Article

Can I Use My Life Insurance as Collateral?

Posted on: 28th May 2019

If you were asked this question out of the blue, your immediate response may be no response at all. This is because at first, it sounds pretty complicated but really, is it? Most people are used to presenting tangible things as collateral so it’s okay if even now your instantaneous answer to this question is “no”. The average man on the street starts to think of things like a house, a business, a car, a building of some sort, etc when he hears the word “collateral” and in most cases, this is what holds.

However, there are other forms of collateral just as valid as the ones you’re most likely familiar with and one of such is your life insurance. Your life insurance policy possesses enough value to be put up as collateral for a loan with any (or most) financial institutions. While many may not know this, it doesn’t change the fact that it’s true and it is doable. As a matter of fact, banks are known to approve loans to customers who put up their life insurance as collateral. For them, it is much safer as getting their money back is almost 100% guaranteed.

 

How Life Insurance is used as Collateral Assignment.

When you sign up for a life insurance policy, you pay a certain amount of money called “premium” on a regular basis. Your premiums sustain the policy, keeping the life insurance intact. This money is what has your life insured and in the event of your sudden death, that money is paid to your beneficiaries (your family, friend(s) or whoever you’ve penned down to receive your insurance claim). This money grows and keeps growing (especially if it’s permanent life insurance and not term life insurance).

When you apply for a loan, you are required to provide a collateral. This is so that if for some reason you are unable to pay back the full amount within the time stipulated by the bank, the financial institution is able to acquire that collateral in order to avoid losses.

When using your life insurance as collateral, it is called “collateral assignment”.  What happens here when you are unable to pay back the full amount of the loan is that the bank is allowed to take out the premiums paid into your insurance policy. Safe to say, they become the beneficiaries of your life insurance. Banks are usually very open to this as it gives them a sort of guarantee that they will get their money back no matter what happens (even in the event of sudden death by the borrower).

 

How does it Work?

There are three simple stages when using your life insurance as collateral. They include;

 

  1. Establishing a Life Insurance Policy.

For starters, you must have established a life insurance policy. This policy must be in your name and no one else. It has to be your typical life insurance policy where your premiums are duly paid on a regular basis. As mentioned earlier, without this, your policy crumbles and will not stand intact let alone be valid enough to be used as collateral.

 

  1. Applying for a Collateral Assignment.

After establishing and verifying that your life insurance is in order, you can then proceed to apply for a collateral assignment staking your life insurance. Your application is to be made to two offices; one application goes to your insurance company and the other goes to your bank.

 

  1. Submission & Approval.

After submitting your application the insurance company will then process it. When your application is processed and eventually approved by your insurance company, you must now go on to declare to your bank the intent for the loan you are about to secure. When that is done, you simply await confirmation from your bank for final approval of the loan.

 

While the idea of using your life insurance as collateral might have initially seemed complicated, you can see now that it isn’t as convoluted as one might think. Using your life insurance as collateral may appear scary to some people and for good reason. You have to make sure you’re able to pay back your loan or you stand a chance of forfeiting your life insurance.

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