- 1 collateral assignment of life insurance
- 1.1 What is a collateral assignment of life insurance?
- 1.2 Assignment Of Life Insurance Policy As Collateral
- 1.3 Collateral Assignment of Life Insurance
- 1.4 Collateral Assignment of Life Insurance
- 1.5 wiseGEEK: What Is Involved in the Collateral Assignment of Life Insurance?
- 1.6 The Collateral Assignment of a Life Insurance Policy
- 1.7 Assigning Life Insurance to Secure a Loan
- 1.8 Never Assign Your Bank as the Beneficiary
- 1.9 What Types of Life Insurance Policies Work for a Collateral Assignment?
- 1.10 How Does it Work and Where Do I Begin?
collateral assignment of life insurance
What is a collateral assignment of life insurance?
A collateral assignment of life insurance is a conditional assignment appointing a lender as the primary beneficiary of a death benefit to use as collateral for a loan. If the borrower is unable to pay, the lender can cash in the life insurance policy and recover what is owed. Businesses readily accept life insurance as collateral due to the guarantee of funds if the borrower were to die or default. In the event of the borrower's death before the loan's repayment, the lender receives the amount owed through the death benefit and the remaining balance is then directed to other listed beneficiaries.
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 particular policy. 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 were to default.
Alternately, the policy owner's access to the cash value is restricted in an effort 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 collateral assignment of a policy, but other than their obligation to meet the terms of the contract, they remain disinterested in the agreement.
This is a very common question among business owners applying for a bank loan. Let's look at an example.
Bob wants to borrow $2 million from his local bank, to expand his business. His banker agrees to lend him the money, but wants to have life insurance in place on Bob's life. Why? Because if Bob tragically dies before the loan is paid off, his banker doesn't want to have to chase his wife or his estate for the money.
So, the race is on for Bob to get a policy. He wants that coverage quickly so he can close the loan and get his money. He gets prequalified for coverage, finds a company that will give him good underwriting, and submits an application. The application is approved, the policy is delivered, he pays for it, and the coverage is put into force.
Now he is ready to execute a collateral assignment. He gets a form from his bank, or from the insurance company – whichever the bank prefers – and completes it. His wife is the beneficiary, and the bank is the assignee. He gets the money from the bank and sinks it into his business.
Now let's suppose he unfortunately meets his demise a year later. His wife files a claim. The claims department of the insurance company pulls the file and notices that the benefit has been collaterally assigned to the bank. They contact the bank and ask for documentation of any outstanding balance on the loan. The bank provides this, gets paid, and then Bob's wife gets the rest of the death benefit.
The use of a collateral assignment makes sure the lender gets paid only what they are due. If the bank had been made the beneficiary, they would've been given the full death benefit, even if some of the loan had already been paid off. They would've been overpaid, and Bob's wife would've been given nothing.
If you are applying for life insurance to secure your own business loan, remember that there is no reason to make the lender the beneficiary. Use a collateral assignment and make sure your broker walks you through its execution.
Please feel free to contact me with additional questions.
Assignment Of Life Insurance Policy As Collateral
1. Assignment. For value received, ___________________, of __________________________________________, assignor,
hereby assigns, transfers, and delivers to ____________________________, of ___________________________________________________,
assignee, successors or assigns, policy No. ______________, issued by ____________________________, insurer, and any supplementary contract issued in connection therewith on the life of ________________________________, of __________________________________________, and all my right, title, and interest therein except as provided in Section 3 hereof, subject to all the terms and conditions of the policy and to all superior liens, if any, that insurer may have against the policy.
2. Rights of assignee. Assignor agrees that the following specific rights pass to assignee by virtue of this agreement:
a. The sole right to collect from insurer the net proceeds of the policy when it becomes a claim by death or maturity;
b. The sole right to surrender the policy and receive the surrender value thereof at any time provided by the terms of the policy and at such other times as insurer may allow, and the full right to obtain one or more loans or advances on the policy from insurer, such rights subject however, to the provisions of Section 5a hereof;
c. The sole right to collect and receive all distributions or shares of surplus, dividend deposits, or additions to the policy now or hereafter made or apportioned thereto, and to exercise any and all options contained in the policy with respect thereto; provided, that unless and until assignee shall notify insurer in writing to the contrary, the distributions or shares of surplus, dividend deposits, and additions shall continue on the plan in force at the time of this assignment; and
d. The sole right to exercise all non forfeiture rights permitted by the terms of the policy or allowed by insurer and to receive all benefits and advantages derived therefrom.
3. Rights reserved by assignor. It is expressly agreed that so long as the policy has not been surrendered, the following specific rights are reserved and excluded from this assignment and do not pass to assignee by virtue hereof:
a. The right to collect from insurer any disability benefit payable in cash that does not reduce the amount of insurance;
b. The right to designate and change the beneficiary; and
c. The right to elect any optional mode of settlement permitted by the policy or allowed by insurer.
4. Indebtedness secured. This assignment is made as collateral security for any and all indebtedness of assignor to assignee, either now existing or that may hereafter arise between assignor and assignee. Assignee agrees to apply any and all money received from insurer to the satisfaction of such indebtedness, and to pay to assignor, his legal representatives, heirs, or assigns, any balance remaining after payment of the indebtedness existing at the time of such payment.
5. Covenants of assignee. Assignee covenants that:
a. Assignee will not exercise either the right to surrender the policy or, except for the purpose of paying premiums, the right to obtain policy loans from insurer, until there has been default in any of the then existing indebtedness secured by this assignment or a failure to pay any premium when due, or until thirty (30) days after assignee shall have mailed to assignor, at the address last supplied in writing to assignee, notice of intention to exercise such right, with specific reference to this assignment; and
b. Assignee will, on request, forward without unreasonable delay to insurer the policy for endorsement of any designation or change of beneficiary or any election of an optional mode of settlement.
6. Payment of charges on policy. Assignor agrees to pay, and assignee shall be under no obligation to pay, any premium, or the principal of or interest on any loans or advances on the policy whether or not obtained by assignee, or any other charges on the policy. However, any such amounts so paid by assignee shall
become a part of the indebtedness hereby secured, shall be due immediately, and shall draw interest at the rate of _____________ percent ( ____%) per year from date of payment.
Collateral Assignment of Life Insurance
Collateral Assignment of Life Insurance
Collateral Assignment of Life Insurance, what is it and how do I apply?
Collateral assignments will often be placed on life insurance to guarantee the loan upon the death of debtor.
The most common time I use them would be if someone is selling a Pension or Structured Settlement monthly income stream. They can also be required on SBA Loans.
Some carriers do not allow this type of assignment and, in fact, may void a current life insurance policy. If you are considering selling a monthly Pension , Structured settlement stream or need an SBA loan, it might be best if you consider getting a stand alone life insurance policy. The actual Collateral Assignment paper work is not overly difficult. However applying and working with the right carriers is the trick!
I am experienced in these type of transactions and I can assist you with the process. I work with several carriers that allow this type of assignment.
Please contact me today for further information. My number is 512-963-5000. You can also fill out my contact request form.
wiseGEEK: What Is Involved in the Collateral Assignment of Life Insurance?
The collateral assignment of life insurance is a type of collateral that lenders extract from borrowers as a basis or condition for lending them money. It is a sort of security for the lender that ensures his or her money will be repaid. This collateral is obtained by the lender from the borrower when the lender needs extra assurance that the borrower will repay the debt. A life insurance can be assigned to anyone by the owner of the insurance, which is what makes this ideal to borrowers.
A lender might insist on a collateral assignment of life insurance when he or she is not sure that the borrower will repay the money. It may be a condition for the disbursement of a loan. In this case, the borrower will take out a life insurance policy and name the lender as a beneficiary. If the borrower passes away before repaying the loan, the lender will retrieve that money from the dividends of the life insurance policy.
The lender may only recover the money owed him or her and no more. If there is any money left after the lender has extracted the debt owed him or her, the money will be paid to the other beneficiaries of the life insurance — usually the family members of the borrower. If the borrower did not name anyone other than the lender as a beneficiary, the balance will be applied to the estate of the borrower.
Most insurance companies are conversant with collateral assignment of life insurance, and each company has its own policies for such coverage. Some insurance companies will seek to contact the lender directly in order to find out exactly how much he or she expects to get from the collateral assignment of life insurance should the owner of the insurance die. They may also want to know what kind of terms the lender is attaching to the collateral assignment of life insurance. Insurance companies do this to avoid any surprises should such an event occur.
If the borrower is able to repay the money owed the lender, then the lender will not be entitled to any money from the life insurance policy. The agreement between the borrower and the lender in respect of the collateral assignment of life insurance usually contains a clause that the claim of the lender as a beneficiary to the life insurance becomes void upon the full repayment of the debt owed. The life insurance policy merely serves as a backup in case the borrower defaults on the repayment of the loan or in case the borrower dies before paying the lender all of the money owed.
The Collateral Assignment of a Life Insurance Policy
Did you know your life insurance policy can help you get a loan? Lenders widely accept life insurance as collateral because of the guaranteed funds, so if the worst happens, they’re still going to get repaid. Let’s take a look at the collateral assignment of a life insurance policy and see how it works.
Assigning Life Insurance to Secure a Loan
Getting approved for a loan depends on a number of different factors — one of which is how you intend to pay back the loan if you die. That’s where assigning a life insurance policy comes into play. It’s a useful feature that guarantees the money will be paid back, no matter what. Thus, a lender is more likely to approve your loan request.
You are free to assign your life insurance policy, granted there isn’t some kind of limitation in your contract that prevents it. You can even assign the same policy to multiple banks to secure more than one loan. Let’s say you have a $500,000 policy. You can assign one portion of it to one bank and another portion to another bank.
With an assignment, you can transfer the rights to all of or a portion of the policy’s proceeds to an assignee. Essentially, the assignment is subject to the negotiations and agreement between you and the lender.
The collateral assignment of a life insurance policy is conditional. A term policy secures the loan in the case of a death, and it is required for many types of bank loans. Collateral refers to the cash value in a life insurance policy — whole life or universal life policies that build up cash value — but it does not apply to term policies.
Unlike an absolute assignment — which pretty much assigns the policy lock, stock, and barrel with no possibility of reversal — the collateral assignment is a more limited type of transfer. If you die before the loan is paid back, the lender receives the amount that is still owed through the death benefit. The remaining balance is then directed to any other named beneficiaries. And the policy has to stay current, meaning you need to keep up with paying all the necessary premiums for the life of the loan.
Also, your access to the cash value (let’s say you have a whole or universal life policy) is restricted in an effort to protect the collateral. If the loan is paid off before your death, the lender will no longer be the beneficiary of the death benefit. Cash value assignments are more attractive to lenders because the funds can be recovered without the death of the borrower.
The insurance company has to be notified of the collateral assignment of a policy, but other than keeping up with the terms of the contract, they really don’t have any involvement or authority in the agreement.
Never Assign Your Bank as the Beneficiary
If your bank asks you to assign them as the beneficiary, don’t do it. If you die and have only paid off half your loan, the bank will get the remaining balance because they are the beneficiary, and that contract takes precedence over any will. Don’t let this happen.
Banks only require a collateral assignment, which means as the amount owed on your loan decreases, the amount that goes to the bank will decrease as well. If you take out a $100,000 loan on a collateral assignment and pay off half that loan, the collateral assignment will only pay the bank what’s left on the loan. The rest will go to the primary beneficiary. If there are no other listed beneficiaries, it will go to your estate. Never give the bank that full amount. The collateral assignment decreases the benefit to be in line with your loan.
What Types of Life Insurance Policies Work for a Collateral Assignment?
Any type of life insurance policy is acceptable for a collateral assignment, as long as the insurance company allows an assignment for that particular policy.
A permanent life insurance policy with a specific cash value allows the lender access to that amount as repayment of the loan if the borrower were to default. The policy owner’s access to the cash value is limited as a safeguard on the collateral. Again, as long as the loan is paid off before the borrower dies, the assignment is removed and the lender has no access to the death benefit. It’s as simple as that, really.
A term life insurance policy is a great (and inexpensive) option, too. Plus, some lenders only require the loan for a certain period of time that coincides with the term of the loan — five years, seven years, oftentimes a 10-year term policy works. Once the loan is paid off, you can cancel the policy or keep it going and continue to protect your family.
Let’s say you purchase $300,000 of term life insurance coverage. Eventually, you go to your bank for a $150,000 loan and use a collateral assignment on the policy as partial collateral. Your children are named as the beneficiaries on your life insurance policy. After you die, both the bank and your children make claims with the insurance company for the death benefit. The bank would have the right to the money that is still owed to them above anything your children would receive. The collateral assignee (the bank) has priority. That means they will be paid before the rest of the death benefit is released to the beneficiaries (in this case, your children).
How Does it Work and Where Do I Begin?
Some lenders will consider using an existing life insurance policy for an assignment. Others may say you need a new policy for their purposes. Either way, using life insurance as collateral to secure a loan is a fairly common practice that every insurance company can handle.
First, begin by securing your loan.
Go to your bank and find out what their requirements are and what kinds of loans they offer.
Loans are most often backed by the Small Business Administration and sold by larger banks like Wells Fargo, Chase, or Bank of America. Smaller banks are certainly an option, as well.
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