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A collateral assignment supersedes your beneficiaries' rights to the death benefit. If you die, the life insurance company pays the lender, or assignee, the loan balance. As noted earlier, any remaining benefit goes to your beneficiaries.
You can use either term or whole life insurance policy as collateral, but the death benefit must meet the lender's terms. Alternately, the policy owner's access to the cash value is restricted to protect the collateral.
Collateral assignment of life insurance is a common requirement for business loans, and lenders may require you to get a life insurance policy to be used for collateral assignment.
Collateral can be a physical asset, such as a home, business real estate or equipment; or a non-physical asset, like accounts receivable or cash in the bank. Collateral requirements vary from lender to lender and depend on the type of loan you want and how much you'd like to borrow.
If you have a life insurance policy, you're in luck, because most businesses typically accept life insurance as collateral as they can guarantee funds if the borrower dies or defaults.
A collateral assignment of life insurance is a conditional assignment appointing a lender as an assignee of a policy. Essentially, the lender has a claim to some or all of the death benefit until the loan is repaid. The death benefit is used as collateral for a loan.
The limit for borrowing money from life insurance is set by the insurer, and it's typically no more than 90% of the policy's cash value. When your policy has enough cash value (minimums vary by insurer), you can use it as collateral to request a loan from your insurance company.
Life insurance can be used as collateral for auto or home loans, but it is also commonly used for small business loans. Often small business owners have to use most of their private money to fund their businesses.