Need a loan but worried about having collateral to back it up? Consider a source you haven\u2019t thought about yet \u2013 your life insurance policy.<\/p>\n
Collateral assignment of life insurance lets you use a life insurance policy as an asset to secure a loan. If you die while the policy is in place and still owe money on the loan, the death benefit goes to pay off the remaining debt. Any money remaining goes to your beneficiaries.<\/p>\n
Why go this route? Most people purchase life insurance to protect their loved ones at the time of their death. By using a life insurance product as collateral, you can tap into its value while you\u2019re still living. You can use your plan as collateral for various types of loans, including mortgages or a business loan. Let\u2019s see how this may help you.<\/p>\n
With collateral assignment of life insurance, ownership of an asset transfers from the borrower to the lender. This transfer only remains in place until the loan is paid in full.<\/p>\n
In this situation, the transferred asset is your life insurance policy. The goal is only to satisfy your loan obligation. Once that debt is repaid, you\u2019ll end the collateral assignment.<\/p>\n
You can use a term or permanent life insurance policy as collateral for a loan, although more lenders may accept a permanent policy. Here\u2019s how each works:<\/p>\n
One key thing to remember about collateral assignment life insurance is that there are consequences if you fail to pay back the loan. The lender may take over your policy if you stop making payments to recover the money they lent to you. Not all collateral assignments allow for this, though.<\/p>\n
How is a collateral assignment used? Here\u2019s an example:<\/p>\n
Let\u2019s say you have a great business idea. You need a loan of $50,000 to get your business started. When you apply for the money, the bank wants collateral to back up the loan, just in case. A life insurance policy with a cash value of $75,000 and a death benefit of $500,000 may help convince them to provide the loan to you. Using collateral assignment of the policy, you allow the insurance company to pay the lender should you default on the loan, or you die before you repay it.<\/p>\n
Using life insurance as collateral for a loan can provide you with the asset you need to fund your business or personal goals, like buying a home or starting a business. However, the biggest risk is losing your life insurance policy if you default on the loan.<\/p>\n
To minimize these risks, some alternatives to a collateral assignment include:<\/p>\n
Not sure where to start with a collateral assignment? Here\u2019s a brief look at the process.<\/p>\n
Get help from our Fidelity Life team. Our agents are here to answer questions and help make sure your life insurance provides financial support each step of the way.
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\nAt Fidelity Life, our goal is to make life insurance simple, affordable, and understandable for everyday families. This content is intended for educational purposes only. Each post is carefully fact-checked, reviewed, and updated regularly to ensure the information is as relevant as possible.<\/i>
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