What is Collateral Assignment?
Collateral Assignment is a financial arrangement in which the policyholder of a life insurance policy assigns the policy’s death benefits to a lender as collateral for a loan. This means that if the borrower fails to repay the loan, the lender has the right to collect the insurance proceeds to cover the remaining balance. Collateral assignments are typically used in business loans, mortgages, and other substantial financial commitments.
In the context of life insurance, this arrangement can involve policies like Term Life Insurance, Whole Life Insurance, and Indexed Universal Life Insurance. While the policyholder retains ownership of the insurance policy, the lender is prioritized as a beneficiary. This is a popular method among business owners and individuals who need financing but may not have other forms of collateral available.
The collateral assignment typically only covers the loan amount, so any remaining death benefit after the loan is repaid goes to the other named beneficiaries, such as family members. This offers a way for policyholders to secure a loan without risking all of the policy’s benefits, ensuring some protection for their loved ones.
Additionally, collateral assignment can be beneficial for seniors looking for life insurance options tied to a loan or specific financial obligation. It provides lenders with assurance while allowing policyholders to use their insurance policy to access financing when needed.
