Life Insurance FAQ

A collateral assignment of life insurance is a contract that assigns a life insurance policy death benefit to the Lender as collateral for a loan.

In examining whether or not to make a loan to a business, the Lender will evaluate if repayment of a loan will be dependent upon a particular business owner’s active participation in the business. In other words, if the business owner dies, will the business operations be adversely affected and the loan default? The pledge of the policy, or death benefit, works as a “security” to ensure that the Lender will be repaid for the loan should the unexpected death of the business owner occur.

The “policy owner” of a life insurance policy can pledge a policy’s death benefits to a Lender, but the insured cannot.

The policy owner and a policy insured could be one of the same, or they could be two separate individuals and/or entities. For example, a husband can own a policy that insures the life of his wife or a company can own a policy that insures the life of its primary officer or director.

The policy owner is the person or entity who has control over the policy.

The policy insured is the individual person that is covered by the policy.

Yes. The policy owner being an obligor or guarantor of the loan evidences that they have an interest in ensuring that the loan is paid off in full should an unexpected death occur.

The Lender does not require any particular type of life insurance policy. However, the life insurance policy must be assignable.

Term Insurance: Term insurance is death protection for a “term” of one or more years. Benefits are paid only if the insured dies within that term of coverage. It has no equity or cash value.

Whole Life or Universal Life Insurance: These forms of insurance are considered permanent insurance and there are numerous variations that enable the insured to custom-design the life insurance to fit their needs, and death benefits are paid when the insured dies.

Second to Die Insurance: This type of policy is meant to insure two people – usually a husband and a wife. The death benefit is not paid until the second person dies.

Group Policy: A group policy is an insurance policy that covers a group of people. It typically covers a group of individuals who are employees of a common employer. Often group policies cannot be collateral assigned. However, in some cases the policy owner can appoint the Lender as an “irrevocable” beneficiary of the policy. Speak with the Loan Officer for more details.

An existing life insurance policy can be pledged if the amount of the life insurance policy is sufficient to cover the amount of the loan.

Contact your Loan Officer to discuss your options. In most cases, additional life insurance must be purchased so that the combined amount of the life insurance policies equal the amount of the loan.

If there is an existing loan on or against the life insurance policy, obtain a statement from your life insurance company setting forth the loan principal balance and speak with your Loan Officer.

The typical time frame for putting a new life insurance policy in place and receiving an acknowledged collateral assignment from the home office of the life insurance company can take up to 45 days. Speak with your Loan Officer about other life insurance policies and products that can be obtained on an expedited basis.

The collateral assignment cannot predate the life insurance policy. Until the policy is issued, the collateral assignment cannot be processed.

Notify your Loan Officer immediately to discuss other options.

The policy owner is expected to pay all premiums associated with the life insurance policy.

The Lender may require an escrow account for the payment of the premiums on the life insurance policy.

Yes. First, the policy owner must make sure that the life insurance company will allow for the policy to be used as collateral “security” for a loan. Many insurance companies have specific requirements and they need to be followed before the collateral assignment of a life insurance policy can take place. The life insurance company must be notified that the assignment has been made.

The Lender will require written notification from the life insurance company home office that the collateral assignment of life insurance has been filed. This will be in the form of a stamped filed copy of the collateral assignment form or a separate cover letter, together with a copy of the executed collateral assignment form.

The policy owner must contact the insurance company and request a “collateral assignment of life insurance policy form”. The form must be completed with the pertinent information, including necessary signatures and returned to the life insurance company for filing.

If the life insurance company does not require their own format be used, a standard form of collateral assignment can be obtained from the Lender.

For the standard collateral assignment form, click here >

An “assignee” is a person or company to which a right or liability is legally transferred. In the case of a collateral assignment of life insurance, the assignee would be the Lender.

An “assignor” is the person who transfers the rights they had to a claim, property, or interest to another person or entity. In this instance, the assignor would be the policy owner.

Depending on the type of loan obtained, the Lender will be listed with their full legal name and main corporate address. The Loan Officer will advise accordingly.

1. The assignment will not be binding until the original is filed at the insurance company’s home office.

2. The insurance company assumes no obligation as to the effect, sufficiency, or validity of the assignment.

3. The assignment is subject to any loans or indebtedness to the insurance company on the policy.

4. The assignor has the right to designate and change the beneficiary.

5. The assignee has the right to receive notices of lapsed premium payments.

Most life insurance companies require 7 to 10 business days to process a filing. Some life insurance companies allow for expedited filing upon request.

It depends. Some life insurance companies allow multiple Lenders on one policy while others do not.

Most Lenders require at least six months of premiums be pre-paid and evidenced prior to closing.

The Lender requires a letter from an authorized representative of the life insurance company, on their letterhead, indicating the following. A sample letter/form will be provided by the Lender.

For the verification form, click here >

a. No other assignment of the life insurance policy has been made for the benefit of any other Lender or creditor - and if so, when was the Assignment made and to whom;

b. All premiums have been paid on the life insurance policy for a period of at least six (6) months prior to closing;

c. If there is a cash surrender value to the life insurance policy, no borrowings have been made against it; and

d. The original life insurance policy is not required to make a claim against the policy.

In order to collect on a collateral assignment, some life insurance companies require the Lender to present the original policy. Accordingly, the Lender may require the policy owner to surrender the original policy for the Lender to hold during the term of the loan.

The policy owner should order a duplicate original policy from the life insurance company. This process may take several weeks and typically requires the policy owner to provide a lost policy affidavit.

“Cash Surrender Value” is a sum of money an insurance company will pay to a policy owner in the event the life insurance policy is terminated before its maturity. In the event there is a filed collateral assignment of life insurance against the policy, any compensation that is paid out will go to the Lender to apply towards the existing loan balance before any balance is directed to the policy owner or its beneficiaries.

Unless the collateral assignment form specifically states otherwise, the cash surrender value of the policy is considered pledged together with the policy. At the discretion of the Lender, other loan documentation may be necessary to confirm that the cash surrender value of the life insurance policy is collateral for the loan.

Yes. If at any time you want to change or swap insurance policies during the duration of the loan, contact your Loan Officer for more information.

Yes. The policy owner will not be able to take a loan against the life insurance policy after the life insurance collateral assignment is filed without the Lender’s written consent. Contact your Loan Officer for more information.

The policy owner should contact the Loan Officer immediately. The loan must remain secured by a collateral assignment of life insurance during the entire term of the loan, unless otherwise agreed to in writing by the Lender and policy owner. As a result, the policy owner may need to obtain a new life insurance and secure a new collateral assignment of that policy for the benefit of the Lender.

Note that the Lender can purchase life insurance on the policy insured. The amount of insurance will be in an amount sufficient to cover the loan balance only and the expense of the policy purchased will be added to the loan as an incurred fee.

The policy owner can change a beneficiary of a life insurance policy at any time. The Lender does not have to be a part of that process; however, you cannot change an assignee without prior written approval from the Lender.

If an unexpected death occurs and the loan is not yet paid in full, the Lender generally receives an amount equal to the then principal balance of the loan. A collateral assignment takes precedence over beneficiary claims, including the deceased person’s spouse or children, against the death benefit proceeds.

For Example: If an insurance policy of $100,000 is pledged to collateralize a $100,000 loan and at the time of the insured’s death, the principal balance owed to the Lender is $51,000, $51,000 will be paid to the Lender and the remaining $49,000 will be paid to the beneficiaries of the policy.

The Lender may pay the premium (but has no obligation to do so) and the Borrower will reimburse the Lender on demand for any premiums paid. The failure to pay all premiums when due or take other action to keep the life insurance policy in full force and effect until the entire principal amount of principal and interest due upon the loan has been paid in full can be considered an event of default under the relevant loan documents. As a consequence of default, the Lender may declare the entire principal of the loan as due and payable.

The Lender can purchase life insurance on the policy insured. The amount of insurance will be in an amount sufficient to cover the loan balance only and the expense of the policy purchased will be added to the loan as an incurred fee.

The failure to pay all premiums when due or take other action to keep the life insurance policy in full force and effect until the entire principal amount of principal and interest due upon the loan has been paid in full can be considered an event of default under the relevant loan documents. As a consequence of default, the Lender may declare the entire principal of the loan as due and payable.

The Lender will release any rights to the life insurance policy. If the Lender is in possession of the original policy, the Lender will return the original policy at that time.

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