Guidelines for Collateral Assignment of Life Insurance
Why do banks require insurance for collateral assignment?
Banks require insurance for collateral assignment so that they can always get any outstanding loan amount back in if the loaner defaults or dies or before being able to pay the loan back.
What is a collateral assignment of life insurance?
Collateral is pledged as security for repayment of a loan, to be forfeited in the event of a default. A collateral assignment of insurance is a conditional assignment appointing a lender as the primary beneficiary of a benefit to use as collateral for a loan. If the borrower is unable to pay, the lender can cash in the insurance policy and recover what is owed.
What are the differences between an absolute assignment and a collateral assignment?
Absolute assignment in insurance involves signing over your entire policy to another person or entity. The person who is selling or gifting the policy is known as the assignor, and the individual or individuals who receive it are the assignee. The assignee takes full ownership of the policy, being held liable for any premiums and also having the authority to change or designate new beneficiaries.
Collateral assignment of life insurance essentially works like a standard loan. The insurance policy is “collateral” for a loan, and the person or organization that pays out that loan is the temporary beneficiary of the policy’s death benefit until the loan is repaid. The entity taking over the policy does so on a conditional basis and, therefore, doesn’t have the authority to make changes to it, re-sell it or take any of its cash value. Instead, the assignee can only draw on the death benefit if the policyholder defaults.
Collateral assignment, on the other hand, enables policy holders to regain control of their own policy once a medical or other crisis has resolved. It is one of the 3 common ways to borrow from your life insurance policy and access the cash value. With a collateral assignment you are able to eventually benefit again from the long-term advantages of a life insurance policy.
What are the rules for assigning the death benefit to the bank?
If one already has a life insurance policy with a face value greater than the loan amount, he can collaterally assign that policy by requesting the paperwork from the insurer. If one doesn’t have a life insurance policy, or need additional coverage, he will need to apply for life insurance and go through underwriting.
Whether one have a term life insurance policy or a whole life insurance policy, he will be the policy owner and responsible for the premium payments. The borrower must be the owner of the policy, but not necessarily the insured, and the policy must remain current for the life of the loan with the owner continuing to pay all necessary premiums.
Any type of life insurance policy is acceptable for collateral assignment, provided the insurance company allows assignment for the policy. Some banks may require an escrow account for the life insurance premiums, others may require proof of premiums paid or prepaid.
If one has a whole life policy that he uses for collateral assignment, banks will have access to the cash value of the policy if he defaulted on the loan. If the loaner dies, insurance company will use the death benefit to pay any outstanding loan amount. The rest, if any, goes to the assigned beneficiaries.
Insurance companies must be notified of the collateral assignment of a policy. When one is applying for life insurance for the purpose of collateral assignment, he will name his beneficiaries as he would for a personal policy. The bank is not his beneficiary, but the assignee on the collateral assignment after the policy is in force. On the form, he will be the assignor.
What are the reasons to consider a collateral assignment of life insurance?
There are several reasons to consider a collateral assignment of life insurance. Collateral assignment guarantees the safety of the amount that was loaned out to the lender, especially under the listed terms and conditions that the lender will be paid in full; moreover, the remaining will be given the listed beneficiaries in the case of death of the borrower.
- It safeguards the interests of the lender. A collateral assignment plays a critical role while securing a loan for the borrower. It is the insurance company’s obligation to guard the lender’s interest after collecting the collateral assignment form.
- A collateral assignment allows you to be more flexible with your capital assets.
- A collateral assignment allows the borrower to purchase insurance as a low-cost collateral to secure paying back a loan.
What are the downsides of a collateral assignment?
A collateral assignment has great advantages, but it has certain limitations as well. First of all, a collateral assignment has limited death benefit. You should assign part of the death benefits as collateral instead of the total benefits which avoids the circumstances where the lender claims all the death benefits after you die.
- If it is difficult to obtain an affordable insurance policy with low premiums.
- Loss of policy control is another disadvantage of collateral assignment.
- Collateral assignment suffers from limited use of cash value.
What types of insurance are best for collateral assignment protection?
Any type of life insurance policy is acceptable for collateral assignment, provided the insurance company allows assignment for the policy.
Some examples of insurance policies you can use for collateral assignment are:
- Term Insurance
Term life insurance is used to offer coverage for a specific number of years. The proceeds of the policy are only paid out after the insurer dies and it lacks equity and a surrender value. It falls under the category of the most affordable insurance plans which is why it is a top pick for most people.
You don’t need to buy a plan that exceeds or falls below your needs, term life insurance enables you to purchase a plan tailored to your needs and since it is not permanent, you are going to pay low premiums.
- Universal Life Insurance or Whole Life Insurance
With universal life insurance, you will be able to design the insurance policy according to how you want it. The insurance proceeds are usually released when the insured party dies. It is great for individuals looking for a permanent insurance policy that never expires unless you are dead. In short, you will continue to receive coverage as long as the annual premiums are getting paid.
On the downside, universal life insurance policies tend to be expensive because they are meant to offer life term coverage.
On the bright side, the policies build cash value and the longer the premiums are paid, then the more value the plan will build. This cash value can be used on other investments or to pay off the outstanding premiums.
How to apply for collateral assignment life insurance?
When applying for a collateral assignment of life insurance, you can use two ways to do so: through the bank or through your insurer. The two are explained further below;
- APPLYING THROUGH YOUR BANK
There are some lenders who will consider using your existing life insurance policy for collateral assignment if you request it, but others might require you to take out a brand-new policy specific for that purpose.
In either case, using life insurance for collateral assignment when applying for loans is a fairly common practice that almost every life insurance company and the bank is equipped to handle.
You start off the application for assignment by securing the loan with the bank in question. This is where you will discover the limitations and regulations the bank has regarding the collateral assignment of life insurance. Each lender has different policies.
- APPLYING THROUGH YOUR INSURER
Once you have found the right loan, you must fill out the collateral assignment form. Your insurer will be able to provide you with this form easily.
The form has to be filled out by every party involved, including yourself, the lender, and the insurance company. You can sign the forms at the time of your loan application or you can sign them after your policy has been issued.
If you are taking out a brand-new life insurance policy, you are better off signing all of the documents for this at the beginning of the application. The time frame to request a collateral assignment and be accepted for it ranges between 24 hours and 48 hours.
Some banks might require that you notarize the form, which can add some time to the application and acceptance process.
What is the template of assignment forms?
There are several essential parts to be included in the collateral assignment forms.
- Policy identification
This part focuses on the information of the insured, including policy numbers, owner’s first and last names, address, phone number, email address.
- Assignee information:
This part contains information of the assignee. The assignee could be an individual, corporate entity or trust. If the assignee is a Trust, he/she ought to list out all the names of currently serving trustees. Moreover, this part should include the assignee’s full legal name, address, tax ID, email address and phone number.
- Terms and conditions:
This section lists all the terms and conditions of the assignment. To be specific, this section covers in details regarding the rights, for instance, “the sole right to collect from the Insurer the net proceeds of the policy, the sole right to obtain one or more loans or advances on the Policy”, etc. Moreover, this section might also include IRS certification to certify the taxpayer identification number filed in the previous sections are authentic and correct.
All owners and assignees are required to sign and date in this section after reviewing the previous terms and conditions. Moreover, beneficiaries are also required to sign this form.
- Submission of the assignment form:
After careful revision of terms and condition of the assignment and signature, the assignment form should be submitted for processing. This part should list detailed instructions for sending back the assignment form. Moreover, this part should also provide address, contact information and the fax number of the company who issued the policy.
How does the collateral assignment process work?
You apply for a life insurance policy and name your beneficiary (your spouse, children, whomever). Just as you normally would.
After the policy goes into force, a collateral assignment form from the life insurance company will be sent for you to complete. When a life insurance company sets a collateral assignment of life insurance, this usually takes in the region of seven to ten days to be filed and acknowledged, however we may expedite this if the collateral assignment is required more urgently. When taking out life insurance at the same time as assigning the collateral, the collateral assignment form must be submitted with the life insurance application.
You get the collateral assignment form signed (some companies require a notarized signature).
It will take a few days to a few weeks for the life insurance company to acknowledge the assignment.
Once the loan has been paid in full, the assignment must be lifted from the policy by means of a release form sent by the lender to the insurance company. When it receives the release, the insurance company cancels the assignment and restores all rights in the policy to the owner.
A collateral assignment allows the life insurance company to pay your SBA lender only what they are owed and the rest goes to your beneficiary. As you pay down the loan, the amount of coverage will be more than you need and a collateral assignment form makes sure the lender is only paid what is needed.
If you named the lender as the beneficiary, the lender would receive the entire death benefit even though you’ve paid down the balance and if you did that, the life insurance company wouldn’t issue you the amount of coverage needed – they’ll typically only issue 80% of the loan amount. So, it’s imperative that you use a collateral assignment.