person life insurance on an employee, absolute assignments transfer ownership to the employee.

Many times, this happens if the employee leaves the company or retires.

You may have a policy permanently assigned to a nursing home or assisted living facility to help with long-term care expenses.

How Do Absolute Assignments Work?

Life insurance companies have forms used for Absolute Assignments.

Absolute assignment forms require:

• Current owner name, address, and tax ID information.
• New owner name, address, and tax ID information.
• Relationship to the proposed insured.
• Spousal consent in some states and situations.

The completed forms are submitted to the insurance company, recorded, and confirmations are sent to all parties.

Frequently Asked Questions About Life Insurance Assignments

You may have questions about your life insurance assignment and how it works.

The following are general guidelines, as each situation is uniquely different.

Can the collateral assignment change the beneficiary?

No, the collateral assignment does not change the beneficiary.

The life insurance assignment gives the lender the right to receive proceeds equal to their outstanding loan balance.

Can a business be a beneficiary in a collateral assignment of life insurance?

A business can be the beneficiary of a life insurance policy that is collaterally assigned.

Final Words

Life insurance assignments are common for absolute and collateral assignments.

What is most important is that you understand what is involved with this process.

That’s where we’ll help you make the best decision for your life insurance.

There is never any pressure or obligation with our life insurance service.

Please take a few minutes to submit your quote request today. Thank you.

Recent Articles

Seniors: Compare Our Life Insurance to Your AARP Coverage!

Replacing Life Insurance in New York

Cigar Smokers Never Pay Smoker Life Insurance Rates!

Chewing Tobacco & Life Insurance: Your Guide to Affordable Coverage

Cigarette Smokers Life Insurance

Pipe Smokers Life Insurance

About the author.

Michael Horbal

Collateral assignment of life insurance

Advertiser disclosure.

We are an independent, advertising-supported comparison service. Our goal is to help you make smarter financial decisions by providing you with interactive tools and financial calculators, publishing original and objective content, by enabling you to conduct research and compare information for free - so that you can make financial decisions with confidence.

Our content is backed by Coverage.com, LLC, a licensed insurance producer (NPN: 19966249). Coverage.com services are only available in states where it is licensed . Coverage.com may not offer insurance coverage in all states or scenarios. All insurance products are governed by the terms in the applicable insurance policy, and all related decisions (such as approval for coverage, premiums, commissions and fees) and policy obligations are the sole responsibility of the underwriting insurer. The information on this site does not modify any insurance policy terms in any way.

How We Make Money

The offers that appear on this site are from companies that compensate us. This compensation may impact how and where products appear on this site, including, for example, the order in which they may appear within the listing categories, except where prohibited by law for our mortgage, home equity and other home lending products. But this compensation does not influence the information we publish, or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be available to you.

• Share this article on Facebook Facebook
• Share this article on Twitter Twitter
• Share this article on LinkedIn LinkedIn
• Share this article via email Email

At Bankrate, we take the accuracy of our content seriously.

“Expert verified” means that our Financial Review Board thoroughly evaluated the article for accuracy and clarity. The Review Board comprises a panel of financial experts whose objective is to ensure that our content is always objective and balanced.

Their reviews hold us accountable for publishing high-quality and trustworthy content.

• • Auto insurance
• • Life insurance
• Connect with Mary Van Keuren on LinkedIn LinkedIn
• Get in contact with Mary Van Keuren via Email Email

• Connect with Natasha Cornelius, CLU on LinkedIn LinkedIn

The Bankrate promise

At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict editorial integrity , this post may contain references to products from our partners. Here's an explanation for how we make money . This content is powered by HomeInsurance.com (NPN: 8781838). For more information, please see our Insurance Disclosure .

Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. We’ve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next.

Bankrate follows a strict editorial policy , so you can trust that we’re putting your interests first. All of our content is authored by highly qualified professionals and edited by subject matter experts , who ensure everything we publish is objective, accurate and trustworthy.

Our banking reporters and editors focus on the points consumers care about most — the best banks, latest rates, different types of accounts, money-saving tips and more — so you can feel confident as you’re managing your money.

Editorial integrity

Bankrate follows a strict editorial policy , so you can trust that we’re putting your interests first. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions.

Key Principles

We value your trust. Our mission is to provide readers with accurate and unbiased information, and we have editorial standards in place to ensure that happens. Our editors and reporters thoroughly fact-check editorial content to ensure the information you’re reading is accurate. We maintain a firewall between our advertisers and our editorial team. Our editorial team does not receive direct compensation from our advertisers.

Editorial Independence

Bankrate’s editorial team writes on behalf of YOU – the reader. Our goal is to give you the best advice to help you make smart personal finance decisions. We follow strict guidelines to ensure that our editorial content is not influenced by advertisers. Our editorial team receives no direct compensation from advertisers, and our content is thoroughly fact-checked to ensure accuracy. So, whether you’re reading an article or a review, you can trust that you’re getting credible and dependable information.

How we make money

You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey.

Bankrate follows a strict editorial policy , so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers.

We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money.

Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories, except where prohibited by law for our mortgage, home equity and other home lending products. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range, can also impact how and where products appear on this site. While we strive to provide a wide range of offers, Bankrate does not include information about every financial or credit product or service.

Insurance Disclosure

This content is powered by HomeInsurance.com, a licensed insurance producer (NPN: 8781838) and a corporate affiliate of Bankrate.com. HomeInsurance.com LLC services are only available in states where it is licensed and insurance coverage through HomeInsurance.com may not be available in all states. All insurance products are governed by the terms in the applicable insurance policy, and all related decisions (such as approval for coverage, premiums, commissions and fees) and policy obligations are the sole responsibility of the underwriting insurer. The information on this site does not modify any insurance policy terms in any way.

Secured loans are often used by individuals needing financial resources for any reason, whether it’s to fund a business, remodel a home or pay medical bills. One asset that may be used for a secured loan is life insurance. Although there are pros and cons to this type of financial transaction, it can be an excellent way to access needed funding. Bankrate’s insurance editorial team discusses what a collateral assignment of life insurance is and when it might—or might not—be the best loan option for you.

What is collateral assignment of life insurance?

A collateral assignment of life insurance is a method of securing a loan by using a life insurance policy as collateral . If you pass away before the loan is repaid, the lender can collect the outstanding loan balance from the death benefit of your life insurance policy . Any remaining funds from the death benefit would then be disbursed to the policy’s designated beneficiary(ies).

Why use life insurance as collateral?

Collateral assignment of life insurance may be a useful option if you want to access funds without placing any of your assets, such as a car or house, at risk. If you already have a life insurance policy, it can be a simple process to assign it as collateral. You may even be able to use your policy as collateral for more than one loan, which is called cross-collateralization, if there is enough value in the policy.

Collateral assignment may also be a credible choice if your credit rating is not high, which can make it difficult to find attractive loan terms. Since your lender can rely on your policy’s death benefit to pay off the loan if necessary, they are more likely to give you favorable terms despite a low credit score.

Pros and cons of using life insurance as collateral

If you are considering collateral assignment, here are some pros and cons of this type of financial arrangement.

• It may be an affordable option, especially if your life insurance premiums are less than your payments would be for an unsecured loan with a higher interest rate.
• You will not need to place personal property, such as your home, as collateral, which you would need to do if you take out a secured loan. Instead, if you pass away before the loan is repaid, lenders will be paid from the policy’s death benefit. Any remaining payout goes to your named beneficiaries.
• You may find lenders who are eager to work with you since life insurance is generally considered a good choice for collateral.
• The amount that your beneficiaries would have received will be reduced if you pass away before the loan is paid off since the lender has first rights to death benefits.
• You may not be able to successfully purchase life insurance if you are older or in poor health.
• If you are using a permanent form of life insurance as collateral, there may be an impact on your ability to use the policy's cash value during the life of the loan. If the loan balance and interest payments exceed the cash value, it can erode the policy's value over time.

What types of life insurance can I use as collateral for a loan?

You may use either of the main types of life insurance— term and permanent —for collateral assignment. If you are using term life insurance, you will need a policy with a term length that is at least as long as the term of the loan. In other words, if you have 20 years to pay off the loan, the term insurance you need must have a term of at least 20 years.

Subcategories of permanent life insurance, such as whole life , universal life and variable life, may also be used. Depending on lender requirements, you may be able to use an existing policy or could purchase a new one for the loan. A permanent policy with cash value may be especially appealing to a lender, considering the added benefit of the cash reserves they could access if necessary.

How do I take out a loan using a collateral assignment of life insurance?

If you already have enough life insurance to use for collateral assignment, your next step is to find a lender who is willing to work with you. If you don’t yet have life insurance, or you don’t have enough, consider the amount of coverage you need and apply for a policy . You may need to undergo a medical exam and fill out an application .

Once your policy has been approved, ask your insurance company or agent for a collateral assignment form, which you will complete and submit with your loan application papers. The form names your lender as an assignee of the policy—meaning that they have a stake in its benefits for as long as the loan exists. You will also name beneficiaries or a single beneficiary, who will receive whatever is left over from the death benefits after the loan is repaid.

Note that you will need to stay current on your life insurance premium payments while the collateral assignment is active. This will be stated in the loan agreement, and failure to do so could have serious repercussions.

Alternatives to life insurance as collateral

If you are considering a collateral assignment of life insurance, there are a few alternative funding options that might be worth exploring. Since many factors determine each option, working with a financial advisor may be the best way to find the ideal solution for your situation.

Unsecured loan

Depending on your situation, an unsecured loan may be more affordable than a secured loan with life insurance as collateral. This is more likely to be the case if you have good enough credit to qualify for a low-interest rate without having to offer any type of collateral. There are many different types of unsecured loans, including credit cards and personal loans.

Secured loan

In addition to life insurance, there are other items you can use as collateral for a secured loan . Your home, a car or a boat, for example, could be used if you have enough equity in them. Typically, secured loans are easier to qualify for than unsecured, since they are not as risky for the lender, and you are likely to find a lower interest rate than you would with an unsecured loan. The flip side, of course, is that if you default on the loan, the lender can take the asset that you used to secure it and sell it to recoup their losses.

Life insurance loan

Some permanent life insurance policies accumulate cash value over time that you can use in different ways. If you have such a policy, you may be able to partially withdraw the cash value or take a loan against your cash value. However, there are implications to using the cash value in your life insurance policy, so be sure to discuss this solution with a life insurance agent or your financial advisor before making a decision.

Home equity line of credit (HELOC)

A home equity line of credit (HELOC) is a more flexible way to access funds than a standard secured loan. While HELOCs carry the downside of risking your home as collateral, you retain more control over the amount you borrow. Instead of receiving one lump sum, you will have access to a line of credit that you can withdraw from as needed. You will only have to pay interest on the actual amount borrowed.

Frequently asked questions

What is the best life insurance company, what type of loans are collateral assignments usually associated with, what are other common forms of collateral, what are the two types of life insurance assignments.

Related Articles

Guaranteed issue life insurance

Life insurance death benefits

What does life insurance cover?

What is collateral insurance and how does it work?

Collateral Assignment of Life Insurance: Everything You Need to Know

• August 4, 2024

Written by:

Bella Gonzalez

Reviewed by:.

Jake Tamarkin, MBA

Jake is a nationally-licensed insurance agent with a Masters in Business Administration and CEO of Everyday Life. His expertise has been featured in: Investopedia, Life Insurers Council, Insurance Thought Leadership, Life-Annuity Agent, and Insurtech Insights.

Life insurance isn’t just about peace of mind for the future; it can also serve as a lifesaver when you’re looking for ways to secure a loan. This clever maneuver is known as a collateral assignment of life insurance. It’s a deal between you and your lender where your life insurance policy, specifically the cash value component, is used as collateral for a loan.

When assigning your life insurance policy as collateral for a loan, the lender will become a temporary beneficiary of your policy. If the assigner dies before repaying the loan, the lender can claim the death benefit up to the outstanding loan balance. If the policyholder defaults, the cash value of the policy will be collected.

Who can benefit from the collateral assignment of life insurance?

If you need to secure a loan but don’t have typical assets like a house or significant savings, collateral assignment of life insurance could be your ticket. It’s great for small business owners, entrepreneurs, and folks with sizable insurance policies but limited liquid assets. 

To use a life insurance policy as collateral, the policy term should be at least as long as the loan duration and should possess a cash value component equal to the loan amount.

What types of life insurance can be used as collateral?

To make this work, you’ll need a permanent life insurance policy that has a cash value component. This includes options like whole life, universal life, and variable life insurance. Unfortunately, term life insurance doesn’t quite make the cut, as it lacks a cash value.

How to use life insurance as collateral for a loan?

1. Ensure the lender accepts life insurance as collateral.

2. Apply for the collateral assignment through the bank or directly with the insurer. 

3. Fill out an “assignment of Life Insurance Policy as Collateral form” provided by your insurer. 

4. Submit the form to the insurer, and wait for approval.

5. Once the collateral assignment is approved, notify your bank or lender. 

6. Bank or lender will set the loan terms such as the interest rate, payment terms, and other obligations.

Is life insurance as collateral widely accepted? Do all banks accept it?

Typically, permanent life insurance policies such as whole life and universal life, which have a cash value component, can be used as collateral. Lenders such as banks want security, and the cash value component of a whole life insurance policy provides this. This cash value grows over time and can be used if the borrower defaults on the loan, which decreases the risk for the lender.

How is the loan amount determined when using life insurance as collateral?

The borrowing capacity is determined as a proportion of the cash value, varying across different insurance companies. Typically, the permissible borrowing range hovers around 90% to 95%. Applying these percentages to a cash value of $50,000, one could potentially secure a loan amounting to $45,000 to $47,500.

What happens when you are unable to pay back the life insurance loan?

The cash value of your policy will be collected by the lender. If this is insufficient, the amount you owe is deducted from the death benefit when you pass away. In some instances, you might also incur a substantial tax bill.

Is the collateral assignment of the life insurance agreement permanent? 

No, the collateral assignment of the life insurance agreement is not permanent. It’s tied to the lifespan of the loan. Once the loan is fully repaid, the assignment can be released, and the life insurance policy returns to its original beneficiary arrangement.

What are the tax implications of using life insurance as collateral for a loan?

If the amount you borrow directly from the insurance company is equal to or less than the total insurance premiums you have paid, it is not subject to taxation. However, If you surrender your policy, or allow it to lapse, and the total amount of outstanding loans and interest surpasses what you have paid in premiums, there is a possibility of incurring a tax liability. In essence, you would be required to pay income tax on any investment earnings in that scenario.

Best Online Life Insurance Calculator

At Everyday Life Insurance , we specialize in finding the perfect policy to match your unique circumstances. Whether you’re a small business owner looking to back your loan or a stay-at-home mom working to provide for her family, we’re here to help. Use our online life insurance calculator to find the best plan for your finances, in just 15 minutes.

Disclaimer : The comments, opinions, and analyses expressed at Everyday Life are for informational purposes only and should not be considered individual investment, legal or tax advice.

• How it works
• Get started
• Client Portal
• Affiliate program
• Privacy policy
• Legal information

Everyday Life

12 Forbes Ln, Andover MA 01810

(888) 681-3811

[email protected]

• Smart life insurance guide

695 Atlantic Avenue, 9th Floor, Boston MA 02111

© 2024 Everyday Life Inc. All Rights Reserved.

Here is your personal referral link..

Share it with your friends!

What Is A Collateral Assignment Of Life Insurance?

Our content follows strict guidelines for editorial accuracy and integrity. Learn about our editorial standards and how we make money.

A collateral assignment is sometimes a necessity if you’re applying for larger financing amounts such as a mortgage or business loan.

But what is a collateral assignment and how do you go about getting it on your life insurance policy? 

In this article, we’ll cover what collateral assignment is, how you can add it to your life insurance, and what alternatives there are out there. 

What Is Collateral Assignment? 

A collateral assignment is a process by which a person uses their life insurance policy as collateral for a secured loan.

In simple terms, collateral assignment is reassigning priorities for who gets paid the death benefit of your life insurance policy.

What Is a death benefit?

A death benefit or face value of a life insurance contract is the amount of money that your beneficiaries will receive from your policy when you die.

Once you apply for collateral assignment and it’s approved, your specified debtor (the loan provider) will be paid first and then your beneficiaries will receive what is left over in your life insurance policy.

This is different from using your cash value to loan money as you are taking out a loan from another financial institution and using your policy as a guarantee that you’ll cover any debt when you die. 

For example, let’s say you want to take out a secured loan from your local bank and want to use your life insurance policy as a collateral assignment.

In this situation, you’d still have to pay back any debt you have with interest during the loan period. 

However, the life insurance policy would be used if the borrower dies and there was an outstanding loan balance remaining. 

Secured Loans vs. Unsecured Loans

Secured loans are debts that are backed by assets that a lender can claim if the debt isn’t repaid. These types of loans often offer better interest rates and more generous payment terms.

Unsecured loans are debts that don’t have collateral. These types of loans are more expensive to repay and considered riskier than secured loans.

Source: Pexels

How Does Applying for Collateral Assignment Work?

The process for getting collateral assignments for life insurance is the same as when you apply for new life insurance coverage. 

All you’ll be doing is indicating to your life insurance provider that your lender will be given priority for the amount of money you have borrowed through them.

There is an:

Application process.

Underwriting process.

Offer that you’ll receive.

You’ll be required to name beneficiaries as well as indicate ownership of the life insurance policy in the collateral assignment form which will be provided by your life insurance company.

This is because you’re changing the terms of your payout and your life insurance provider will need to follow these instructions once you die.

NB Some insurance companies don’t offer collateral assignment on new loans and generally only provide this feature to an existing life insurance policy.

You should check beforehand to see what will be required to apply for a collateral assignment. If you need help finding plans that offer this, send an email to a licensed insurance agent today.

Once you’ve assigned a new collateral assignee to your life insurance policy, they will be entitled to lay a claim on your death benefit for any debt you have with them.

For example, let’s say you take out a collateral assignment life insurance policy worth $200,000 for a loan of $75,000 over 7 years at an interest rate of 18%.

If you die after five years, based on these figures, you’ll still have $41,231.02 owed on your loan.

Your $200,000 life insurance plan will be used to cover this and your beneficiaries will receive the remaining $158 768.98 from your life insurance policy.

Your lender is only allowed to take the amount outstanding on the debt owed and cannot take more. 

What about Missed Payments and Cash Value Life Insurance?

If you have a permanent life policy with a cash value account, sometimes called cash value life insurance, your lender will have access to it to cover missed payments on your loan.

For example, let’s say you miss a payment on your loan and have a collateral assignment. Your lender will be able to access your cash value account and withdraw that month’s payment to cover your debt.

Who Can You Add as a Collateral Assignee?

You can add any person or institution as a collateral assignee to your life insurance policy if you owe them money.

This can include banks, lenders, private individuals, businesses, or credit card companies. 

The most common collateral assignments are for business loans and mortgages. This is because they are loans for high amounts that are paid off over several years. 

In fact, some banks and financial lenders may require that you add them as collateral assignees when you apply for any of the financing options mentioned below.

Common Collateral Assignees Include:

💵 Bank loans

💳 Credit cards

🏡 Mortgages

💼 Business loans

What Do I Do If I’ve Paid Off My Debt?

If you’ve managed to pay off your debt - firstly, congratulations! Secondly, you’ll want to notify your life insurance company that you’ll be changing your collateral assignments on your life policy.

While there is no legal claim that a company can make to debts that aren’t owed anymore, there may be a hold up in paying out the death benefit to your beneficiaries and other collateral assignees.

Life insurance companies will have to figure out who must be paid first, according to the order stated in your collateral assignment terms.

In general, life insurance policies will settle claims within 24 hours of being notified of a policyholder’s death.

The process can be delayed if you do not release your collateral assignees from your life insurance contract. 

Tips to Make Sure Your Life Policy Is Paid Out Quickly

Here are some tips if you want your beneficiary claims to be handled as fast as possible:

1) Keep a copy of your life insurance policy and policy number in a safe place or with your lawyer, financial advisor, or estate planner.

2) Speak to your beneficiaries about your policies and give them the contact details of the relevant life insurance company.

3) Make sure your life insurance contract is updated to reflect your latest list of beneficiaries.

4) Make sure you have your beneficiaries' details listed in the contract or with your lawyer.

The Benefits of Using Collateral Assignment of Life Insurance

While adding a collateral assignment to your current life insurance policy may require an application, paperwork, and time, there are benefits:

Many lenders like it: Banks and financial institutions sometimes prefer it when applicants use their life insurance policy as collateral for a loan. This is because they know that their debt will be serviced long-term by your insurance company which makes their loan to you a lower risk.

Your private property won’t be jeopardized: The last thing you want when you go into debt is to put your personal items, such as your car, investments, or home on the line as collateral. Using collateral assignment is an alternative to this and can protect you in the event that you can’t service your debt.

It can be affordable for some people: If you’re in good health and young, you may be paying affordable rates for permanent life cover. In situations like this, it can make sense to use your life cover as collateral for debts you’ve incurred.

What Are Some Alternatives to Collateral Assignment?

Term Life Insurance: Getting a term life insurance contract to cover specific debts is one way of ensuring your estate and family are protected when you die.

There are multiple types of term life insurance plans and they are more affordable than permanent life insurance. This makes options like level term life insurance and decreasing term life insurance ideal for different types of debts you may have over your lifetime.

What Is Term Life?

Term life is a temporary life coverage option that lasts for a specific period of time. It is different from permanent life insurance which lasts until you die or you stop paying premiums.

Term life contracts are typically between 5 to 20 years, however, you can get renewable term life plans and even a forty-year term life plan .

Borrow from your life insurance: If you have a permanent life insurance policy, such as universal, whole, or indexed life cover, you can borrow money from your cash value account. 

However, keep in mind that you’ll be required to pay interest on any amount that you borrow and any amount of debt incurred will be deducted from your policy’s death benefit when you die.

What Is Cash Value?

Cash value is a feature of permanent life insurance plans that policyholders can contribute additional money toward while they have a policy in force.

This money is set aside in a cash value account which is tax-deferred and can be used in a number of ways.

In some cases, if your policy allows it, you can end your contract and get the cash surrender value of it. This amount is usually much less than the value of your total life insurance contract. 

Our Verdict on Collateral Assignment

Many banks, lenders, and financial institutions want long-term guarantees that you’ll be able to service your debt if anything happens to you.

In some situations, getting collateral assignments on your life insurance to cover these debts is a good option for people who are trying to access finance from these institutions. 

However, there is a risk that your death benefit payout may be delayed for your beneficiaries if you don’t keep your different collateral assignees up to date.

If you already have a life insurance policy, you should contact your provider to find out what the process is and what you’ll need to do to change the collateral assignees on your policy.

If you don’t have a policy yet, our advice is to look at all of your options before you decide to take a permanent life insurance contract with a collateral assignment.

There are alternatives out there that are more affordable if you’re looking to protect your family and estate from debt.

Term life is one such option that is adaptable to your life and easy to get. 

For example, a decreasing term life insurance policy might be the right choice for someone who has recently bought a home and wants to cover their mortgage while they pay it back.

Another option is final expense insurance, which is a permanent life policy for smaller amounts, usually under $50,000.

With final expense insurance, your beneficiaries can pay for anything they want, including any debts you may have had in your life.

The process for applying is simple and you won't have to go through a medical exam or intensive underwriting as you would with traditional permanent life insurance. 

If you need any assistance with finding, comparing, or learning about the different life insurance options to cover your debts, speak to one of our expert advisors today at 1-888-912-2132 or [email protected] .

Where Can I Learn More about Life Insurance?

If you’re looking to learn more about life insurance, different kinds of coverage, or costs, visit our life insurance hub to find our latest articles.

We do the research so that you don’t have to and our articles cover complicated topics like what is a cash value account, what is key person insurance, or how long life insurance takes to pay out a death benefit.  

If you need help with quotes, try out a life insurance quote finder or reach out to us via email at [email protected] to get in touch with a licensed life insurance agent for your state.

Collateral Assignment of Life Insurance

Collateral assignment of life insurance means using a policy as collateral for a loan. If the borrower dies before paying it back, the lender can take the unpaid amount from the insurance payout upon the borrower’s death.

In this guide, you’ll learn how collateral assignments work, why they’re used, and the pros and cons of using life insurance as collateral.

Table of Contents

What Is Collateral Assignment?

• Policy Options for Collateral Assignment

How to Use Life Insurance as Collateral for a Loan

• Life Insurance as Collateral: Pros & Cons
• Alternatives to Life Insurance

Did you know you can use  life insurance to secure an SBA loan for your growing business? Get started today.

Valuable assets (like a home or vehicle) typically serve as collateral for a mortgage or an auto loan. If you default on payments, the lender can repossess it to recover their money.

Lenders require reassurance for loans that aren’t directly tied to a physical asset. You can use a life insurance policy as loan collateral in these cases.

As owner of the life insurance policy , you collaterally assign it to the lender, which means:

• If you die before the loan is repaid, the death benefit covers your remaining loan balance
• Any remaining proceeds go to your named beneficiaries

Collateral vs Absolute Assignment of Life Insurance

There are two types of assignment for life insurance: collateral and absolute.

Collateral assignment of life insurance : You control the policy. It’s commonly used to secure a small business loan.

Absolute assignment : You transfer all policy rights to the assignee. It’s often used when a policy owner sells it to a third party for an immediate cash benefit.

Similarities between collateral and absolute assignment:

• Both involve the transfer of rights under a policy.
• Both require the consent of the insurance company.
• Both can be used as a means of managing financial risks or responsibilities.

Differences between collateral and absolute assignment:

Collateral assignment:

• Used to secure a loan or other financial obligation.
• The policy owner maintains ownership and control over the asset, except for the rights assigned as collateral.
• The lender (assignee) only has rights to the asset in the event of death or, in some cases, default.
• The assignment is temporary and removed when the loan is repaid.

Absolute assignment:

• The policy is fully transferred to a new owner.
• The original owner gives up all rights and control over the policy, including the right to name beneficiaries and access cash value.
• The new owner can manage the policy however they see fit, including selling it, borrowing against it, or changing its terms.
• The assignment is permanent; the original owner can’t reclaim rights to the policy without the new owner’s consent.

Life Insurance Assignee vs Beneficiary

A life insurance assignee is a person or entity to whom a policy’s rights have been transferred.

A beneficiary is a person, trust, or entity designated by a policy owner to receive the death benefit when the insured person dies.

Whether used for collateral assignment or not, your policy needs designated beneficiaries .

Here’s why:

• The lender only has a legal claim to the death benefit if you die before the loan is paid.
• If you pass away, the lender gets their payment, and the rest goes to your beneficiaries.
• If you repay the loan in full and die, the lender receives nothing, and your beneficiaries receive the full benefit.

Life Insurance Policy Options for Collateral Assignment

Using life insurance for collateral assignment when applying for loans is a common practice that almost every life insurance company and lender is equipped to handle.

Examples of when life insurance can be collaterally assigned include:

• Personal loans
• Business loans

There are two types of life insurance—term life insurance and permanent life insurance—and both kinds can be used for collateral assignment.

Term Life Insurance

Lenders typically accept term life insurance as collateral, provided that the policy aligns with the size and duration of the loan.

Coverage and term length must equal the loan’s terms– or exceed them.

For example, if you’re securing a 20-year loan, you would need a term life insurance policy that spans 20 years.

If you pass away before repayment, the insurance company pays the outstanding loan balance to the lender from your policy’s death benefit first. Any remaining amount after the loan is fully paid would then be distributed to the beneficiaries you have named on your policy.

If you repay the loan before passing, the collateral assignment ends, and the total death benefit amount is reserved for your beneficiaries.

Permanent Life Insurance

Lenders often find permanent life insurance policies appealing as collateral due to their unique cash value component.

Life insurance with cash value provides an added level of reassurance to the lender, ensuring the cash value will offset the loan if the borrower defaults. 

However, even though the policy’s worth grows over time, the death benefit must cover the entire loan.

If you pass away before the loan is repaid, the company would first pay the loan balance from your policy’s death benefit to the lender.

Any remaining proceeds from the death benefit would then be distributed to the beneficiaries named on your policy.

Learn more about the differences between term and permanent life insurance .

See what you’d pay for life insurance

If you’re looking to secure a loan with life insurance, you can buy a policy to do so or collaterally assign a policy you already own.

Collateral Assignment of a Life Insurance Policy You Already Own

To collaterally assign an existing policy, you and your lender must fill out a short form confirming the details.

You or your agent can request this form directly from the life insurance company.

Once the completed forms are back in the insurance company’s possession, they will review them and send confirmation in a few weeks.

• If you already own a life insurance policy worth enough to cover the loan, you can usually use it as collateral.
• If you currently have term life insurance, the remaining years on your term must be longer than the loan’s term.

Collateral Assignment of a New Life Insurance Policy

Buying a new life insurance policy for collateral assignment is similar to that of any other purpose for life insurance.

• Step 1: Determine the amount of life insurance coverage you need . While the coverage should be sufficient to cover the loan, you may consider additional obligations like income replacement for your family, mortgage payments, and more.
• Step 2: Apply for a life insurance policy as you would normally. List your chosen beneficiaries, such as your spouse, adult child, etc. At this stage, there’s no need to list the lender as a beneficiary.
• Step 3: Activate your policy. Then, request a collateral assignment form from your agent or insurer directly.
• Step 4: Complete the form and return it to the insurance company. After processing, the insurer acknowledges the collateral assignment. Then the lender obtains rights to the death benefit, up to the amount owed on the loan, if you die before the loan is repaid. Any remaining death benefit would be distributed to the other named beneficiaries.
• Step 5: While collateral assignment is active, policy control may be limited. The specifics of what actions are permissible can vary, so reviewing the terms of the loan and collateral assignment agreement is essential.
• Step 6: Collateral assignment terminates when the loan is paid. Your full ownership rights are then restored.

Explore the various ways business owners use life insurance to protect their business and their loved ones. 

Life Insurance as Collateral: Pros and Cons

Overall, using life insurance as collateral can be a sound and effective strategy for obtaining a loan, provided that it aligns with your financial circumstances and goals.

Collateral assignment impacts your control and financial protection for beneficiaries positively and negatively.

• Access to loans
• Loan approval
• Protection for beneficiaries
• Limited policy control
• Risk to beneficiaries
• Additional costs
• Policy loss

Alternatives to Collateral Assignment

Collateral assignment isn’t the only way to secure a loan. Knowing alternatives can help you decide what best aligns with your financial circumstances and goals.

Some examples include:

• Cash value: If you already own a permanent life insurance policy with accumulated cash value, you can borrow against this amount through policy loans .
• Unsecured loans: These do not require collateral and are primarily based on your creditworthiness. They often come with higher interest rates.
• Secured loans: These are backed by collateral that isn’t life insurance, like investments, savings accounts, or valuable property. If you default on a secured loan, the lender seizes the collateral.
• Home Equity Line of Credit (HELOC): This uses your home as collateral if you’ve built enough equity.
• Credit cards: Interest rates are higher than other loans, but credit cards can be used in a pinch.
• Grants or government programs: Grants or government programs might be available to provide funds with attractive terms.

Compare Life Insurance Quotes and Apply Today

The primary purpose of life insurance is to provide financial protection to those who depend on you. But life insurance has other uses as well, such as collateral assignment.

If you don’t yet have life insurance, start by getting quotes . Here at Quotacy, you can see quotes instantly without giving away any contact information. Compare policies from multiple top-rated insurers and apply with confidence.

The online application only takes a few minutes. When you submit yours, you’re assigned a dedicated life insurance agent who advocates for you. Your agent ensures you get the best possible rate and provides unbiased advice.

Submit a Comment Cancel reply

Your email address will not be published. Required fields are marked *

Submit Comment

March 23, 2021 By csbenton

While our site doesn’t feature every company or financial product on the open market, we believe everyone should be able to make great financial decisions with the utmost confidence. The guidance we offer, the information we provide, and the tools we create are objective, independent, straightforward — and free.

So how do we make money? Our partners compensate us. This may influence what products we write about and review and where on the site we put them. In no way does this affect our recommendations or advice, which are grounded in many hours of research. Our partners cannot pay us to guarantee favorable reviews of their products or services. Here is a list of our partners.

Collateral Assignment of Life Insurance: A Comprehensive Overview

As the saying goes, “Life is uncertain, so you need to be prepared.” And one of the ways to be prepared for life’s uncertainties is through life insurance . But did you know that you can use your life insurance policy as collateral? Enter the world of collateral assignment of life insurance. This comprehensive overview will explore the ins and outs of collateral assignment, shedding light on this often-overlooked strategy. It’s a knowledge that can prove invaluable in uncertain times.

• updated last on June 11, 2024

Understanding how collateral assignment works is crucial whether you are a policyholder or a lender. For instance, you can use your life insurance policy as collateral to secure a loan for a major home renovation, potentially obtaining better interest rates due to the reduced risk for the lender. Alternatively, you could transfer ownership of the policy to a family member, ensuring their financial security in the event of your passing. It’s a versatile tool that can provide financial protection and flexibility when you need it most.

Join us as we dive deep into the mechanics of collateral assignment, discussing the benefits, risks, and important considerations. From the legal aspects to the potential impact on your beneficiaries, this comprehensive guide will empower you with the knowledge you need to make informed decisions about collateral assignment of life insurance. So, let’s embark on this enlightening journey together.

What is a Collateral Assignment of Life Insurance?

Collateral assignment of life insurance is a financial arrangement that can offer significant benefits. It allows a policyholder to assign their life insurance policy as collateral to a lender in exchange for a loan or other financial benefits. This arrangement can unlock the policy’s cash value or death benefit, providing a way for individuals to access funds while maintaining coverage for their beneficiaries. If the policyholder defaults on the loan, the lender can access the policy’s proceeds to recoup the outstanding debt. This understanding can empower individuals to make informed decisions about their financial planning.

While collateral assignment can offer flexibility and access to funds when needed, it’s important to be aware of the potential risks. Policyholders must carefully consider the implications of such an arrangement. Understanding the mechanics of collateral assignment, its benefits, risks, and potential impact on the policy and beneficiaries is crucial before deciding to assign your life insurance policy as collateral. This balanced understanding will help you make an informed decision about whether collateral assignment is the right choice for you.

How Does Collateral Assignment Work?

If the policyholder defaults on the loan, the lender can access the policy’s cash value to recover the outstanding debt. However, it’s important to note that the lender’s claim is limited to the amount of the loan plus any accrued interest and fees. Any remaining funds beyond what is needed to satisfy the debt will be paid to the policy’s beneficiaries upon the insured’s death.

Collateral assignment can be a valuable tool for policyholders who need access to funds for a specific purpose, such as funding a business venture, purchasing a home, or covering unexpected expenses. By leveraging the value of their life insurance policy, policyholders can obtain loans at more favorable terms and interest rates compared to other types of unsecured loans.

Compare the market, right here.

Coach B. saves you up to 60% by comparing the top-rated companies on our quote and apply platform.

Benefits of Collateral Assignment of Life Insurance

Another critical advantage of collateral assignment is the potential for lower interest rates on loans compared to unsecured loans. Since the lender has the security of the policy as collateral, they may be more willing to offer favorable terms, such as lower interest rates or more extended repayment periods. This can result in significant cost savings for the policyholder over the life of the loan, providing a positive outlook on your financial planning.

Additionally, collateral assignment allows policyholders flexibility in using the loan proceeds. Whether for funding a business, covering medical expenses, or purchasing a home, the funds obtained through collateral assignment can be used for various purposes based on the policyholder’s needs and priorities. This versatility empowers you to make the best financial decisions, making collateral assignment a versatile financial tool for policyholders seeking additional liquidity.

Risks and Considerations of Collateral Assignment

Another consideration is the risk of policy lapse if the policyholder cannot repay the loan. This underscores the need for policyholders to be vigilant in monitoring their loan balances. Suppose the outstanding debt exceeds the policy’s cash value. In that case, the policy may risk lapsing, resulting in the loss of coverage and potential financial consequences for the policyholder and their beneficiaries. It’s crucial for policyholders to carefully monitor their loan balance and ensure timely repayment to avoid any lapses in coverage.

Furthermore, policyholders should know the potential tax implications of collateral assignment. Depending on the arrangement’s specifics and the loan amount, there may be tax consequences associated with using the policy as collateral. Reassuringly, consulting with a financial advisor or tax professional can help policyholders understand the tax implications and make informed decisions about collateral assignment, providing them with the support and guidance they need.

Types of Loans That May Require Collateral Assignment

Collateral assignment of life insurance can be used to secure various types of loans, depending on the lender’s requirements and the policyholder’s needs. Common examples of loans that may require collateral assignment include:

• Business Loans : Entrepreneurs and business owners can leverage the value of their life insurance policies to secure loans for business expansion, working capital, or other business-related expenses, providing a reassurance of financial security.
• Real Estate Loans : Homebuyers or property investors may leverage their life insurance policies to secure loans for purchasing real estate or funding property renovations.
• Education Loans : Parents or students seeking funding for education expenses can use the collateral assignment of life insurance to obtain education loans at favorable terms, offering a hopeful outlook for their financial future. Medical Loans : Individuals facing high medical costs may use their life insurance policies as collateral to cover medical expenses or fund specialized treatments.

By understanding the specific requirements of each type of loan and how collateral assignment can be used as a viable option for securing financing, policyholders can make informed decisions about leveraging their life insurance policies for various financial needs. It’s important to note that while collateral assignment can provide access to funds, it also comes with certain risks and benefits.

Compare and buy life insurance

How to Initiate a Collateral Assignment of Life Insurance

• Determine Loan Need : Identify the specific financial need or purpose for which you require a loan and assess whether collateral assignment is the appropriate option to meet that need.
• Contact Lender : Reach out to potential lenders who offer loans that can be secured by a collateral assignment of a life insurance policy and inquire about their terms and conditions.
• Review Collateral Assignment Agreement : Carefully review the collateral assignment agreement provided by the lender, which outlines the terms, conditions, and responsibilities of both parties.
• Consult with Professionals : Seek guidance from financial advisors, insurance agents, or legal experts to ensure you fully understand the implications of collateral assignment and its impact on your policy.
• Sign Agreement : Once you are satisfied with the terms of the collateral assignment agreement, sign the document and provide any necessary documentation to the lender to formalize the arrangement.
• Monitor Loan Repayment : Keep track of your loan balance, interest payments, and repayment schedule to ensure that you meet your obligations and avoid any potential policy lapse or default risks.

By following these steps and staying informed throughout the process, policyholders can navigate the complexities of collateral assignment and make informed decisions that align with their financial goals and priorities.

Important Terms and Conditions to Understand

When embarking on the collateral assignment of life insurance, it’s crucial to empower yourself by comprehending the key terms and conditions that govern the arrangement. Some significant terms to grasp include:

• Loan Amount : For instance, if you have a life insurance policy with a face value of $ 100,000 and you assign it as collateral for a loan, the loan amount would be the total value of the policy, i.e., $ 100,000.
• Interest Rate : The rate at which interest is charged on the outstanding loan balance, which may vary depending on the lender and the terms of the agreement.
• Repayment Schedule : The timeline and structure for repaying the loan, including the frequency of payments, due dates, and any penalties for late payments.
• Default Provisions : The conditions under which the lender may declare the loan in default and take action to recover the outstanding debt, including accessing the policy’s cash value.
• Policy Protection : These are the provisions that provide a safety net for the policyholder’s rights and interests, ensuring that the collateral assignment does not transfer ownership of the policy to the lender, thereby offering a sense of security and reassurance.

Grasping these terms and conditions is a key to confidently and clearly navigating the collateral assignment process, ensuring you are fully informed about your rights and obligations under the agreement.

Common Misconceptions About Collateral Assignment

Despite its potential benefits, collateral assignment of life insurance is often surrounded by misconceptions and misunderstandings. Some common misconceptions include:

• Loss of Ownership : Many people mistakenly believe that collateral assignment transfers ownership of the policy to the lender when it simply creates a security interest in the policy’s value.
• Impact on Beneficiaries : Some individuals may be concerned that collateral assignment will negatively impact their beneficiaries by reducing the policy’s death benefit. However, proper planning and management can help mitigate these risks.
• Complexity of Process : There is a perception that collateral assignment is a complex and convoluted process, but policyholders can navigate the process smoothly and effectively with the proper guidance and support.

Policyholders can make informed decisions that align with their financial goals and priorities by dispelling these misconceptions and gaining a clear understanding of how collateral assignment works.

Ready to see the plans and pricing?

Alternatives to Collateral Assignment of Life Insurance

While collateral assignment can be a valuable strategy for accessing funds and leveraging the value of a life insurance policy, there are alternative options that policyholders may consider based on their specific needs and circumstances. Some alternatives to the collateral assignment of life insurance include:

• Policy Loans : Borrowing against the policy’s cash value through a policy loan, which allows policyholders to access funds without needing to assign the policy as collateral.
• Surrendering Policy : Surrendering the policy in exchange for the cash value provides a lump sum payout but may result in the loss of coverage and potential tax consequences.
• External Financing : Exploring traditional loans or lines of credit from financial institutions or lenders that do not require a collateral assignment of life insurance.

By exploring these alternatives and weighing the pros and cons of each option, policyholders can make informed decisions about how best to leverage their life insurance policies to meet their financial needs and goals.

Is Collateral Assignment of Life Insurance Right for You?

As with any financial decision, weighing the benefits and risks, and carefully assessing your circumstances before proceeding with collateral assignment is essential. However, the importance of consulting with professionals cannot be overstated. By staying informed, proactive, and diligent in managing your policy and financial affairs, with the guidance of experts, you can make the most of collateral assignment and use it as a strategic tool in your financial planning arsenal.

Remember, life insurance is not just about protecting your loved ones—it can also be a valuable asset that provides financial flexibility and security when needed. So, consider the possibilities of collateral assignment and explore how it can complement your financial strategy and goals. Embrace the opportunities that collateral assignment of life insurance offers, and embark on a journey towards greater financial empowerment and peace of mind. The potential for a more secure and flexible financial future is within your reach.

Frequently Asked Questions

Who can authorize to assign a life insurance policy as collateral for a loan?

To authorize a life insurance policy as collateral for a loan, the insured must specifically endorse it in writing. The only person who can endorse the policy is an authorized representative from the insurer or the insured themselves.

What Are the Benefits of Collateral Assignment of Life Insurance?

Collateral assignment of life insurance provides many benefits, including more flexibility and control over the policy, improved liquidity in case of an unexpected financial need, tax benefits, and excellent safety against creditors. The key benefit is that the insured can leverage their life insurance policy as collateral to secure a loan or line of credit. This type of asset-back lending may be used for business expansion, investment, debt consolidation, and many other uses.

What is an example of collateral assignment?

An example of a collateral assignment is when an insurance policy is assigned to a third party as security for a loan or the repayment of an existing debt. The collateral assignment creates a legally binding agreement between the insurer, the lender, and the debtor.

About Coach B.

After starting his financial career with Phoenix Home Life Insurance Company back in 1992, Scott decided he wanted to provide people with an easier and more enjoyable way to buy life insurance. That was the start of Coach B. Life Insurance, whose mission is to be transparent, honest, and helpful to customers — without ever bugging or pushing them.

In the years since then, he has worked tirelessly to improve the process of shopping for insurance. His goal is to make sure that everyone who comes to Coach B. — whether they end up buying a policy or not — has the best possible experience.

More Articles

Exploring level term life insurance advantages and disadvantages.

Advertiser disclosure While our site doesn’t feature every company or financial product on the open market, we believe everyone should be able to make great

What Will Happen If You Die With No Life Insurance?

Advertiser disclosure While our site doesn’t feature every company or financial product on the open market, we believe everyone should be able to make great

10 Life Changes That Impact Life insurance Needs

How to use life insurance for income replacement, best level premium life insurance policies, life insurance for non-us citizens (2024).

Get help from a licensed agent at no-cost and no-obligation

Disclaimer: Coach B. Insurance strives to keep its information accurate and up to date. This information may be different than what you see when you visit a financial institution, service provider or specific product’s site. All financial products, shopping products and services are presented without warranty. When evaluating offers, please review the financial institution’s Terms and Conditions. 

Testimonials

Call us (800) 342-1537

Medicare Supplements

Types of Life Insurance

No Medical Exam Term Insurance

Affordable Term Life Insurance

Instant Issue Life Insurance

Final Expense Life Insurance

Universal Life Insurance

Guaranteed Issue Life Insurance

Accidental Death Life Insurance

Living Benefits Life Insurance

Let Us Shop For You

FAQ’s

Life Insurance Calculator

© Copyright 2020 – Coach B. Life Insurance                            Sitemap         Privacy Policy       Terms and Conditions

• Search Search Please fill out this field.
• Life Insurance

What Is Collateral Assignment (of a Life Insurance Policy)?

Meredith Mangan is a senior editor for The Balance, focusing on insurance product reviews. She brings to the job 15 years of experience in finance, media, and financial markets. Prior to her editing career, Meredith was a licensed financial advisor and a licensed insurance agent in accident and health, variable, and life contracts. Meredith also spent five years as the managing editor for Money Crashers.

Definition and Examples of Collateral Assignment

How collateral assignment works, alternatives to collateral assignment.

Kilito Chan / Getty Images

If you assign your life insurance contract as collateral for a loan, you give the lender the right to collect from the policy’s cash value or death benefit in two circumstances. One is if you stop making payments; the other is if you die before the loan is repaid. Securing a loan with life insurance reduces the lender’s risk, which improves your chances of qualifying for the loan.

Before moving forward with a collateral assignment, learn how the process works, how it impacts your policy, and possible alternatives.

Collateral assignment is the practice of using a life insurance policy as collateral for a loan . Collateral is any asset that your lender can take if you default on the loan.

For example, you might apply for a $25,000 loan to start a business. But your lender is unwilling to approve the loan without sufficient collateral. If you have a permanent life insurance policy with a cash value of $40,000 and a death benefit of $300,000, you could use that life insurance policy to collateralize the loan. Via collateral assignment of your policy, you authorize the insurance company to give the lender the amount you owe if you’re unable to keep up with payments (or if you die before repaying the loan).

Lenders have two ways to collect under a collateral assignment arrangement:

• If you die, the lender gets a portion of the death benefit—up to your remaining loan balance.
• With permanent insurance policies, the lender can surrender your life insurance policy in order to access the cash value if you stop making payments.

Lenders are only entitled to the amount you owe, and are not generally named as beneficiaries on the policy. If your cash value or the death benefit exceeds your outstanding loan balance, the remaining money belongs to you or your beneficiaries.

Whenever lenders approve a loan, they can’t be certain that you’ll repay. Your credit history is an indicator, but sometimes lenders want additional security. Plus, surprises happen, and even those with the strongest credit profiles can die unexpectedly.

Assigning a life insurance policy as collateral gives lenders yet another way to secure their interests and can make approval easier for borrowers.

Types of Life Insurance Collateral

Life insurance falls into two broad categories: permanent insurance and term insurance . You can use both types of insurance for a collateral assignment, but lenders may prefer that you use permanent insurance.

• Permanent insurance : Permanent insurance, such as universal and whole life insurance, is lifelong insurance coverage that contains a cash value. If you default on the loan, lenders can surrender your policy and use that cash value to pay down the balance. If you die, the lender has a right to the death benefit, up to the amount you still owe.
• Term insurance : Term insurance provides a death benefit, but coverage is limited to a certain number of years (20 or 30, for example). Since there’s no cash value in these policies, they only protect your lender if you die before the debt is repaid. The duration of a term policy used as collateral needs to be at least as long as your loan term.

A Note on Annuities

You may also be able to use an annuity as collateral for a bank loan. The process is similar to using a life insurance policy, but there is one key difference to be aware of. Any amount assigned as collateral in an annuity is treated as a distribution for tax purposes. In other words, the amount assigned will be taxed as income up to the amount of any gain in the contract, and may be subject to an additional 10% tax if you’re under 59 ½.

A collateral assignment is similar to a lien on your home . Somebody else has a financial interest in your property, but you keep ownership of it.

The Process

To use life insurance as collateral, the lender must be willing to accept a collateral assignment. When that’s the case, the policy owner, or “assignor,” submits a form to the insurance company to establish the arrangement. That form includes information about the lender, or “assignee,” and details about the lender’s and borrower’s rights.

Policy owners generally have control over policies. They may cancel or surrender coverage, change beneficiaries, or assign the contract as collateral. But if the policy has an irrevocable beneficiary, that beneficiary will need to approve any collateral assignment.

State laws typically require you to notify the insurer that you intend to pledge your insurance policy as collateral, and you must do so in writing. In practice, most insurers have specific forms that detail the terms of your assignment.

Some lenders might require you to get a new policy to secure a loan, but others allow you to add a collateral assignment to an existing policy. After submitting your form, it can take 24 to 48 hours for the assignment to go into effect.

Lenders Get Paid First

If you die and the policy pays a death benefit , the lender receives the amount you owe first. Your beneficiaries get any remaining funds once the lender is paid. In other words, your lender takes priority over your beneficiaries when you use this strategy. Be sure to consider the impact on your beneficiaries before you complete a collateral assignment.

After you repay your loan, your lender does not have any right to your life insurance policy, and you can request that the lender release the assignment. Your life insurance company should have a form for that. However, if a lender pays premiums to keep your policy in force, the lender may add those premium payments (plus interest) to your total debt—and collect that extra money.

There may be several other ways for you to get approved for a loan—with or without life insurance:

• Surrender a policy : If you have a cash value life insurance policy that you no longer need, you could potentially surrender the policy and use the cash value. Doing so might prevent the need to borrow, or you might borrow substantially less. However, surrendering a policy ends your coverage, meaning your beneficiaries will not get a death benefit. Also, you’ll likely owe taxes on any gains.
• Borrow from your policy : You may be able to borrow against the cash value in your permanent life insurance policy to get the funds you need. This approach could eliminate the need to work with a traditional lender, and creditworthiness would not be an issue. But borrowing can be risky, as any unpaid loan balance reduces the amount your beneficiaries receive. Plus, over time, deductions for the cost of insurance and compounding loan interest may negate your cash value and the policy could lapse, so it’s critical to monitor.
• Consider other solutions : You may have other options unrelated to a life insurance policy. For example, you could use the equity in your home as collateral for a loan, but you could lose your home in foreclosure if you can’t make the payments. A co-signer could also help you qualify, although the co-signer takes a significant risk by guaranteeing your loan.

Key Takeaways

• Life insurance can help you get approved for a loan when you use a collateral assignment.
• If you die, your lender receives the amount you owe, and your beneficiaries get any remaining death benefit.
• With permanent insurance, your lender can cash out your policy to pay down your loan balance.
• An annuity can be used as collateral for a loan but may not be a good idea because of tax consequences.
• Other strategies can help you get approved without putting your life insurance coverage at risk.

NYSBA. " Life Insurance and Annuity Contracts Within and Without Tax Qualified Retirement Plans and Life Insurance Trusts ." Accessed April 12, 2021.

IRS. " Publication 575 (2020), Pension and Annuity Income ." Accessed April 12, 2021.

Practical Law. " Security Interests: Life Insurance Policies ." Accessed April 12, 2021.

Absolute Assignment of Life Insurance Policies

An absolute assignment transfers all ownership rights of a life insurance policy.

PhotoObjects.net/PhotoObjects.net/Getty Images

More Articles

•   1. What Is the Assignment of Insurance Benefits?
•   2. What Is a Life Insurance Assignment?
•   3. Does Life Insurance Count Towards the Two Million for Federal Estate Tax?

An absolute assignment of a life insurance policy involves transferring all rights and ownership decisions to another party. You could have one of several reasons for wanting to do this; for example, using the policy as collateral for a loan, or making a donation to your favorite charity at death. Making an absolute assignment is relatively simple as long as your life insurance policy allows it.

How Transfer of Ownership Works

Absolute assignment is akin to a transfer of ownership, in that you are giving all ownership rights to another party. Although you remain the insured under the contract, the new party can change the beneficiary (usually to itself), it can make decisions about investment options of a whole-life policy, and it can take any other action that does not jeopardize the policy's in-force status. You remain responsible for the premium payments, and you could be in breach of the assignment provisions if you don't pay them.

Collateral Loan Bank Assignment

Absolute assignment of life insurance is often done when a person applies for a loan. If the bank is concerned that the loan might not be repaid if you died, if might require a life policy with an absolute assignment to the bank. The bank names itself the beneficiary of the policy up to the amount of the loan balance. Any residual death benefit would go to your named beneficiary.

Financing a Charitable Gift

Another use of absolute assignment is to make a charitable gift. This approach is gaining in popularity.

Life insurance is often purchased to finance a charitable donation by the estate of a deceased individual. One drawback to this approach is that the entire gift goes through the estate and might incur probate delays and fees.

The use of an absolute assignment streamlines the process, as the charity can name itself the beneficiary of the policy. The charity can issue you a tax receipt for every premium, which you can deduct as a charitable contribution.

Absolute Assignment Legal Considerations

Insurance companies freely provide assignment forms that are straightforward and easy to fill out. Once an assignment is complete, a copy of the form should be filed with the insurance company.

The life insurance company may withhold part of its payout to any beneficiary -- including a newly designated one -- if a premium hasn't been fully paid, or because of other indebtedness. That might have legal ramifications for you and the assignee, in which the insurance company will take no part.

• Standard Life Insurance Co. of New York: Absolute Assignment Form
• Waypoint Partners: Assigning Your Life Insurance Policy
• Collateral Assignment Agreement

Philippe Lanctot started writing for business trade publications in 1990. He has contributed copy for the "Canadian Insurance Journal" and has been the co-author of text for life insurance company marketing guides. He holds a Bachelor of Science in mathematics from the University of Montreal with a minor in English.

Related Articles

What is the assignment of insurance benefits, what is a life insurance assignment, does life insurance count towards the two million for federal estate tax, what happens to homeowner's insurance when a person dies, what is the collateral assignment of a life insurance policy, borrowing as a beneficiary from an irrevocable life insurance trust, how to change the maturity date on whole life insurance policy, can you change the owner of a nonqualified annuity, how to cancel an irrevocable trust life insurance policy, how do i set up a trust fund with a life insurance policy, tax consequences of changing beneficiaries on a life insurance policy, how much can i borrow against cash value.

Zacks Research is Reported On:

Zacks Investment Research

is an A+ Rated BBB

Accredited Business.

Copyright © 2024 Zacks Investment Research

At the center of everything we do is a strong commitment to independent research and sharing its profitable discoveries with investors. This dedication to giving investors a trading advantage led to the creation of our proven Zacks Rank stock-rating system. Since 1986 it has nearly tripled the S&P 500 with an average gain of +26% per year. These returns cover a period from 1986-2011 and were examined and attested by Baker Tilly, an independent accounting firm.

Visit performance for information about the performance numbers displayed above.

NYSE and AMEX data is at least 20 minutes delayed. NASDAQ data is at least 15 minutes delayed.

• Construction Accidents

Practice Areas

• Retirement Planning

Assignment of Benefits: What You Need to Know

• August 17, 2022
• Steven Schwartzapfel

Insurance can be useful, but dealing with the back-and-forth between insurance companies and contractors, medical specialists, and others can be a time-consuming and ultimately unpleasant experience. You want your medical bills to be paid without having to act as a middleman between your healthcare provider and your insurer.

However, there’s a way you can streamline this process. With an assignment of benefits, you can designate your healthcare provider or any other insurance payout recipient as the go-to party for insurance claims. While this can be convenient, there are certain risks to keep in mind as well.

Below, we’ll explore what an assignment of insurance benefits is (as well as other forms of remediation), how it works, and when you should employ it. For more information, or to learn whether you may have a claim against an insurer, contact Schwartzapfel Lawyers now at 1-516-342-2200 .

What Is an Assignment of Benefits?

An assignment of benefits (AOB) is a legal process through which an insured individual or party signs paperwork that designates another party like a contractor, company, or healthcare provider as their insurance claimant .

Suppose you’re injured in a car accident and need to file a claim with your health insurance company for medical bills and related costs. However, you also need plenty of time to recover. The thought of constantly negotiating between your insurance company, your healthcare provider, and anyone else seems draining and unwelcome.

With an assignment of benefits, you can designate your healthcare provider as your insurance claimant. Then, your healthcare provider can request insurance payouts from your healthcare insurance provider directly.

Through this system, the health insurance provider directly pays your physician or hospital rather than paying you. This means you don’t have to pay your healthcare provider. It’s a streamlined, straightforward way to make sure insurance money gets where it needs to go. It also saves you time and prevents you from having to think about insurance payments unless absolutely necessary.

What Does an Assignment of Benefits Mean?

An AOB means that you designate another party as your insurance claimant. In the above example, that’s your healthcare provider, which could be a physician, hospital, or other organization.

With the assignment of insurance coverage, that healthcare provider can then make a claim for insurance payments directly to your insurance company. The insurance company then pays your healthcare provider directly, and you’re removed as the middleman.

As a bonus, this system sometimes cuts down on your overall costs by eliminating certain service fees. Since there’s only one transaction — the transaction between your healthcare provider and your health insurer — there’s only one set of service fees to contend with. You don’t have to deal with two sets of service fees from first receiving money from your insurance provider, then sending that money to your healthcare provider.

Ultimately, the point of an assignment of benefits is to make things easier for you, your insurer, and anyone else involved in the process.

What Types of Insurance Qualify for an Assignment of Benefits?

Most types of commonly held insurance can work with an assignment of benefits. These insurance types include car insurance, healthcare insurance, homeowners insurance, property insurance, and more.

Note that not all insurance companies allow you to use an assignment of benefits. For an assignment of benefits to work, the potential insurance claimant and the insurance company in question must each sign the paperwork and agree to the arrangement. This prevents fraud (to some extent) and ensures that every party goes into the arrangement with clear expectations.

If your insurance company does not accept assignments of benefits, you’ll have to take care of insurance payments the traditional way. There are many reasons why an insurance company may not accept an assignment of benefits.

To speak with a Schwartzapfel Lawyers expert about this directly, call 1-516-342-2200 for a free consultation today. It will be our privilege to assist you with all your legal questions, needs, and recovery efforts.

Who Uses Assignments of Benefits?

Many providers, services, and contractors use assignments of benefits. It’s often in their interests to accept an assignment of benefits since they can get paid for their work more quickly and make critical decisions without having to consult the insurance policyholder first.

Imagine a circumstance in which a homeowner wants a contractor to add a new room to their property. The contractor knows that the scale of the project could increase or shrink depending on the specifics of the job, the weather, and other factors.

If the homeowner uses an assignment of benefits to give the contractor rights to make insurance claims for the project, that contractor can then:

• Bill the insurer directly for their work. This is beneficial since it ensures that the contractor’s employees get paid promptly and they can purchase the supplies they need.
• Make important decisions to ensure that the project completes on time. For example, a contract can authorize another insurance claim for extra supplies without consulting with the homeowner beforehand, saving time and potentially money in the process.

Practically any company or organization that receives payments from insurance companies may choose to take advantage of an assignment of benefits with you. Example companies and providers include:

• Ambulance services
• Drug and biological companies
• Lab diagnostic services
• Hospitals and medical centers like clinics
• Certified medical professionals such as nurse anesthetists, nurse midwives, clinical psychologists, and others
• Ambulatory surgical center services
• Permanent repair and improvement contractors like carpenters, plumbers, roofers, restoration companies, and others
• Auto repair shops and mechanic organizations

Advantages of Using an Assignment of Benefits

An assignment of benefits can be an advantageous contract to employ, especially if you believe that you’ll need to pay a contractor, healthcare provider, and/or other organization via insurance payouts regularly for the near future.

These benefits include but are not limited to:

• Save time for yourself. Again, imagine a circumstance in which you are hospitalized and have to pay your healthcare provider through your health insurance payouts. If you use an assignment of benefits, you don’t have to make the payments personally or oversee the insurance payouts. Instead, you can focus on resting and recovering.
• Possibly save yourself money in the long run. As noted above, an assignment of benefits can help you circumvent some service fees by limiting the number of transactions or money transfers required to ensure everyone is paid on time.
• Increased peace of mind. Many people don’t like having to constantly think about insurance payouts, contacting their insurance company, or negotiating between insurers and contractors/providers. With an assignment of benefits, you can let your insurance company and a contractor or provider work things out between them, though this can lead to applications later down the road.

Because of these benefits, many recovering individuals, car accident victims, homeowners, and others utilize AOB agreements from time to time.

Risks of Using an Assignment of Benefits

Worth mentioning, too, is that an assignment of benefits does carry certain risks you should be aware of before presenting this contract to your insurance company or a contractor or provider. Remember, an assignment of benefits is a legally binding contract unless it is otherwise dissolved (which is technically possible).

The risks of using an assignment of benefits include:

• You give billing control to your healthcare provider, contractor, or another party. This allows them to bill your insurance company for charges that you might not find necessary. For example, a home improvement contractor might bill a homeowner’s insurance company for an unnecessary material or improvement. The homeowner only finds out after the fact and after all the money has been paid, resulting in a higher premium for their insurance policy or more fees than they expected.
• You allow a contractor or service provider to sue your insurance company if the insurer does not want to pay for a certain service or bill. This can happen if the insurance company and contractor or service provider disagree on one or another billable item. Then, you may be dragged into litigation or arbitration you did not agree to in the first place.
• You may lose track of what your insurance company pays for various services . As such, you could be surprised if your health insurance or other insurance premiums and deductibles increase suddenly.

Given these disadvantages, it’s still wise to keep track of insurance payments even if you choose to use an assignment of benefits. For example, you might request that your insurance company keep you up to date on all billable items a contractor or service provider charges for the duration of your treatment or project.

For more on this and related topic, call Schwartzapfel Lawyers now at 1-516-342-2200 .

How To Make Sure an Assignment of Benefits Is Safe

Even though AOBs do carry potential disadvantages, there are ways to make sure that your chosen contract is safe and legally airtight. First, it’s generally a wise idea to contact knowledgeable legal representatives so they can look over your paperwork and ensure that any given assignment of benefits doesn’t contain any loopholes that could be exploited by a service provider or contractor.

The right lawyer can also make sure that an assignment of benefits is legally binding for your insurance provider. To make sure an assignment of benefits is safe, you should perform the following steps:

• Always check for reviews and references before hiring a contractor or service provider, especially if you plan to use an AOB ahead of time. For example, you should stay away if a contractor has a reputation for abusing insurance claims.
• Always get several estimates for work, repairs, or bills. Then, you can compare the estimated bills and see whether one contractor or service provider is likely to be honest about their charges.
• Get all estimates, payment schedules, and project schedules in writing so you can refer back to them later on.
• Don’t let a service provider or contractor pressure you into hiring them for any reason . If they seem overly excited about getting started, they could be trying to rush things along or get you to sign an AOB so that they can start issuing charges to your insurance company.
• Read your assignment of benefits contract fully. Make sure that there aren’t any legal loopholes that a contractor or service provider can take advantage of. An experienced lawyer can help you draft and sign a beneficial AOB contract.

Can You Sue a Party for Abusing an Assignment of Benefits?

Sometimes. If you believe your assignment of benefits is being abused by a contractor or service provider, you may be able to sue them for breaching your contract or even AOB fraud. However, successfully suing for insurance fraud of any kind is often difficult.

Also, you should remember that a contractor or service provider can sue your insurance company if the insurance carrier decides not to pay them. For example, if your insurer decides that a service provider is engaging in billing scams and no longer wishes to make payouts, this could put you in legal hot water.

If you’re not sure whether you have grounds for a lawsuit, contact Schwartzapfel Lawyers today at 1-516-342-2200 . At no charge, we’ll examine the details of your case and provide you with a consultation. Don’t wait. Call now!

Assignment of Benefits FAQs

Which states allow assignments of benefits.

Every state allows you to offer an assignment of benefits to a contractor and/or insurance company. That means, whether you live in New York, Florida, Arizona, California, or some other state, you can rest assured that AOBs are viable tools to streamline the insurance payout process.

Can You Revoke an Assignment of Benefits?

Yes. There may come a time when you need to revoke an assignment of benefits. This may be because you no longer want the provider or contractor to have control over your insurance claims, or because you want to switch providers/contractors.

To revoke an assignment of benefits agreement, you must notify the assignee (i.e., the new insurance claimant). A legally solid assignment of benefits contract should also include terms and rules for this decision. Once more, it’s usually a wise idea to have an experienced lawyer look over an assignment of benefits contract to make sure you don’t miss these by accident.

Contact Schwartzapfel Lawyers Today

An assignment of benefits is an invaluable tool when you need to streamline the insurance claims process. For example, you can designate your healthcare provider as your primary claimant with an assignment of benefits, allowing them to charge your insurance company directly for healthcare costs.

However, there are also risks associated with an assignment of benefits. If you believe a contractor or healthcare provider is charging your insurance company unfairly, you may need legal representatives. Schwartzapfel Lawyers can help.

As knowledgeable New York attorneys who are well-versed in New York insurance law, we’re ready to assist with any and all litigation needs. For a free case evaluation and consultation, contact Schwartzapfel Lawyers today at 1-516-342-2200 !

Schwartzapfel Lawyers, P.C. | Fighting For You™™

What Is an Insurance Claim? | Experian

What is assignment of benefits, and how does it impact insurers? | Insurance Business Mag

Florida Insurance Ruling Sets Precedent for Assignment of Benefits | Law.com

Related Posts

Can you plead the fifth in a civil case.

Most of us associate the Fifth Amendment with police interrogations and criminal courtrooms on TV. But what if you find

Do Civil Cases Have A Jury?

If you or a loved one has been injured and are seeking financial compensation, you might be wondering what to

De Jure vs. De Facto: The Differences Explained

Two important concepts often get tangled in the legal system: de jure vs. de facto. These Latin terms may sound

We'll Fight For You

Schwartzapfel® lawyers has a 99% client satisfaction rate, quick links.

• News & Events
• Verdicts & Settlements
• Video Gallery
• Wrongful Death
• Vehicle Accidents
• Slip & Fall
• Medical Malpractice
• Workers' Compensation
• Personal Injuries
• Product Liability
• Garden City

Risk Management

Capital markets.

Ariel Tavor

Keith yagnik, ariel serber, michael kikoz.

• (212) 548-6201

Guidelines for Collateral Assignment of Life Insurance

• By: Risk Management Team

Lions Financial provides comprehensive guidelines for the collateral assignment of life insurance. The collateral assignment involves using a life insurance policy as collateral for a loan or debt. Lions Financial assists individuals and businesses in understanding the process and implications of collateral assignment, ensuring they make informed decisions.

The guidelines cover important aspects such as determining the policy’s cash surrender value, establishing the assignment amount, and defining the rights and responsibilities of the assignee and assignor. Lions Financial also helps clients navigate legal and tax considerations related to collateral assignment.

Banks require insurance for collateral assignment so that they can always get any outstanding loan amount back if the loaner defaults or dies before being able to pay the loan back.

Collateral is pledged as security for repayment of a loan, to be forfeited in the event of a default. A collateral assignment of insurance is a conditional assignment appointing a lender as the primary beneficiary of a benefit to use as collateral for a loan. If the borrower is unable to pay, the lender can cash in the insurance policy and recover what is owed.

An Absolute assignment in insurance involves signing over your entire policy to another person or entity. The person who is selling or gifting the policy is known as the assignor, and the individual or individuals who receive it are the assignee. The assignee takes full ownership of the policy, being held liable for any premiums and also having the authority to change or designate new beneficiaries.

Collateral assignment of life insurance essentially works like a standard loan. The insurance policy is “collateral” for a loan, and the person or organization that pays out that loan is the temporary beneficiary of the policy’s death benefit until the loan is repaid. The entity taking over the policy does so on a conditional basis and, therefore, doesn’t have the authority to make changes to it, re-sell it or take any of its cash value. Instead, the assignee can only draw on the death benefit if the policyholder defaults.

On the other hand, Collateral Assignment enables policy holders to regain control of their own policy once a medical or other crisis has resolved. It is one of the 3 common ways to borrow from your life insurance policy and access the cash value. With a collateral assignment, you are able to eventually benefit again from the long-term advantages of a life insurance policy.

If one already has a life insurance policy with a face value greater than the loan amount, he can collaterally assign that policy by requesting the paperwork from the insurer. If one doesn’t have a life insurance policy or needs additional coverage, he will need to apply for life insurance and go through underwriting.

Whether one has a term life insurance policy or a whole life insurance policy, he will be the policy owner and responsible for the premium payments. 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 policy. Some banks may require an escrow account for the life insurance premiums, others may require proof of premiums paid or prepaid.

If one has a whole life policy that he uses for collateral assignment, banks will have access to the cash value of the policy if he defaulted on the loan. If the loaner dies, the insurance company will use the death benefit to pay off any outstanding loan amount. The rest, if any, goes to the assigned beneficiaries.

Insurance companies must be notified of the collateral assignment of a policy. When one is applying for life insurance for the purpose of collateral assignment, he will name his beneficiaries as he would for a personal policy. The bank is not his beneficiary, but the assignee on the collateral assignment after the policy is in force. On the form, he will be the assignor.

There are several reasons to consider a collateral assignment of life insurance. The Collateral assignment guarantees the safety of the amount that was loaned out to the lender, especially under the listed terms and conditions that the lender will be paid in full; moreover, the remaining will be given to the listed beneficiaries in the case of death of the borrower.

• It safeguards the interests of the lender. A collateral assignment plays a critical role in securing a loan for the borrower. It is the insurance company’s obligation to safeguard the lender’s interest after collecting the collateral assignment form.
• A collateral assignment allows you to be more flexible with your capital assets.
• A collateral assignment allows the borrower to purchase insurance as a low-cost collateral to secure paying back a loan.

A collateral assignment has great advantages, but it has certain limitations as well. First of all, a collateral assignment has a limited death benefit. You should assign part of the death benefits as collateral instead of the total benefits which avoids the circumstances where the lender claims all the death benefits after you die.

• Difficulty in obtaining an affordable insurance policy with low premiums.
• Loss of policy control is another disadvantage of collateral assignment.
• Collateral assignment suffers from the limited use of cash value.

Any type of life insurance policy is acceptable for collateral assignment, provided the insurance company allows assignment for the policy.

Some examples of insurance policies you can use for collateral assignment are:

• Term Insurance

Term life insurance is used to offer coverage for a specific number of years. The proceeds of the policy are only paid out after the insurer dies, and it lacks equity and a surrender value. It falls under the category of the most affordable insurance plans which is why it is a top pick for most people.

You don’t need to buy a plan that exceeds or falls below your needs. Term life insurance enables you to purchase a plan tailored to your needs and since it is not permanent, you are going to pay low premiums.

• Universal Life Insurance or Whole Life Insurance

With universal life insurance, you will be able to design the insurance policy according to how you want it. The insurance proceeds are usually released when the insured party dies. It is great for individuals looking for a permanent insurance policy that never expires unless you are dead. In short, you will continue to receive coverage as long as the annual premiums are getting paid.

On the downside, universal life insurance policies tend to be expensive because they are meant to offer life term coverage.

On the bright side, the policies build cash value and the longer the premiums are paid,  the more value the plan will build. This cash value can be used on other investments or to pay off the outstanding premiums.

When applying for a collateral assignment of life insurance, you can use two ways to do so: through the bank or through your insurer. The two are explained further below;

• APPLYING THROUGH YOUR BANK

There are some lenders who will consider using your existing life insurance policy for collateral assignment if you request it, but others might require you to take out a brand-new policy specifically  for that purpose.

In either case, using life insurance for collateral assignment when applying for loans is a fairly common practice that almost every life insurance company and the bank is equipped to handle.

You start off the application for assignment by securing the loan with the bank in question. This is where you will discover the limitations and regulations the bank has regarding the collateral assignment of life insurance. Each lender has different policies.

• APPLYING THROUGH YOUR INSURER

Once you have found the right loan, you must fill out the collateral assignment form. Your insurer will be able to provide you with this form easily.

The form has to be filled out by every party involved, including yourself, the lender, and the insurance company. You can sign the forms at the time of your loan application or you can sign them after your policy has been issued.

If you are taking out a brand-new life insurance policy, you are better off signing all of the documents for this at the beginning of the application. The time frame to request a collateral assignment and be accepted for it ranges between 24 hours and 48 hours.

Some banks might require that you notarize the form, which can add some time to the application and acceptance process

  There are several essential parts to be included in the collateral assignment forms.

1.  Policy Identification

This part focuses on the information of the insured, including policy numbers, owner’s first and last names, address, phone number, and email address.

2. Assignee information:

This part contains information about the assignee. The assignee could be an individual, corporate entity or trust. If the assignee is a Trust, he/she ought to list out all the names of currently serving trustees.

Moreover, this part should include the assignee’s full legal name, address, tax ID, email address, and phone number.

3. Terms and conditions:

This section lists all the terms and conditions of the assignment. To be specific, this section covers in detail the rights, for instance, “the sole right to collect from the Insurer the net proceeds of the policy, the sole right to obtain one or more loans or advances on the Policy”, etc. Moreover, this section might also include IRS certification to certify the taxpayer identification number filed in the previous sections are authentic and correct.

4. Signatures:

All owners and assignees are required to sign and date in this section after reviewing the previous terms and conditions. Moreover, beneficiaries are also required to sign this form.

5. Submission of the assignment form:

After careful revision of terms and conditions of the assignment and signature, the assignment form should be submitted for processing. This part should list detailed instructions for sending back the assignment form. Moreover, this part should also provide the address, contact information, and the fax number of the company who issued the policy.

You apply for a life insurance policy and name your beneficiary (your spouse, children, whomever). Just as you normally would.

After the policy goes into force, a collateral assignment form from the life insurance company will be sent for you to complete. When a life insurance company sets a collateral assignment of life insurance, this usually takes in the region of seven to ten days to be filed and acknowledged. However we may expedite this if the collateral assignment is required more urgently.

When taking out life insurance at the same time as assigning the collateral, the collateral assignment form must be submitted with the life insurance application.

You get the collateral assignment form signed (some companies require a notarized signature).

It will take a few days to a few weeks for the life insurance company to acknowledge the assignment.

Once the loan has been paid in full, the assignment must be lifted from the policy by means of a release form sent by the lender to the insurance company. When it receives the release, the insurance company cancels the assignment and restores all rights in the policy to the owner.

A collateral assignment allows the life insurance company to pay your SBA lender only what they are owed and the rest goes to your beneficiary. As you pay down the loan, the amount of coverage will be more than you need, and a collateral assignment form makes sure the lender is only paid what is needed.

If you named the lender as the beneficiary, the lender would receive the entire death benefit even though you’ve paid down the balance. And if you did that, the life insurance company wouldn’t issue you the amount of coverage needed – they’ll typically only issue 80% of the loan amount. So, it’s imperative that you use a collateral assignment.

The Collateral Assignment of Life Insurance is a way to secure funding for business or other ventures. It is important to understand the different types of assignments and how they work before choosing this option.

At Lions Financial, we offer a variety of services and resources to help businesses secure funding and protect their assets.

To learn more about these services, sign up for our newsletters or make an appointment with a representative today!

Contact us at https://lions.financial/contact/

Learn more, visit:

What Are the Tax Considerations For Life Insurance Premiums Under Collateral Assignment For Business Bank Loans

Should You Consider An Asset-Based Loan For Your Business

Process For A Business To File a Life Insurance Claim

Life Insurance Requirements for SBA Loans

Life Insurance Requirements when getting an SBA Loan

The sources we use for this information include:

https://www.investopedia.com/terms/c/collateral.asp

https://www.investopedia.com/terms/l/lender.asp

https://www.investopedia.com/terms/b/beneficiary.asp

View all posts

Navigating Corporate Venture Capital: A Strategic Guide for Insurtech Startups

In the rapidly evolving Insurtech landscape, startups often find themselves at a crossroads, seeking significant investments to fuel their growth and innovation. Corporate venture capital

Navigating the Venture Capital Landscape : How Lions Financial Prepares Startups for Success

Venture capital is more than just a financial injection for startups—it’s a catalyst that propels innovation into sustainable business success. Given the high stakes and

Scaling New Heights: Preparing for Series A Round with Lions Financial

Transitioning from seed funding to Series A fundraising marks a pivotal stage for a startup. At this juncture, the emphasis shifts from showcasing potential to

Life Insurance Requirements When Getting an SBA Loan

  As a business owner, you are required to purchase life insurance as part of a loan agreement. This life insurance policy will serve as

Schedule a call with us to get the assistance you need for your business!

Framing entity buy-sell agreement insurance for business owners, investment research analysis risk management air france, investment research analysis risk management aero mexico, copyright © 2023 | lions financial.

Credit Cards

Financial planning.

• Cheapest Car Insurance
• Cheapest Full Coverage Car Insurance
• Car Insurance Cost Calculator
• Best Car Insurance
• Compare Car Insurance Costs
• Average Cost of Car Insurance
• Best Term Life Insurance
• Best Whole Life Insurance
• Best Life Insurance Companies
• Best Universal Life Insurance
• Best Life Insurance for Seniors
• Compare Quotes
• Best Auto and Home Insurance Bundle
• Homeowners Insurance
• Renters Insurance
• Health Insurance
• Pet Insurance
• Small Business Insurance

Insurance Guidance

• Conventional Mortgages
• Jumbo Loans
• Best HELOC Loans and Rates
• Get a HELOC With Bad Credit
• Pay Off Your Mortgage With a HELOC
• Pros and Cons of HELOCs
• The HELOC Approval Process
• Mortgage Payment Calculator
• Reverse Mortgage Calculator
• FHA vs. Conventional Loan Calculator
• Private Mortgage Insurance Calculator
• Debt-to-Income Ratio Calculator

Mortgage Guidance

• Best Balance Transfer Credit Cards
• Best Cash Back Credit Cards
• Best Travel Rewards Credit Cards
• Best Airline Credit Cards
• Best Credit Cards for Excellent Credit
• Best Business Credit Cards
• Best American Express Cards
• Best Capital One Credit Cards
• Best Chase Credit Cards
• Best Citi Credit Cards
• Best Bank of America Credit Cards
• Cash Back Calculator
• Pros and Cons of Balance Transfers
• Practical Guide for Improving Credit Fast
• Average Credit Score by Age
• Credit Cards For Bad Debt
• Credit Card Glossary

Recent Credit Card Reviews & Comparisons

• Best Personal Loans of 2024
• Best Personal Loans for Excellent Credit
• Best Personal Loans for Good Credit
• Best Personal Loans for Bad Credit
• Best Same-Day Approval Loans
• Best Personal Loans for Debt Consolidation
• Best Private Student Loans
• Best Student Loans for Bad Credit
• Best Student Loans for International Students
• Best Low-Interest Student Loans
• Best Student Loans Without a Co-Signer
• Personal Loan Calculator
• Auto Loan Calculator
• Student Loan Calculator
• How to Calculate Loan Payments
• Can You Get a Personal Loan With Bad Credit?

Loans Guidance

• Compound Interest Calculator
• Cost of Living Calculator
• Financial Literacy Handbook
• Guide to Retirement Planning
• Ultimate Guide to Budgeting
• Understanding Types of Debt
• How to Pay Down Student Loan Debt
• How to Start Saving & Investing
• Should You Rent or Buy a House
• How to Pay for College
• Guide to Buying a Car
• Guide to Negotiating Salary
• Safest Cities in America
• Top Cities for Job Seekers
• Most & Least Tax-Friendly States
• Most Dangerous Days for DUIs

Who Should Use Life Insurance as Collateral?

You can use life insurance as collateral for a loan, which can offer many benefits but also comes with risks. Whether this is a wise financial strategy for you will depend on your needs, circumstances and goals.

Enter your ZIP code to get started

Free. Simple. Secure.

Melissa Wylie

Content and SEO Manager

Melissa Wylie is the Content and SEO Manager at MoneyGeek, with nearly a decade of editorial experience and six years of work in financial content focused on small businesses. She previously held SEO positions at Bankrate and LendingTree, with bylines on ValuePenguin and MagnifyMoney. Wylie has a journalism degree from the University of North Texas. Her strong foundation in journalism helps her craft content that simplifies complex financial topics to help everyone feel confident when making decisions with their money.

Victoria Copans

Victoria Copans is a professional writer, editor and translator. She previously worked as the managing editor for online events industry publication XLIVE. As a self-described budgeting nerd, she was drawn to the personal finance space to help share important and useful information that people may not otherwise have access to. In her free time, she loves to travel, learn languages and explore the beautiful nature in her home of Vermont.

Updated: July 23, 2024

Advertising & Editorial Disclosure

• How Collateral Assignment Works
• Pros and Cons
• Eligible Life Insurance Types
• Using Life Insurance as Collateral
• Other Ways to Use Life Insurance
• Alternatives to Life Insurance
• When to Use It

Policyholders can use life insurance as collateral when taking out a loan, allowing you to access funds by assigning a portion or all of your policy's death benefit to a lender as collateral. You may use the cash value component if you have a permanent policy.

Although the collateral assignment of life insurance can provide financial flexibility among other benefits, it requires careful consideration of all variables, such as the type of life insurance policy, terms and individual financial needs. Comparing it to alternative options can also help you decide if you should use life insurance as collateral for a loan.

How Collateral Assignment of Life Insurance Works

• Advantages and Drawbacks of Using Life Insurance as Loan Collateral

Life Insurance Types That Can Act as Collateral

How to use life insurance as loan collateral, alternatives to life insurance as collateral, when to use life insurance as collateral, faq about collateral assignment of life insurance, key takeaways.

Collateral assignment of life insurance involves using a life policy as security for a loan, ensuring that the lender will be repaid if the borrower defaults.

Although you can use term life insurance as collateral in some cases, permanent life insurance policies like whole and universal life can act as collateral more effectively as they build cash value.

Utilizing life insurance as collateral may be a good choice for individuals who need access to funds but want to keep assets private. Collateral assignment of life insurance may also offer potential tax benefits and lower interest rates.

Collateral assignment of life insurance is a legal agreement where the policyholder assigns a portion or all of the policy's death benefit or cash value to a lender as collateral for a loan. This arrangement provides the lender with security, knowing that if the borrower defaults, the lender can claim the amount due from the death benefit.

The amount you can borrow under a collateral assignment life insurance agreement generally depends on negotiations between you and the lender, factoring in the policy’s death benefit amount, its duration and your creditworthiness. Banks and other lenders that accept life insurance as collateral consider these elements to determine loan eligibility and terms.

Understanding the definition of collateral assignment and the role of a collateral assignee is pivotal in navigating this financial strategy. The assignment of a life insurance policy as collateral underlines the borrower's responsibility to keep the policy in good standing.

Collateral Assignee Definition

A collateral assignee in life insurance refers to the lender or financial institution that holds the rights to a portion or the entire death benefit of a policy as security under a collateral assignment life insurance agreement. This entity can claim the assigned benefits if the borrower defaults.

Collateral Beneficiary Definition

A collateral beneficiary is an entity designated to receive specific benefits from a life insurance policy under a collateral assignment. Unlike the primary beneficiary, who is entitled to the remainder of the death benefit post-loan settlement, the collateral beneficiary directly benefits from the insurance arrangement related to the terms of a loan or financial obligation secured by the policy. In the context of collateral assignment of life insurance, the collateral assignee effectively acts as a collateral beneficiary.

Absolute Assignment vs. Collateral Assignment

There are two assignment options related to life insurance policies: absolute and collateral.

Absolute assignment refers to the complete transfer of all rights, ownership and control of a life insurance policy from the current policy owner (assignor) to a new owner (assignee). This transfer is permanent and irrevocable. After the assignment, the original owner has no further rights or control over the policy. The new owner can change beneficiaries, borrow against the policy or even surrender the policy for its cash value. Absolute assignments may be useful in estate planning, business agreements or fulfilling contractual obligations.

Collateral assignment , on the other hand, is a temporary and often revocable arrangement. The policyholder retains ownership and control over the policy but agrees that the lender has a claim to a part of the death benefit if the loan is not repaid. Unlike absolute assignment, the policyholder continues to have rights over the policy in collateral assignments, subject to the terms of the loan agreement.

Tax Implications of Using Life Insurance as Collateral

Loans secured through collateral assignment of life insurance are generally not considered taxable income, as you are borrowing against your own asset. However, there are situations where tax liabilities may apply:

Failure to Repay the Loan : If you fail to repay the loan and the policy lapses, the outstanding loan amount could be considered income, subject to regular income tax.

Exceeding Cash Value : If the amount you borrowed exceeds the policy's cash value, the excess could be considered a distribution and might be taxable.

Surrendering the Policy : If you surrender the policy with an outstanding loan, the total amount borrowed minus premiums paid could be considered taxable income.

Death of the Policyholder : If the policyholder dies with an outstanding loan, the death benefit paid to beneficiaries may be reduced by the loan amount. The reduced amount is generally not taxable, but the loan interest might be.

Understanding the tax implications of assigning a life insurance policy as collateral helps ensure informed financial decisions.

Pros and Cons of Using Life Insurance as Loan Collateral

Using life insurance as collateral for a loan is a strategy that can provide financial leverage in various situations, but it's not without its risks. Below, we highlight some of the advantages and drawbacks of this approach.

Advantages of Using Life Insurance as Collateral:

Access to Funds Without Selling Assets : By using life insurance as collateral, you can access funds without having to sell or liquidate other assets. This allows you to retain your investments and other valuable possessions while obtaining the necessary capital.

Potential Tax Benefits : Depending on individual circumstances, loans against life insurance may offer a tax advantage since the borrowed amount is generally not considered taxable income.

Maintaining Life Insurance Coverage : Collateral assignment of life insurance allows you to keep the coverage. The death benefit remains intact (minus the loan amount if not repaid), providing continued protection for your beneficiaries.

Lower Interest Rates : Loans secured with life insurance as collateral may offer lower interest rates compared to unsecured loans. The collateral provides security for the lender, often resulting in more favorable loan terms.

Easier Access : Since the life insurance policy secures the loan, lenders may not require a credit check or a lengthy approval process. This can make accessing funds quicker and more accessible, especially for those with less-than-perfect credit.

Customizable Repayment Terms : Typically, borrowers can customize the repayment terms for loans using life insurance as collateral to fit their financial situation. Whether you need short-term financing or a longer repayment period, you may find options that align with your needs.

Potential for Continued Growth : If you have a whole or universal life insurance policy, the cash value may continue to grow even when you use it as collateral. This growth can offset interest costs and contribute to the policy's overall value.

Drawbacks of Using Life Insurance as Collateral:

Impact on Beneficiaries : Collateral assignment of life insurance may reduce the death benefit available to beneficiaries. If the loan remains unpaid at the time of the policyholder's death, the lender will receive the outstanding amount, and only the remaining benefit will go to the beneficiaries.

Unexpected Tax Liabilities : Mismanagement of collateral loans on life insurance, such as failure to repay or allowing the life insurance policy to lapse with an outstanding loan, may lead to unexpected tax liabilities. For example, if the policy lapses with an outstanding loan, the total amount you borrowed minus the premiums you paid may be considered taxable income.

Risk of Policy Lapse : If the loan interest accumulates and is not paid, it could reduce the cash value and eventually lead to a policy lapse. Losing life insurance coverage could have significant consequences, especially if obtaining a new policy is difficult or more expensive due to age or health conditions.

Possible Restrictions on Policy Changes : Some collateral assignments may include terms restricting the policyholder's ability to make certain changes to the policy without the lender's consent. This could limit flexibility in managing the policy according to changing needs or circumstances.

Interest Accumulation : Interest on the loan will typically accumulate, and if not managed properly, it can become a significant financial burden. Understanding the interest rate and having a clear plan for managing the interest will help you avoid unexpected financial strain.

Reduced Investment Growth : For policies with a cash value component, borrowing against the policy may reduce the cash value's growth potential. This could impact the policy's investment performance and reduce its overall benefits over the long term.

Understanding these potential pitfalls and benefits can help you make an informed financial decision when considering your options for collateral.

Before using life insurance as collateral for a loan, you should know which types of policies are suitable for this purpose. Generally, you can use the following types of life insurance as collateral:

Whole Life Insurance : This provides permanent coverage, meaning it lasts for the insured's entire life as long as you pay premiums. One of the key features of whole life insurance is the cash value component, which grows over time on a tax-deferred basis. This cash value can be used as collateral for a loan, providing a source of funds you can access without surrendering the policy.

Universal Life Insurance : This permanent life insurance offers more flexibility in premiums and benefits. Like whole life insurance, universal life also builds cash value that you can use as collateral. However, universal life policies often include variable interest rates on the cash value, which may lead to fluctuations in the amount available for borrowing.

Term Life Insurance : Unlike whole and universal life insurance, term life insurance doesn't build cash value. It provides coverage for a specific term, such as 10, 20 or 30 years. While it's generally not used for borrowing against the cash value, you can still use term life insurance in collateral assignment in some cases. The lender may agree to accept the death benefit as collateral, and the loan amount would be based on the death benefit's value and the lender's willingness to lend against it. Specific terms depend on negotiations with the lender.

Identifying the right type of life insurance to use involves understanding the nuances of each policy type, including their capacity to serve as insurance collateral.

Using life insurance as collateral for a loan involves coordinating with the insurer and the lender. Here's a comprehensive guide to the process:

Contact Your Insurer

The first step in the collateral assignment of life insurance is to contact your insurance company to discuss the possibility of using your policy as collateral. They will provide the necessary paperwork and guide you through the requirements. This step may include supplying details about the policy, the intended lender and the loan amount. Ensure that your policy qualifies for collateral assignment and follow the insurer's specific procedures.

Find a Lender

Not all lenders are willing to accept life insurance collateral assignments, so you need to find a suitable lender. Discuss your intentions with potential lenders, understand their requirements and ensure they are comfortable with the collateral assignment process. This step may involve negotiating the loan terms, including interest rates and repayment schedules.

Know the Loan Terms and Compare With Other Options

Understand the loan terms, including the interest rate, repayment schedule and any conditions related to the collateral assignment. Consider comparing these terms with other loan options to ensure that using life insurance as collateral is the best choice for your situation.

Complete the Collateral Assignment Form

Once you've agreed to the terms with the lender, you'll need to complete a collateral assignment of life insurance form. This legal document outlines the specifics of the agreement. Both the policyholder and the lender must sign this form.

Submit the Form to the Insurer

After completing and signing the collateral assignment form, submit it to the insurance company for processing. The insurer will review the form, ensure you meet all requirements and then formally record the collateral assignment. This step makes the agreement legally binding.

Monitor the Loan and Policy

Keep track of loan payments, interest accumulation and any changes in the policy's cash value or death benefit. Regular monitoring helps ensure that the loan and the policy remain in good standing.

Repay the Loan

Repaying the loan according to the agreed-upon schedule will maintain the coverage. Remember that failure to repay the loan could lead to reduced death benefits or tax implications.

What to Expect in a Collateral Assignment of Life Insurance Form

A collateral assignment of life insurance form is a key document containing the following important details about using your life insurance as collateral for a loan.

Policy Identification : This section includes specific policy details, such as the policy number, the insured's name and the coverage amount.

Collateral Assignee Information : This part provides comprehensive information about the lender, including name, address and contact details.

Terms and Conditions of the Assignment : This outlines the specifics of the agreement, such as the loan amount, interest rate and any special conditions or requirements.

Signatures of Owners and Assignees : Signatures from both the policyholder and the lender are necessary for legal validation, confirming agreement to the terms.

Familiarizing yourself with these documents is a key step to preparing for the process of collateral assignment.

Other Ways to Use Life Insurance for a Loan

If using life insurance as collateral for a loan is not for you, you may explore other ways to access funds with your policy.

Life Insurance Loan (Policy Loan) : A policy loan allows you to borrow directly against the cash value of a permanent life insurance policy, such as whole or universal life. This loan doesn't require a credit check, and the interest rates are often competitive. The loan amount is limited to the policy's cash value minus any existing loans or withdrawals. While this option provides quick access to funds, failure to repay the loan can reduce the death benefit and lead to tax implications.

Surrendering Your Policy : Surrendering a life insurance policy means giving up the policy in exchange for its cash surrender value . This option provides a lump sum that you can use as needed but also means losing the death benefit and any future growth potential. Surrender charges may apply, especially if the policy is surrendered in the early years.

Consider your options for accessing funds through your insurance policy and determine if other avenues better suit your circumstances.

While using life insurance as collateral can be viable, other financial solutions may be a better fit. Here's a closer look at some alternatives:

HELOC (Home Equity Line of Credit) : A HELOC allows you to borrow against the equity in your home. It offers a revolving line of credit with variable interest rates, allowing you to borrow as needed. However, it puts your home at risk if you fail to repay.

Home Equity Loan : A home equity loan allows you to borrow against your home's value and typically comes with fixed interest rates. It provides a lump sum suitable for large, one-time expenses.

Unsecured Loan : An unsecured personal loan doesn't require collateral, making it a less risky option for your assets. Interest rates may be higher, and credit requirements more stringent, but it doesn't directly impact your life insurance or other valuable assets.

Annuity as Collateral : An annuity is a financial product that provides regular income payments and is often used in retirement planning. If you have an annuity, you may be able to use it as collateral for a loan. This option can provide access to funds without affecting life insurance benefits, but understanding the terms and potential implications is crucial.

Laying out all your options for accessing necessary funds will assist you in making a more informed financial decision, allowing you to weigh the advantages and risks of different scenarios.

Life insurance as collateral for a loan may be a good choice if you have a whole or universal life insurance policy with sufficient cash value, need access to funds without selling other assets and are comfortable with the potential risks and terms of the loan. It may provide financial flexibility, potential tax benefits and lower interest rates than unsecured loans.

On the other hand, collateral assignment of life insurance may not be the best choice if you have a term life insurance policy without cash value or are concerned about the impact on beneficiaries if the potential risks and complexities outweigh the benefits for your specific situation. Alternative options like a HELOC, home equity loan or unsecured personal loan might be more suitable depending on your needs and risk tolerance.

Careful consideration and comparison of alternative options will help you determine if a collateral assignment of life insurance is right for you. You may also consult with financial advisors, tax professionals or legal experts for guidance and to understand the specific implications of using this financial strategy for your situation.

Navigating the specifics of collateral assignment of life insurance can raise several questions. This section aims to clarify common inquiries, ensuring you understand how this financial strategy can impact your loan and insurance policy.

A collateral assignment is a legal agreement in which a life insurance policy's benefits are assigned to a lender as insurance collateral for a loan.

The collateral assignee is the lender in a collateral assignment agreement. It holds a secured interest in the death benefit of a life insurance policy until the loan is fully repaid.

The collateral in a life insurance policy loan typically refers to the cash value. This value secures the loan and ensures the lender can reclaim their funds if the borrower defaults.

Collateral assignments are typically associated with loans where borrowers want to secure financing without selling assets. They use the value of their life insurance policy as security for the loan.

In a life insurance contract , a collateral assignment ensures that the lender receives payment from the death benefit if the borrower fails to repay the loan without transferring full ownership of the policy to the lender.

Collateral assignments are temporary and allow the borrower to retain ownership and control over the policy, whereas absolute assignments permanently transfer all rights, ownership and control to another party.

If a bank loan application requires collateral, the policy owner can opt for a collateral assignment of life insurance, assigning their policy as security to meet the bank's requirements. This is subject to approval by lenders that accept life insurance as collateral.

Only the policy owner, who holds the rights to the life insurance policy, is authorized to assign it as collateral. This process involves filling out a collateral assignment of life insurance form and providing a copy of the insurance policy on collateral to the collateral assignee.

Many financial institutions and banks that accept collateral assignments provide loans that allow the use of life insurance. These lenders assess the policy’s value and terms before approving the loan.

Yes, whole life insurance is commonly used as collateral due to its inherent cash value accumulation. Collateral loans on life insurance like these can provide a solid basis for securing a loan.

Typically, annuities can be used as collateral for loans. However, this depends on the terms of the annuity and the lender's willingness to accept it as security. Like life insurance, the annuity must have a sufficient value to cover the loan.

About Melissa Wylie

Melissa Wylie is the Content and SEO Manager at MoneyGeek, with nearly a decade of editorial experience and six years of work in financial content focused on small businesses. She previously held SEO positions at Bankrate and LendingTree, with bylines on ValuePenguin and MagnifyMoney.

Wylie has a journalism degree from the University of North Texas. Her strong foundation in journalism helps her craft content that simplifies complex financial topics to help everyone feel confident when making decisions with their money.

• Car Insurance
• Home Insurance
• Rental Insurance
• Life Insurance
• Refinancing
• Conventional Loan
• Business Credit Cards
• Student Credit Cards
• Balance Transfer Cards
• Credit Cards with Rewards
• Travel Credit Cards
• Cash Back Credit Cards

View content for NY Residents

Viewing content for NY Residents Exit

Notifications & Disaster Information

Colonial Penn Insights

Understanding Collateral Assignment of Life Insurance

Any time you apply for a loan, the lender considers the risk that you can’t pay it back. To help reduce this risk, the lender may require you to put up collateral, which is anything of value you pledge as security for repayment. If you fail to repay the loan, the lender receives that collateral.

In some cases, you might consider using your life insurance policy as collateral. Here’s what to know about this option.

What Is Collateral Assignment of Life Insurance?

Collateral assignment of life insurance occurs when you use your life insurance policy’s value as collateral to secure a loan. If you default on the loan or pass away before repaying the entire balance, the lender receives a payout from your policy.

Which Life Insurance Policies Can You Use as Collateral?

If you already have an existing policy, you may be able to use it as collateral. But some lenders may require you to get a new, separate policy.

Lenders typically have specific requirements your policy must meet, such as the type of insurance and coverage amount. Some lenders may allow you to use term life insurance , but most require a whole life policy that builds cash value . The cash value is important because you can access it while alive, providing security even if you don’t pass away. A term policy is only payable at your death.

Your policy’s face value typically must be at least as much as your loan balance, and you must maintain your policy until you fully repay the loan. Failure to maintain your policy violates your loan agreement. The lender may raise the interest rate for the remainder of your loan term or even “call” your loan, which requires you to repay any remaining balance at once.

How Does the Collateral Process Work?

Using life insurance as collateral is common in business lending. For example, suppose you want to start a business and need $65,000. If you don’t have sufficient assets or income to support the loan, the lender may require you to pledge a life insurance policy as collateral. In this scenario, assume you have a whole life policy with a current cash balance of $70,000 and a death benefit of $400,000.

If the lender accepts this policy, you’ll formally list the lender as a collateral assignee on your life insurance policy. Ask your insurer for the necessary form; the provider will ask for the lender’s information so it can contact the lender if a payment needs to be made. Once the appropriate paperwork is complete, you’ll finish the loan application with the lender using the life insurance as collateral.

Once the loan is funded, you continue paying your premium as normal.

Guaranteed Acceptance Life Insurance

Coverage options starting at $9.95 a month!

Guaranteed acceptance life insurance without medical exams, health questions, or rate increases.

What’s the Difference between a Collateral Assignee and a Beneficiary?

Naming a lender as a collateral assignee isn’t the same as listing it as a beneficiary , so follow the correct process. A collateral assignment limits the payout to the unpaid loan balance and expires once the loan is repaid. Meanwhile, a beneficiary designation has no connection to the loan. A beneficiary receives the death benefit regardless of whether you have an outstanding loan balance when you die.

What Happens If You Default on the Loan?

If you default on your loan or pass away before you pay off your loan completely, a portion of your death benefit is used to pay off the remaining balance. This reduces the payout your beneficiaries receive. To offset this risk, you may want to consider getting an additional policy or temporarily increasing your death benefit.

Other Lending Options to Consider

Although collateral assignment of a life insurance policy can make the difference between qualifying for a loan or not, you can weigh other options too.

Borrowing from Your Life Insurance Policy’s Cash Value

If your policy has sufficient cash value, you could borrow directly from that amount and avoid needing a lender altogether.

Withdrawing from Your Policy’s Cash Value

You could withdraw your policy’s cash balance. If you only withdraw a portion of the cash balance, your policy remains in force. However, you could also surrender your policy and withdraw the entire cash balance. In this case, you typically no longer have insurance coverage, and you may owe taxes and penalties on a portion of the withdrawal.

Applying for Unsecured Loans

Not all loans require you to post collateral. You could take out an unsecured loan from your bank or credit union.

Your Life Insurance Can Work for You

While most people purchase life insurance to provide financial security for their loved ones after passing, policies can also be used for special purposes. Assigning life insurance as collateral for a loan is one way to make your policy work for you while you’re still living.

To learn more about using life insurance as collateral and explore the options available to you, reach out to an experienced financial professional, who can take a close look at your situation and offer personalized guidance.

Insurers and their representatives are not permitted by law to offer tax or legal advice. The general and educational information here supports the sales, marketing or service of insurance policies. Based upon individuals’ particular circumstances and objectives, they should seek specific advice from their own qualified and duly-licensed independent tax or legal advisors.

Colonial Penn is here for you!

Colonial Penn has specialized in making life insurance simple and accessible by offering it directly to consumers since 1957. Click here to learn more.

Related Articles

The Downside of Crowdfunding for Medical Bills: 7 Options to Try Instead

Medical debt is common in the United States, with approximately 14 million Americans owing over $1,000 in medical debt and […]

What Is Universal Life Insurance?

Universal life insurance is permanent coverage that offers financial protection for beneficiaries and a savings component you can tap. Learn how it works.

How to Handle Life Insurance and Divorce

If you and your spouse own life insurance but part ways, you may wonder what to do with the policy. Here’s how life insurance and divorce generally work.

Get a quick insurance quote now!

Pressed for time? We get it! Select your State to see which of our plans fit your needs and are available to you.

New York Residents

In New York, the Colonial Penn ® Program is underwritten by Bankers Conseco Life Insurance Company. We'll now take you to the website for New York residents. If you are not a New York resident, you can change your state at any time in the state menu.

• Best Extended Auto Warranty
• Best Used Car Warranty
• Best Car Warranty Companies
• CarShield Reviews
• Best Auto Loan Rates
• Average Auto Loan Interest Rates
• Best Auto Refinance Rates
• Bad Credit Auto Loans
• Best Auto Shipping Companies
• How To Ship a Car
• Car Shipping Cost Calculator
• Montway Auto Transport Review
• Best Car Buying Apps
• Best Sites To Sell a Car
• CarMax Review
• Carvana Review (July 2024)
• Best LLC Service
• Best Registered Agent Service
• Best Trademark Service
• Best Online Legal Services
• Best Accounting Software
• Best Receipt Scanner Apps
• Best Free Accounting Software
• Best Online Bookkeeping Services
• Best Mileage Tracker Apps
• Best Business Expense Tracker Apps
• Best CRMs for Small Business
• Best CRM Software
• Best CRM for Real Estate
• Best Marketing CRM
• Best CRM for Sales
• Best SEO Services
• Best Mass Texting Services
• Best Email Marketing Software
• Best SEO Software
• Best Free Time Tracking Apps
• Best HR Software
• Best Payroll Services
• Best HR Outsourcing Services
• Best HRIS Software
• Best Project Management Software
• Best Construction Project Management Software
• Best Task Management Software
• Free Project Management Software
• Best Personal Loans
• Best Fast Personal Loans
• Best Debt Consolidation Loans
• Best Personal Loans for Fair Credit
• HOME EQUITY
• Best Home Equity Loan Rates
• Best Home Equity Loans
• Best Checking Accounts
• Best Online Checking Accounts
• Best Online Banks
• Bank Account Bonuses
• Best High-Yield Savings Accounts
• Best Savings Accounts
• Average Savings Account Interest Rate
• Money Market Accounts
• Best CD Rates
• Best 3-Month CD Rates
• Best 6-Month CD Rates
• Best 1-Year CD Rates
• Best 5-Year CD Rates
• Best Hearing Aids
• Best OTC Hearing Aids
• Most Affordable Hearing Aids
• Eargo Hearing Aids Review
• Best Medical Alert Systems
• Best Medical Alert Watches
• Best Medical Alert Necklaces
• Are Medical Alert Systems Covered by Insurance?
• Best Online Therapy
• Best Online Therapy Platforms That Take Insurance
• Best Online Psychiatrist Platforms
• BetterHelp Review
• Best Mattress
• Best Mattress for Side Sleepers
• Best Mattress for Back Pain
• Best Adjustable Beds
• Best Home Warranty Companies
• Best Home Appliance Insurance
• American Home Shield Review
• Liberty Home Guard Review
• Best Moving Companies
• Best Interstate Moving Companies
• Best Long-Distance Moving Companies
• Cheap Moving Companies
• Best Window Brands
• Cheap Window Replacement
• Window Replacement Cost
• Best Gutter Guards
• Gutter Installation Costs
• Best Solar Companies
• Best Solar Panels
• How Much Do Solar Panels Cost?
• Solar Calculator
• Texas Electricity Companies
• Texas Electricity Rates
• Best Car Insurance Companies
• Cheapest Car Insurance Companies
• Compare Car Insurance Quotes
• Best Car Insurance for New Drivers
• Best Pet Insurance
• Cheapest Pet Insurance
• Pet Insurance Cost
• Pet Insurance in Texas
• Pet Wellness Plans
• Is Pet Insurance Worth It?
• Best Life Insurance
• Best Term Life Insurance
• Best Whole Life Insurance
• Term vs. Whole Life Insurance
• Best Travel Insurance Companies
• Best Homeowners Insurance Companies
• Best Renters Insurance Companies
• Best Motorcycle Insurance
• Cheapest Homeowners Insurance
• Cheapest Renters Insurance
• Travel Medical Insurance

MarketWatch Guides is a reviews and recommendations team, independent of the MarketWatch newsroom. We might earn a commission from links in this content.  Learn More

Split-Dollar Life Insurance: What It Is and How It Works (2024)

with our comparison partner, Policygenius

Scott Karstens is a writer and accomplished insurance and financial services veteran. He’s the president of NFG Brokerage and founder and CEO of both Broker Backoffice and his new direct-to-consumer insurance platform, Quote Bot.

Tori Addison is an editor who has worked in the digital marketing industry for over five years. Her experience includes communications and marketing work in the nonprofit, governmental and academic sectors. A journalist by trade, she started her career covering politics and news in New York’s Hudson Valley. Her work included coverage of local and state budgets, federal financial regulations and health care legislation.

Our editorial team follows a strict methodology for reviewing life insurance companies.

A split-dollar life insurance arrangement is a planning tool that can be used to provide benefits for both an employer and its employees. It involves the sharing of premiums and death benefits related to a life insurance policy taken on the employee.

Split-dollar arrangements are often used as part of executive compensation packages, helping employers attract and retain key personnel. Split-dollar life insurance may also provide personal financial protection for individuals by allowing them to build up their own cash value within the policy or to help them afford the life insurance protection they need.

With such a wide range of possible advantages, split-dollar life insurance can be an effective way for businesses and individuals alike to plan ahead financially.

What Is Split-Dollar Life Insurance?

Split-dollar life insurance is an agreement where two parties — an employer and an employee — agree to split the benefits, and sometimes the costs, of a life insurance policy . The employer pays the life insurance premium, in whole or in part, on a cash value life insurance policy purchased on the life of the employee. It’s a common part of a C-suite’s executive compensation package.

Often in these arrangements, the employer retains the rights to the cash value and the death benefit up to the premiums paid by the employer. Sometimes, the employer earmarks an amount greater than the premiums paid.

In some split-dollar arrangements, the employee has rights to any cash surrender value in excess of the employer’s contribution to the plan. If the employee pays into the plan, the employee’s beneficiaries may be entitled to an amount that’s proportionate to the employee’s premium payments.

Advantages for the employer:

• The death benefit is specialized for each agreement.
• The business can plan its premium contribution for each agreement.
• The employer can control the flow of the cash value and death benefit you own.
• The business has significant flexibility in nearly every portion of the plan design.
• If the business is a C corporation, it may use the cash value to which it’s entitled for corporate needs.

Advantages for the employee:

• You may use your portion of the death benefit for your personal use.
• You can accumulate cash value more quickly due to the employer’s contribution.
• Your beneficiaries receive a tax-free death benefit.

How Split-Dollar Life Insurance Works

Split-dollar life insurance begins with an agreement. The following steps pertain specifically to corporate split-dollar agreements rather than private split-dollar agreements.

In a corporate split-dollar agreement, an employer and the employee are sharing the costs and benefits of a life insurance policy for whom the employee is the insured person. The agreement will describe how the death benefit is divided between each party, how each party can access cash (if applicable) and how each party can exit the agreement.

Final regulations provide two types of split-dollar life insurance arrangements: economic benefit regimes and loan regimes. Under the economic benefit regime, the employer owns the life insurance policy but allows the employee certain rights, such as the right to name beneficiaries. Under a loan regime, the employee owns the policy and awards an interest in the policy to the employer. The taxation of the arrangement depends on which regime is chosen.

Here’s how a split-dollar life insurance arrangement under the economic benefit regime might be created.

• Employer drafts a split-dollar agreement.
• Employee signs a notice and consent for the life insurance being purchased and signs the life insurance application as the insured person.
• Employer signs as the owner and payor of the life insurance policy and submits an application for life insurance on the life of the employee to the insurance company. Employer also sends along a split-dollar agreement.
• Employee completes a medical exam to qualify, unless it’s a no-exam life insurance policy .
• Once the life insurance policy is approved, Employee and Employer sign the split-dollar agreement.
• Employer and Employee pay the premiums pursuant to their agreement.
• Employer reports premiums by the Employer for coverage exceeding $50,000 as compensation on Employee’s Form W-2, Wage and Tax Statement .
• Employer files Form 8925 , Report of Employer-Owned Life Insurance Contracts , each year.
• Employer or a third party administrator tracks any change or fluctuation in benefit to Employee for tax purposes.

Example of a Split-Dollar Agreement

ABC Corp. and its executive enter a split-dollar agreement using the economic benefit regime. The policy provides a $1 million life insurance death benefit on the executive’s life. In their agreement, ABC Corp. owns the policy and, upon the termination of the agreement, is entitled to the greater of premiums advanced or the policy’s cash value. The executive (and whomever the executive names as a beneficiary) is entitled to death benefits paid under the policy in excess of the amounts owed to ABC Corp.

ABC Corp. reserves the right to use $500,000 of the policy’s death benefit for key person coverage. ABC also retains the right to all cash value as collateral for its contribution. The remaining $500,000 in death benefits is available for the executive to choose a beneficiary or beneficiaries.

Benefits of Split-Dollar Life Insurance Plans

Split-dollar life insurance arrangements seek to benefit both the employer and the employee.

First, the employer is allowed to individualize the agreement for each person covered, and the business receives the cash value and death benefit based on its contribution. It may also negotiate more favorable terms. This agreement lowers the cost, and possibly the tax burden, of providing an insurance benefit to the employee.

Also, the employee receives a death benefit at a discount or more cash value growth due to employer contributions.

Tax Benefits

In general, a corporation can’t claim a tax deduction for premiums payment provided for a split-dollar agreement. However, if the employer chooses to provide cash value to the employee at a future date, the employer can then take a deduction for the compensation to the employee.

Under the economic benefit regime, the employee pays a tax for the benefit they are able to control. Under the loan regime, premium payments by the employer are treated as a loan to the employee. In this agreement, the employee would pay tax on the interest for this loan.

Low Interest Rates

In the loan regime for split-dollar agreements, the employer is required to charge interest on the loan to the employee. Most often, the applicable federal rate (AFR) is used when calculating the interest for these loans. This rate is the minimum rate the employer can charge for a bona fide loan and is typically below market value interest rates.

Implications of Split-Dollar Plans

As an employee, when you enter into a split-dollar agreement, you are allowing life insurance to be owned on your life, directly (in an economic benefit arrangement) or through collateral assignment (in a loan arrangement), in exchange for what can often be favorable out-of-pocket expenses compared to buying a life insurance policy on your own.

Employers need to make sure they have the resources to keep up with the economic benefit calculations and make sure that loan terms and rates are up-to-date for each premium payment. Perhaps the most overlooked item is having the proper notice and consent from the employee on file and making sure the company files Form 8925 each year. Working with an experienced tax professional can be extremely valuable in navigating these complexities.

Types of Split-Dollar Life Insurance Policies

Final regulations published by the IRS and U.S. Treasury Department allow for two types of split-dollar life insurance arrangements.

Economic Benefit Regime

In an economic benefit arrangement, an employer owns and pays for the life insurance premium and will be the beneficiary of the policy up to some amount, which may be the greater of the employer’s contribution to the life insurance policy and a stated benefit needed for corporate planning.

The employee will name beneficiaries on the death benefit assigned to the employee. This assignment of death benefit provides a benefit to the employee similar to term insurance.

While the employee does not own or control the policy, the employee still receives value. This value is calculated each year based on the age of the employee and the death benefit available for the employee to assign to beneficiaries. The IRS provides a table of one-year term costs to calculate the economic value of death benefit available, which determines the taxability of the plan.

Loan Regime

Under a loan arrangement, the employee is the policy owner, and the employer generally pays the premium.

To ensure the employer is made whole, the employee grants an interest in the cash value and death benefit of the policy back to the employer through a collateral assignment. This assignment places restrictions on the policy, safeguarding the interests of both parties. For example, the employer may recover the loaned premiums to the employee if the employee were to unexpectedly pass away. This also makes it possible for the employer to recover their loaned premiums if the employee is no longer employed by the employer or at the termination of the agreement.

The premium payments made by the employer are treated as loans to the employee. Each year, these premium payments are considered as separate loans, allowing for flexibility in structuring them as either term or demand loans.

Moreover, these loans must be provided at an interest rate that complies with the applicable federal rate (AFR). The good news is that these loan rates will stay constant for each premium payment, so even though the interest rate can change each year, you will have known interest rates for each premium payment.

Determining If Split-Dollar Life Insurance Is Right for You

As an employer, a split-dollar plan provides you with a greater degree of benefits planning, while also providing ownership and control of the benefits. These agreements are very advantageous when looking to attract and retain key employees.

Before deciding if a split-dollar life insurance plan is right for you, it’s important to consider the benefits and implications of such an agreement.

Implementing Split-Dollar Life Insurance

To implement a split-dollar plan, you will need a split-dollar agreement. You may be able to find sample documents for these types of plans online, but for the complexity involved in these agreements it’s necessary to seek legal and tax advice.

Once you have this agreement, you will need to apply for life insurance for your employee, and they will need to qualify for life insurance. Once the plan is in place, you will need to do an annual review of the benefits to make sure you are properly accounting for the structure of the agreement in place.

How Split-Dollar Policies Are Terminated

Split-dollar plans are terminated at the earlier of the employee’s death or the termination date included in the agreement (often retirement or a benchmark of employment). There are three common ways that plans are terminated:

• The employee dies. If an employee were to pass away unexpectedly while the agreement is still active, the employer recovers either the premiums paid, cash value or the amount owed in loans per the agreement. Then, the employee’s named beneficiaries receive the remainder as a tax-free death benefit.
• The agreement terms end. If the employee completes the terms of the agreement in a loan regime agreement, all collateralized restrictions are released under the loan arrangement. In an economic benefit plan, the ownership of the policy may also be transferred to the employee as an added benefit. In either of these circumstances, this event would generate taxable income to the employee, which may be deductible by the employer.
• One party chooses to terminate. An employer could choose to exit the plan at the termination of the agreement, and the employer may recover all or a portion of the premiums paid or cash value. The employee then would own the insurance policy. The value of the policy is taxed to the employee as income tax and is potentially deductible for the employer.

The Bottom Line

A split-dollar plan is a valuable, non-qualified plan that can provide significant benefits to all parties when structured properly. An employer can provide additional benefits to key employees and an employee can benefit from the employer’s contribution to premium payments . Consider working with a knowledgeable insurance agent and a financial advisor when putting these plans in place.

Frequently Asked Questions about Split-Dollar Life Insurance

Why use a split-dollar plan.

The goal of a split-dollar arrangement is to lower the cost and/or tax burden of providing a life insurance contract for the benefited party.

What are the key components of a split-dollar agreement?

There are three key components that drive the tax implications of these agreements: the owner of the policy, the split of premium payments (if any) to the life insurance company and the division of equity between the parties.

What is collateral assignment?

In a loan split-dollar life insurance arrangement, a collateral assignment allows the employer to recoup its premium payments if the employee dies prematurely or exits the agreement. Collateral assignments apply to both the death benefit and the cash value in a life insurance policy.

What types of life insurance are used in split-dollar plans?

Typically, a permanent life insurance policy is used in split-dollar agreements. Permanent life insurance includes whole life, universal life, indexed universal life and variable universal life insurance.

What are the most common mistakes in split-dollar plans?

Common mistakes include: forgetting to document proper notice and consent prior to the implementation of the plan, forgetting to file Form 8925 annually for employer-owned life Insurance and improperly structuring benefits to the employee.

Methodology: Our System for Ranking the Best Life Insurance Companies

Our goal at the MarketWatch Guides team is to provide you with comprehensive, unbiased recommendations you can trust. To rate and rank life insurance companies, we created a thorough methodology and analyzed each company by combing through online policy information, speaking to agents via phone, reading customer reviews for insight into the typical customer experience, and reviewing third-party financial reliability scores.

After collecting this data, we scored each company in the following categories: coverage, riders, availability and ease of use and brand trust. To learn more, read our full life insurance methodology for reviewing and scoring providers.

If you have feedback or questions about this article, please email the MarketWatch Guides team at editors@marketwatchguides. com .

MarketWatch Guides may receive compensation from companies that appear on this page.
The compensation may impact how, where and in what order products appear, but it does not influence the recommendations the editorial team provides. Not all companies, products, or offers were reviewed.

Who gets Ozempic? People with private insurance and generous health plans, study shows

The demand for popular prescription drugs that treat diabetes, obesity and heart disease has skyrocketed over the past few years. New research from t he University of Southern California showed a 442% increase in prescriptions for semaglutide between January 2021 and December 2023. Semaglutide is the active ingredient in diabetes drugs  Ozempic , Rybelsus and  Wegovy , a heart disease prevention and weight-loss drug.

As the list of medical uses for these drugs continues to grow, patients are experiencing more difficulty getting their insurers to cover these prescriptions that can cost over $10,000 a year. In fact, patients covered by Medicaid and Medicare represent a small share of those who've had their Ozempic and Wegovy prescriptions filled.

The USC study published this month in JAMA Health Forum sheds light on the disparities Medicaid and Medicare holders face when trying to access these blockbuster anti-obesity and diabetes drugs.

"If only certain patient populations get access to these medications — those primarily with private insurance, more generous health plans — then there's a huge percentage of the U.S. population that isn't getting access to these medications," lead author Christopher Scannell told Axios .

Here's what you need to know about patient access to Ozempic, Rybelsus and Wegovy:

Privately insured patients more likely to have their prescriptions filled

Many private insurers and government-funded Medicare and Medicaid typically don't cover these drugs for weight loss, leaving them out of reach for significant numbers of people who want them. Some insurers have imposed requirements such as prior authorization or step therapy, which mandates that people try less expensive drugs first.

For those who are covered, patients with private insurance represented 90% of prescription fills for Wegovy in December of 2023, according to data from IQVIA's National Prescription Audit Payer Trak. Patients with Medicare Part D plans represented 1.2% of prescription fills during that same time period.

Less than 1% of prescription fills went to people paying in cash, the study found.

Medicare, the federal health program for adults 65 and older, is prohibited by  law  from covering drugs for the more than 2 in 5 Americans who are obese but otherwise do not have serious risk factors. Ozempic is only FDA approved to manage blood sugar levels and treat those with Type 2 diabetes - it's not yet approved for weight loss.

The nonprofit health policy organization KFF estimates that  1 in 4 Medicare enrollees  who are obese may be eligible for Wegovy to reduce their risk of heart attack or stroke.

Federal spending on weight-loss drugs surges

A KFF  analysis  found Medicare spending on three drugs − Novo Nordisk's Ozempic and Rybelsus and Eli Lilly's Mounjaro − surged from $57 million in 2018 to $5.7 billion in 2022. That figure did not include rebates or other discounts negotiated by pharmacy benefit managers.

Federal spending on these drugs is likely to grow, experts say. If just 1 in 10 eligible adults take Wegovy to prevent heart attack or stroke, KFF  estimated  it would cost Medicare's Part D prescription drug coverage nearly $3 billion each year.

These weight loss drugs can cost patients around $1,350 a month, but research suggests they cost just $22 to make, USA TODAY previously reported.

Contributing: Ken Alltucker , Karen Weintraub , USA TODAY

Governor issues emergency proclamation over condominium insurance rates

Gov. Josh Green has issued an emergency proclamation to stabilize the insurance market where condominium buildings have been unable to secure full insurance coverage from one of the three companies operating in Hawaiʻi.

The proclamation would allow the state to loan up to $60 million in general funds to the Hawaiʻi Hurricane Relief Fund and the Hawaiʻi Property Insurance Association to issue insurance policies.

It would also allow the Hawaiʻi Hurricane Relief Fund to issue hurricane insurance again, which it has not done since the early 2000s.

The idea would be to use these loans to help alleviate pressure for condo owners in the short-term, without dipping into the about $160 million Hurricane Relief Fund, which has acted as part of the state’s reserve funds for the past two decades.

The proclamation is based on recommendations from the Insurance Task Force, which Speaker Scott Saiki co-chairs.

“It's really meant to be a temporary stopgap measure that will provide some limited relief to condo buildings by giving them one layer of potential insurance coverage that they would otherwise have to obtain through a foreign source,” Saiki said.

“So this is just meant to provide a layer of coverage that condo buildings can access,” he said.

Foreign sources of coverage are extremely expensive.

So the insurance policies permitted through the emergency proclamation are closer to the market rate.

Saiki added that other types of residences, not just condos, have started seeing dramatic increases in property insurance — which is why the task force recommended that the governor issue an emergency proclamation.

There was a measure that failed last legislative session that would have used the Hurricane Relief Fund as a mechanism to provide state-backed insurance policies for condominiums. Saiki said that it is an option the task force is considering recommending next year.

Buildings can contact the Insurance Division of the Department of Consumer Affairs to apply for hurricane coverage or the Hawaiʻi Property Insurance Association for other property insurance policies.

• Follow PetaPixel on YouTube
• Follow PetaPixel on Facebook
• Follow PetaPixel on X
• Follow PetaPixel on Instagram

Woman Has Insurance Canceled After Company Flew Drone Over Her House

A woman who spent hundreds of thousands of dollars on home renovations had her insurance canceled after the company flew a drone over her house and cited unsanitary conditions.

Joan Van Kuren from Modesto, California was furious after receiving a letter from CSAA dropping her insurance citing unacceptable hazards and liability exposure.

After Van Kuren called them, she was told by a CSAA representative that the company had flown a drone over her house.

“It almost feels like someone’s looking in your windows, you know, when they tell you that they flew a drone over your home and looked at it. It’s like, whoa,” she tells CBS Sacramento .

Van Kuren has been with CSAA for almost 40 years and in that time estimates she has paid $80,000 to them. She has spent the last three years renovating her entire property, including her driveway, kitchen, and bathroom.

CSAA took issue with some clutter on the left-hand side of her house which is the final part of her property to be renovated. There is an old planter and some tires there. The insurance firm did not give Van Kuren the opportunity to fix it.

CSAA denied to CBS Sacramento that it flies drones. However, it does use “several sources of information to assess the condition of properties, including aerial imagery captured by third-party, fixed-wing aircraft and satellites.”

“It’s not ‘their drone’,” says consumer advocate Amy Bach of the United Policy Holders. “It doesn’t really matter does it.”

Van Kuren also had her car insurance and business insurance with CSAA which she, unsurprisingly, has now canceled.

“The gentleman said to me, ‘Is there any conversation we could have to keep you?'” she says of her chat with a CSAA representative. “I said to him, ‘There is absolutely no freaking way’.”

Companies Are Spying on You From the Air

A report back in April revealed that home insurance companies are secretly taking photos of private residences with drones , surveillance balloons, and even manned planes to find reasons to drop customers.

Mega-insurers are reportedly dropping all but the safest properties in an effort to recover from big underwriting losses — and aerial photography is a cheap and easy way to justify it.

Image credits: Header photo licensed via Depositphotos .

More From Forbes

Fda approves epipen-alternative neffy, a nasal spray to treat allergy emergencies.

• Share to Facebook
• Share to Twitter
• Share to Linkedin

This image provided by ARS Pharmaceuticals on Friday, Aug. 9, 2024, shows the company's Neffy nasal ... [+] spray to treat severe allergic reactions. (ARS Pharmaceuticals via AP)

The Food and Drug Administration approved Neffy epinephrine-based nasal spray to treat emergency allergic reactions, including life-threatening anaphylaxis in adults and children, according to an August 9 news release .

Availability of a needle-free epinephrine option — comparable in price to injectables — may reduce barriers to rapid treatment of anaphylaxis, especially for those people who have a fear of injections.

Neffy’s approval was based on four studies that included 175 healthy adults without anaphylaxis. Concentrations of epinephrine in their blood after taking Neffy were comparable to those after using an auto-injector pen, according to the FDA.

The recommended use of Neffy is a single-dose spray of 2mg into one nostril for adults and children who weigh at least 30 kilograms (approximately 66 pounds). If type I hypersensitivity symptoms — extreme problems breathing, swelling, allergic reaction shock — do not improve within five minutes, patients can administer another spray in the same nostril.

The most common side effects of Neffy reported in clinical studies were throat irritation (2% of trial participants after one dose and 19% after two doses), headache (6% after one dose and 18% after two doses) and nasal discomfort (10% after one dose and 13% after two doses).

Musk-Trump X Interview: Trump Takes Friendly Questions From Musk After Glitch-Plagued Start

Today’s nyt mini crossword clues and answers for tuesday, august 13, wwe raw results, winners and grades on august 12, 2024.

In a surprise decision last year, the FDA declined to approve Neffy despite a positive recommendation from an expert panel of advisors. The agency requested that the manufacturer complete a study comparing repeat doses of Neffy to those of epinephrine injections, which is what the sponsor did prior to last week’s approval.

Type I allergic reactions are mediated by proteins called IgE antibodies produced by the human immune system. These are produced in response to allergens such as pollen, insect bites or stings, animal dander or dust mites and certain foods. This causes the release of histamine and other chemicals, leading to inflammation. Common symptoms include hives, itching, vomiting and respiratory difficulty.

Anaphylaxis is the most severe form of reaction and constitutes a medical emergency because it can result in sudden, life-threatening respiratory failure. People with anaphylaxis can experience extreme difficulty breathing, swelling, low blood pressure, bluish skin and anaphylactic shock. The condition is responsible for more than 30,000 emergency room visits annually and results in approximately 2,000 hospitalizations and 230 deaths in the U.S. each year.

Roughly 3.6 million people in the United States have epinephrine auto-injectors on hand in the event of a severe allergic reaction. But anxiety may contribute to a relatively high percentage of prescriptions that never get filled: About 40% of the 6 million prescriptions, according to an FDA advisory committee meeting last year. As such, Neffy appears to address an unmet need.

Neffy will come in packs of two and is expected to be list-priced at or under a twin-pack of branded auto-injectors, between $300 to $700 . For individual patients, a two-pack of Neffy will cost no more than $199 if purchased through entities such as BlinkRx or GoodRx. This includes people who are uninsured or have high-deductible health insurance plans. For people with commercial insurance, the manufacturer plans to deploy a patient assistance program that will include coupons to lower co-payments to $25 per twin-pack. Some patients may be able to access the product for free via the sponsor’s program.

There doesn’t appear to be a U.S.-based study assessing the cost-effectiveness of nasal spray epinephrine. But given that the list prices between the two versions of epinephrine are similar, existing analyses of auto-injector formulations may serve as proxies.

For researchers, the “value-based price” for epinephrine depends in part on how much the active ingredient reduces risk. Based on a 10-fold fatality risk difference between use of epinephrine and non-use of the drug, the price was determined to be $34.51 for an auto-injector twin-pack, assuming a ceiling cost-effectiveness threshold of $100,000 per quality-adjusted-life-year. A QALY is a composite measure of the extent to which a medical treatment lengthens life and improves patients’ qualify of life. At a 100-fold fatality risk difference, the value-based price rose to $378 per twin-pack. Not factored into these calculations is the probable impact of more people willing to use the nasal spray devices than the auto-injectors. In turn, this could raise the value-based price of Neffy further.

It’s unclear at this point in time how comprehensive insurance coverage of Neffy will be in the three main markets, commercial, Medicare and Medicaid. This is an important consideration because besides needle anxiety, another reason patients don’t fill prescriptions for epinephrine scripts is the out-of-pocket cost. This has risen in recent years for people in high-deductible plans and those whose insurers don’t cover the product at all, particularly branded versions.

When contrasted with branded auto-injector epinephrine, insurers and patients may favor Neffy’s value proposition. The improved formulation could be a valuable selling point. However, the situation gets more complicated when comparing Neffy to cheaper generic injectable epinephrine. Here is where payers and patients will evaluate the trade-off between a higher price but greater convenience.

• Editorial Standards
• Reprints & Permissions

Join The Conversation

One Community. Many Voices. Create a free account to share your thoughts. 

Forbes Community Guidelines

Our community is about connecting people through open and thoughtful conversations. We want our readers to share their views and exchange ideas and facts in a safe space.

In order to do so, please follow the posting rules in our site's  Terms of Service.   We've summarized some of those key rules below. Simply put, keep it civil.

Your post will be rejected if we notice that it seems to contain:

• False or intentionally out-of-context or misleading information
• Insults, profanity, incoherent, obscene or inflammatory language or threats of any kind
• Attacks on the identity of other commenters or the article's author
• Content that otherwise violates our site's  terms.

User accounts will be blocked if we notice or believe that users are engaged in:

• Continuous attempts to re-post comments that have been previously moderated/rejected
• Racist, sexist, homophobic or other discriminatory comments
• Attempts or tactics that put the site security at risk
• Actions that otherwise violate our site's  terms.

So, how can you be a power user?

• Stay on topic and share your insights
• Feel free to be clear and thoughtful to get your point across
• ‘Like’ or ‘Dislike’ to show your point of view.
• Protect your community.
• Use the report tool to alert us when someone breaks the rules.

Thanks for reading our community guidelines. Please read the full list of posting rules found in our site's  Terms of Service.

We've detected unusual activity from your computer network

To continue, please click the box below to let us know you're not a robot.

Why did this happen?

Please make sure your browser supports JavaScript and cookies and that you are not blocking them from loading. For more information you can review our Terms of Service and Cookie Policy .

For inquiries related to this message please contact our support team and provide the reference ID below.

Looking For Market Distribution? Download the Media Kit

Daily NewsFlash

Insurance News, Delivered.

Stay up-to-date on all things insurance. Sign up for our free newsletter.

Pennsylvania Supreme Court Backs Employer Use of Drones for Surveillance

Published on August 12, 2024

Implications for Insurers

In this Article

This ruling could lead to increased demand for insurance coverage related to drone usage by employers. Insurers may need to develop or expand policies covering the risks associated with drone surveillance, including privacy concerns and operational hazards.

Industry Impact

The decision sets a precedent that could influence drone-related insurance products and liability coverage. Insurers will need to stay informed about the legal landscape and ensure that their offerings align with evolving drone regulations.

More Drones

As drone usage grows in various industries, insurers must anticipate and adapt to the associated risks and liabilities. This ruling highlights the importance of clear policy language and comprehensive coverage for employers using drone technology.

Related Articles:

FAA Approves State Farm’s Use of Drones to Assess Hurricane Damage

Failure of Anti-Drone Tests Exposes U.S. Airport Vulnerability

Insurers Using Aerial Home Images to Assess Risk

California Utilities Hope Drones, AI Will Lower Risk of Future Wildfires

Are you retail Agent Looking for a Quote?