Can a Life Insurance Policy be Used as Collateral?

Are you applying for a loan? Wondering what you can use as collateral?

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. Essentially, a collateral assignment of life insurance means a lender is set as the primary beneficiary of a death benefit to use as collateral for a loan.

In fact, according to Life Ant, “a large percentage of lenders will require borrowers to use a life insurance policy as collateral for the loan” (these loans are usually a small business loan or a Small Business Administration loan).¹ Life Ant goes on to say that as long as the insurance company allows collateral assignment for a policy, “all types of life insurance policies can be acceptable”¹ for assignment. A term life insurance policy, according to Life Ant, is used when lenders require the loan for a time period that coincides with the term of the loan; and a permanent life insurance policy with cash value allows lenders “access to the amount as repayment of the loan if the borrower were to default.”¹

To put it simply, a term life policy can ensure a lender will be paid back if the borrower dies before paying back the loan. A whole life policy can pay back a lender if the borrower dies or defaults (because of its cash value). Of course, the lender no longer will have access to the death benefit of a life insurance policy once the loan is paid off.

If you want to know how to use your life insurance policy as collateral for a loan, contact the bank from which you’re borrowing and your life insurance company for more information. They will provide you with all the info you need to get your loan secured (if you’re approved) with your life insurance policy as your collateral.

Sources:
1 Life Ant, What is a Collateral Assignment of a Life Insurance Policy?, 2019