A collateral assignment is a legal arrangement where a policyholder assigns their life insurance policy’s death benefit as collateral to secure a loan, typically from a lender like a bank. In this agreement, the lender’s claim on a portion of the policy’s death benefit serves as security for the loan.
If the borrow were to die before the loan is repaid, the lender can collect the outstanding loan balance from the death benefit of the life insurance policy. Depending on the design, if the borrower fails to repay the loan, the lender may also have access to the policy’s cash value to cover the outstanding debt.
Risk Resource specializes in designing and implementing life insurance policies for collateral assignments and works closely with a number of different banks and other lenders.
Here’s how it typically works
- Policy Ownership: The life insurance policy remains owned by the policyholder. They retain control of the policy’s death benefit and cash value.
- Collateral Assignment: The policyholder and the lender sign a collateral assignment agreement, specifying that the lender has a claim on the policy’s death benefit and/or cash value to secure the loan. This ensures that the lender will be repaid if the borrower dies or defaults.
- Loan Terms: The lender sets the terms of the loan, including the interest rate and repayment schedule. The loan is backed by the death benefit and/or cash value of the policy.
- Policy Maintenance: The policyholder must keep the life insurance policy in force by paying premiums.