How Can A Person Use A Life Insurance Policy As A Collateral?
Updated On Sep 20, 2021
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A borrower will assign a portion or their insurance policy as collateral for a loan in the case of death, this doesn’t mean that you can use life insurance as traditional forms of collateral, it’s only a measure lenders take to protect themselves against the potential death of the borrower. This means that part of the insurance proceeds are used to pay the loan principal and interest. In the event of the death of the borrower, part of the death benefit proceeds are used to pay off the loan balance while the remaining amount goes to their beneficiary.
How to Apply For Collateral Assignment Life Insurance?
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 specific 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.
How Does Collateral Assignment Work?
Here’s how the collateral assignment process works:
- 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 take a few days to a few weeks for the life insurance company to acknowledge the assignment (we accelerate the process and know what companies do this quickly)
- 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.
- To clarify, 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.
The process of setting up a collateral assignment does not have to be a nightmare. If you dread the whole process, then it is better to consult with a financial expert to guide you through. All in all, it may be unnecessary if you have an insurance policy in place and only need a collateral assignment. Since the process only entails filling up a few forms and waiting for a few days for approval, it is possible to do it on your own.
Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.