Can You Use Life Insurance As Collateral for a Loan?

A collateral loan is a loan secured by the assets you own. You promise to hand the assets over to the lender if you cannot pay back the loan as agreed. Using a collateral loan will make it easier to get funded, because the lender will take less risk.  Before applying for a loan, we recommend you to research the basic mechanism of obtaining funding.

life insurance policyBesides assets, you can use life insurance as collateral for a loan.  Almost all policies, including term life insurance plans can be used a guarantee for your loan.

People prefer to use collateral loans, because they have a guarantee to compensate the lender, in case they are unable to repay the debt.  In contrast, contracting unsecured loans can ding your credit or end up with legal actions if you do not pay the money back.

With collateral loan, the bank will have the right to take your assets. The following assets can be used as assurance for loans:  vehicles, real estates, bank accounts, future payments, valuable, collectibles, jewelry and even insurance policies.  If you use a policy as a guarantee, the lender will cash in the death benefit, should you die before paying the debt.  In a collateral assignment, the policy becomes the sole property of the borrower once the debt is satisfied.

Discuss with the lender the terms of the assignment, the value of the loan, its duration and the exact rights and obligation of both borrower and lender.   You must specify who pays the premiums, beneficiary modification, claiming death benefit and default provisions.

If you already have a policy in force, consider assigning it if it conforms to the agreement specifications.  Talk with your insurer and get the collateral assignment form and complete it. Once you have done that, send a copy to the insurance company for official recordings and one copy to the lender.

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