Your life insurance could be used as collateral to secure financing if you are in need of money.
There are two types of loan that you can choose from when large-scale expenses occur: secured and unsecured. Although secured loans offer greater rates and higher approval chances, there is one important condition: you must provide collateral. Although you have the option to use your vehicle, or your home, this comes with a high level of risk. If you are unable to repay the loan, your car or your house could be taken away.
If your lender is willing to accept your life insurance policy, you might be better off taking these risks.
What is collateral assignment in life insurance?
A collateral assignment of insurance is a way to secure a loan using a life policy as collateral. The lender may collect the remaining loan balance from your death benefit if you die before the loan is paid. Any funds remaining from the death benefit will then be paid to the beneficiary(s) of the policy.
Life insurance is a great collateral option.
There are many reasons you might choose to use your life insurance as collateral when taking out a loan. Here are some of them:
- It is possible to afford it. Life insurance costs can vary depending on your age, health, and the type and amount of policy you choose. Life insurance premiums can be lower than the cost of an unsecured loan at higher interest rates.
- Your personal property is not at risk. You might be able take out a secured loan by using your life insurance as collateral. This will not put your vehicle or home at risk. The lender will pay the loan off if you die before it is fully repaid.
- Lenders may find it attractive. Life insurance is a popular option because it provides collateral.
There are situations where a collateral assignment of your life insurance may not be the best choice. Due to age or other health issues, some people may not be able to afford life insurance. A lender might require that you take out a new policy if you want to use your existing life insurance policy to secure a loan.
Alternatives to life insurance that can be used as collateral
There are several funding options available if you’re considering collateral assignments of life insurance. Working with a financial advisor is the best way to determine the right solution for you. There are many factors that affect each option.
Unsecured loan
An unsecured loan might be cheaper than a secured loan with insurance collateral depending on your financial situation. If you have sufficient credit to qualify for a low rate of interest without the need to provide collateral, this is more likely to happen. There are many types of unsecured loans available, including personal loans and credit cards.
Cash value life insurance
Life insurance policies can accumulate cash value over the years that you can use in a variety of ways. You may be able partially to withdraw cash or take out a loan against the cash value if you have this type of policy. There are some implications when using cash value from your life insurance policy. Before making a decision, make sure you talk to a financial advisor or a life agent about this.
Home equity line credit (HELOC).
A home equity loan (HELOC) is more flexible than a traditional secured loan. HELOCs have the disadvantage of putting your home at risk, but you still have more control over how much you borrow. Instead of one lump sum, you’ll have access to a line credit that you can draw from whenever you need it. The actual amount borrowed will not be charged interest.
Questions frequently asked
How can I get a loan using a collateral assignation of my life insurance?
If you are looking to borrow money using your life insurance as collateral, the first step is to locate a lender who will issue this type loan. Once you have confirmed the requirements of the lender, you might be able use your existing life insurance policy (if allowed by the lender) or you will need to buy a new policy to serve as collateral.
The application process for a new policy is the same as any other type life insurance. It may require extensive underwriting and a medical exam. Once you have purchased your new policy, you will need a collateral assignment form from the insurance company. You will need this form to include your lender as an assignee. A lender will not normally be listed as a beneficiary. If the lender does not claim any benefits, the beneficiary will be the beneficiary.
What type of life insurance is available as collateral?
A loan can be secured using any type of life insurance policy. According to the Insurance Information Institute, this includes universal life, term, and traditional whole life. Each financial institution will have its own requirements. Before purchasing life insurance, you should discuss the requirements with your lender. You may wish to compare the premiums of each type of policy if more than one is available.
