How To Use Term Life Insurance As Collateral?

If you’re applying for a loan and your lender requires collateral, you may be able to use your life insurance policy as collateral. Here’s how to use term life insurance as collateral:

Step 1Check with your lender if they accept the collateral assignment of an existing life insurance policy or if they require a new life insurance policy for collateral assignment.
Step 2If a new policy is required, shop around for a life insurance policy with a death benefit amount sufficient as loan collateral.
Step 3Apply for a new life insurance policy with the insurer and confirm with your lender that the policy meets their loan requirements.
Step 4Complete a collateral assignment form via your insurer and provide your lender’s contact information. The form requires signatures from both the assignor and assignee.
Step 5Proceed with your loan application once your bank confirms they’re the collateral assignee for your life insurance policy.

It’s important to note that the total death benefit available to your beneficiaries will depend on whether you pay off your loan before passing away. If you pay off the loan, your beneficiaries can file a claim for the policy’s full death benefit. However, if you pass away before paying off the loan, the total death benefit available will be reduced by the amount needed to fully pay back your lender. Your lender will be an assignee rather than a beneficiary, and the assignee can only claim up to the amount required to settle your loan. Any amount remaining may be claimed by your beneficiaries.

Collateral assignment may not be the only way to qualify for the loan you need. If you have a whole life or universal life policy, you may be able to borrow from your policy’s cash value instead of borrowing from a lender.

Consult with a financial advisor to understand the implications of your particular situation.

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