Before delving further into finer details about collateral assignment, you need to understand what it is.
What is a collateral assignment?
This is a conditional assignment where a borrower allows their lender to receive proceeds from his/her insurance policy as a means of repaying a loan. When you borrow a loan from a bank or a credit union, they will often request for collateral. If you don’t have a different form of collateral, you can assign your insurance policy as collateral to the lender
A collateral assignment also requires a beneficiary to be named. The beneficiary will receive the remaining proceeds of the insurance policy after you die, after the loan balance is completely paid off. So, your beneficiary should be someone you trust or someone you would like your money to go to after your death.
There are two types of assignment for life insurance that you should avoid mixing up.
Collateral assignment and absolute assignment.
With collateral assignment, you are in full control of the insurance policy, meaning that you are the only person with the power to make any changes and pay the required premiums.
As opposed to collateral assignment, an absolute assignment signs over all the rights of the insurance policy to the lender. You remain to be the insured party but you hand over all control to your lender. This means that they possess the power to make any changes to the policy, like adding beneficiaries and they are also responsible for paying premiums. This form of assignment is also regarded as a gift or sale.
When collaterally assigning a life insurance policy, there are two main things you need to consider. First of all, you need to ensure that your insurer allows collateral assignment. While most insurance companies do, it is still important to confirm if your insurer does.
Second and last, you need to confirm with your lender if it accepts life insurance policies as collateral. You do not want to be in for surprises so make sure to ask just so as to get the facts straight.
Best Life Insurance to Use for Collateral
You can use any type of life insurance as collateral. The choice you make should be determined by your needs so at the time of choosing it as collateral, you ought to have enough information regarding the involved processes. The following are life insurance policies that can be used as collateral.
Term Life Insurance
Proceeds from a term life insurance policy are usually issued for a specific time period that could be 10 years, 15 years, 20 years, and so on. The major advantage of term life insurance is that premiums for purchasing a large coverage are cost-effective.
In addition, the death benefits and premiums will remain the same until the end of the term. In its simplest form, term life insurance is used to provide coverage at the needed/specified time.
When to Consider Term Life Insurance
If you are considering a term life insurance policy, then ensure that your needs for insurance coverage are for a certain period of time. Also, term life insurance is the best option when you are on a budget and when you want a large face amount from your insurance policy.
Whole Life Insurance
As opposed to term life insurance which covers you for a specific period of time, whole life insurance is meant to cover you until the event of your death. It includes cash value components and stays value for as long as you make your premium payments. The premium payments will remain the same up to the end or and if lucky you may not have to pay them later in life.
When to Consider Whole Life Insurance
For whole life insurance to work for you, you need to go through the loan policy features and ensure that you are comfortable with them. Also, if you plan to use your life insurance policy to give a financial gift then whole life insurance may be your best choice. Unless you want a short term coverage only choose whole life insurance if you want coverage that won’t expire for the rest of your life.
No Exam Life Insurance
No exam life insurance is usually issued without a medical examination. Due to this, it usually has downsides to it but is still a great option for you if you want approval in a shorter period. It is a great option for collateral assignment and is usually available as whole life, universal, and term life insurance.
When to Consider No Exam Life Insurance
As mentioned, no exam life insurance usually takes off a considerable amount of time for approval, so is a great option if you need insurance as fast as possible. Also, if your health is in great condition, then a no exam life insurance may help you get good rates for the insurance policy. If you are worried that something you didn’t know of might manifest itself then you can skip the whole medical examination process straight to the application process.
Universal Life Insurance
Universal Life(UL) insurance is similar to the whole life insurance but only differs in that it has flexible premium payments.
When to Consider Universal Life Insurance
You may consider universal life insurance if you need a permanent policy that will last as long as you live. Also, you need to know that with universal life insurance, the death benefit can be adjusted and so can the premiums you pay every year. The two depend on both your needs and those of the policy. In addition, the investment component of your insurance policy will be affected by market performance.
Guaranteed Universal Life Insurance
A guaranteed universal life insurance policy, abbreviated as GUL, is a combination of permanent and term life insurance. It is the best option for you if you need a lifelong insurance policy that is not expensive. With guaranteed universal life insurance, you will receive coverage until you attain a certain age which is usually over 100years.
When to Consider Guaranteed Universal Life Insurance
When choosing guaranteed universal life insurance as your policy, you need to know that the death benefits and premiums remain the same until the end. It is a cheaper option compared to whole life insurance but will cost more than term life insurance and it has no cash value component.
Generally, collateral assignment will be good for you if you lack enough cash reserves that you can use as collateral for your loan. It will also make sense for you when you are applying for a loan with specifications for collateral assignment.
On the other hand, you may not need a collateral assignment if your loan can be approved without one. Also, you may not need a collateral assignment if you prefer to use another form of collateral which you can easily access.
The Collateral Assignment Process
You may be confused as to what to apply for first, the loan or the insurance policy. The very first step is to consult with your potential lender to ensure that life insurance can be used as collateral. If it can, you need to also confirm if an existing policy can be used. Moving forward, you will be able to know if the insurance policy you wish to use as collateral is valid to your lender. Read on to see the steps involved in collateral assignment process.
The first step for the collateral assignment process is the application of the insurance policy. During this process, you need to name a beneficiary, who could be your spouse, child, or anyone else who is dependent on you.
Completing the Collateral Assignment Form
After the insurance policy is approved, you will be required to fill in the collateral assignment form. Filing and acknowledgment may take a varying time period depending on the company and the urgency.
Signing of the Form
You are required to sign the form before forwarding it back to the insurance company. Some companies will request for a signature that is notarized so be sure to confirm with them.
Acknowledgment of the Assignment
After the collateral assignment form has been signed and sent back to the insurance company, you will have to wait for them to acknowledge the process. This may take some days but the process can be accelerated if need be.
When applying for a collateral assignment make sure that you don’t list your lender as your beneficiary. Only name a spouse or another family member as your beneficiary. If you list your lender as the beneficiary, they may claim the insurance proceeds that exceed the initial loan amount.
After your death, the policy proceeds that go to the bank or credit union which is the collateral assignee will only cover the principal balance and interest. The remaining proceeds are transferred to whoever you listed as your beneficiary.
However, there may come a time when you need to change the collaterally assigned insurance company. So if you need such a change, there are also a few steps involved. They include;
You need to find an insurance policy that you can afford while also fulfilling all the requirements of your lender.
After approval of the coverage, you will have to sign the collateral assignment form together with the lender. The insurance company then signs the form before processing as an acknowledgment of the new collateral assignment.
An email is sent by the insurance company to both the lender and the insured as formal communication of the whole change process.
When to Best Use Collateral Assignment
If you do not have enough borrowing power to get a loan, then a collateral assignment would be a great solution. It is good to note that a collateral assignment will work best in some case scenarios when compared to others. The following are some of the best situations to best use a collateral assignment.
If You Have a New Policy
You can apply for a new insurance policy specifically for the collateral assignment, even if you have another one that already covers your family and other beneficiaries. You can choose to have the older policy strictly for your family then use a new one for collateral assignment.
However, it is important to understand that you can assign your policy to one lender. All that is needed is to ensure that your insurer meets all the requirements and that all your lenders accept the policy as collateral.
If You Cannot Borrow
If you are not eligible for loans from most lenders, then your best shot to securing a loan is through a collateral assignment. It allows you to borrow a loan even when you don’t have the power to do so.
If You Have Additional Coverage
With every stage of life, you will require a certain amount of coverage. What may be enough coverage in your younger years may not be necessary in your older years. Later in your life, you may be able to afford a collateral assignment and still have the coverage you need.
Making and Ending a Collateral Assignment
Making a collateral assignment is easy and begins from downloading the form or asking your insurance company to mail it to you. Before making your inquiry, first check with the company to ensure that it allows for collateral assignment.
If you decide to make any changes to the insurance policy and the collateral assignment, then you will need to send copies of the correspondence to your lender.
On the completion of the loan repayment, it means that the collateral assignment is ended. Your lender needs to send a release form to your insurer so as to lift the assignment from the insurance policy. Upon receiving the release form, the insurance company transfers back all the policy rights to you and cancels the collateral assignment.
While a collateral assignment is highly beneficial, it also has a few downsides. Let’s look at the two sides of the coin below.
The following are some of the top advantages of having life insurance as a collateral assignment;
Freedom to Your Property
One reason why you should have your insurance policy as a collateral assignment is that it gives you the freedom to do what you wish with your personal property. When you list your own property as collateral, your lender can claim it when you default your loan. Also, you may be faced with serious problems when you sell the property listed as collateral.
Using your life insurance policy as collateral is a unique way to pay up your loan even when you pass away. Your death, which means the end of insurance premiums payments also denotes the loan balance repayments from the policy proceeds.
With some life insurance policies, you will be able to receive large coverage even when paying small premiums. This is an affordable way of repaying a huge loan without breaking your back.
A collateral assignment is appealing to most people, but it also has a few disadvantages listed below;
Loss of Policy Control
Your lender has the right to purchase a different policy for you and add the premiums to the initial principal if you don’t pay for the initial policy premiums. This would only happen if the loan is not fully repaid, so make sure that the insurance policy remains active until you fully repay your loan.
Limited Death Benefit
If the death benefit is assigned to the lender, they could claim all the death benefit proceeds. To avoid such a situation, assign a different insurance policy as collateral or just a portion of the initial policy.
Limited Use of Cash Value
When cash value is used as collateral for your policy, it may limit flexibility. With a whole life insurance policy, the cash value component can be used later in life to shrink annual premiums which makes coverage more affordable. With other insurance policies, the cash value is tied to the investment index.
The struggle for getting insured is real. To get insured, it may take a few weeks, especially if you want the policy to be medically underwritten. The other struggle is getting attractive premiums if you are healthy. On the brighter side, the underwriting process has been quickened but it is still hard to get an affordable premium with appealing premiums, all in a short period of time.
When applying for a collateral assignment, it is important to ensure that insurer approves it and the lender accepts it. From there, you can plan accordingly to avoid unnecessary delays if you need it in a short time. Also, avoid making mistakes like naming your lender as your primary beneficiary. In your collateral assignment, your lender should only be your assignee and nothing else. While you may not be able to place value to your life insurance policy, it is an important part of securing an important loan.