What is Collateral Assignment?

Have you ever thought about or tried to apply for a Small Business Loan? If so, then the words collateral assignment may sound familiar. When you apply for a loan, especially an SBA loan, asset assignment ownership is transferred to the lender as an additional security throughout the duration that the loan is being paid is known as collateral assignment. Lenders prefer collateral assignment and sometimes require it as a term to obtain a loan because it guarantees they will receive their money back if anything were to happen to the assignor that would cause them to default on payments.

Collateral Assignment

A common form of collateral assignment is a life insurance policy, an asset that the lender will have access to if the assignor dies or can no longer pay the loan back. The owner of the policy will conditionally assign the lender as the primary beneficiary of the death benefit on their life insurance policy to cover the remaining amount of their loan should anything happen to them during the duration that the loan is being paid off.

The additional security that the lender, usually the bank of your choice, receives from the collateral assignment allows them to loan out greater amounts, benefitting both the lender and the assignor. The way that it works is, if the assignor dies or can no longer repay the loan for any reason, the remaining value of the loan will be deducted from the cash value of the life insurance policy. After the loan has been repaid in full amount, the remaining amount of the death benefit will go to other beneficiaries such as children, spouses, and relatives.

Life Insurance

Any life insurance policy would be acceptable as a collateral assignment for a loan, given that the policy will be current throughout the duration of the loan’s repayment and the insurance company allows it. To ensure that the policy will remain current throughout the duration of the loan’s repayment, pay premiums on time and check that the policy won’t lapse before the loan is repaid. Therefore, when using a term policy as collateral, it is helpful to have the repayment term of the loan line up with how long the term policy will be active, many policy owners can do this with a seven or ten-year loan easily.

A permanent life insurance policy with a cash value will allow the lender access to the value in order to repay the remaining loan amount. Some loans may require that the assignor has limited access to the cash value of their policy during the repayment of the loan in order to protect the value of their collateral.  Most insurance companies allow policies to be used as a collateral assignment and only need to be notified of the transfer of beneficiary, meaning the insurance company does not have any direct involvement in your loan.

If you have any questions about how to use your life insurance policy as a collateral assignment on a loan, please contact one of our financial advisors here to find out what your options may be.