What Is the Collateral Assignment of a Life Insurance Policy?
Many lenders require borrowers to use life insurance as collateral.
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Collateral assignment refers to the contractual designation of a company or other entity as beneficiary of a life insurance policy. This arrangement is fairly common among business owners in search of additional funds or credit. Many lenders will consider the assignment of life insurance alongside other factors when evaluating creditworthiness for business financing applications. Some lenders even require an assignment of life insurance as a condition of loan approval. When leveraged properly, a collateral assignment can help business owners obtain funding that would otherwise be unattainable.
Life insurance collateral assignments have become commonplace and the documents necessary to enact these agreements can be obtained directly from the life insurance company. These assignment templates contain widely accepted language and terms, and after filling in the blanks regarding the specific details of the arrangement, the forms must be signed by both the policy owner and lender. However, no obligation exists requiring the use of boilerplate documents; collateral assignments may be negotiated and created by the parties involved. The insurance
company remains disinterested in the assignment arrangements, except for its obligation to uphold the terms of a properly executed contract.
Typical insurance assignments focus on a policy's death benefit as the source of collateral for a loan. The agreement places the lender in the primary beneficiary position, ensuring the recovery of an outstanding loan balance if the owner dies before final repayment is made. If the policy's death benefit exceeds the dollar amount of the collateral assignment, the remaining proceeds are distributed to the owner's listed beneficiaries as per the original policy documents.
Although less common, some collateral assignments involve the cash value of existing permanent life insurance policies. Under this type of arrangement, the lender is granted permission to access cash value and make withdrawals if the borrower defaults on loan payments. Additionally, these agreements restrict the policy owner's access to the cash value to protect the integrity of the lender's new collateral. Cash value-focused collateral assignments provide the added benefit of allowing borrowers to keep current beneficiary designations without a reduction in benefits.
Termination of the PolicySource: finance.zacks.com