Gab

Gabriel Lalonde
July 28th, 2022

All You Need to Know About Collateral Assignment of Life Insurance

Sometimes we face significant unexpected expenses and resort to a loan to sort things. Such a loan falls into two categories: (i) secured loans or (ii) unsecured loans. Secured loans come with improved rates and a greater probability of getting approved, provided you have a suitable form of collateral. Collaterals, in this case, include cars or even your house.

Pledging your house or car as collateral is risky – you may forfeit such collateral if you fail to repay the loan as stipulated. Fortunately, you can avoid such risks with a life insurance policy. Some lenders accept your insurance policy as a collateral option.

Read on to learn more.

Collateral Assignment of Life Insurance Explained

A collateral assignment of life insurance simply means getting a loan with your life insurance policy as collateral. If the lender dies before completing the loan repayment, the lender can claim part (or all) of the life insurance policy benefits as the outstanding loan balance. Any unclaimed funds from the death benefit go to the borrower’s beneficiaries as stipulated in their policy.

Benefits of Collateral Assignment of Life Insurance

Here are some of the reasons you should consider using your life insurance as loan collateral;

1. Affordability – The cost of life insurance differs, often based on the value and type of the policy, your age, and your health. That said, you will most likely pay more for an unsecured loan with higher interest rates than your life insurance premiums.

2. Lesser risk – With the collateral assignment of life insurance, you are not risking your car, house, or any other personal property to get a loan. In the case of your demise (before the complete repayment of the loan), the lender will take from your insurance policy’s death befit as repayment for the loan.

3. Lenders’ preference – Most lenders prefer life insurance as a collateral option when giving out a loan. After all, they are convinced of repayment (using your death benefit), even in the event of your demise

What happens when Collateral Assignment of Life Insurance doesn’t work?

The Collateral assignment of life insurance arrangement is not perfect. For instance, older adults or people with certain health complications cannot access affordable insurance and hence will find this option unsuitable. Similarly, some lenders may ask for a new life insurance policy rather than allowing the borrower to use their existing policy for collateral assignment.

But not to worry, there are other viable options you can explore if you find yourself in such situations. As always, speaking with your Ottawa CFP when in doubt is advisable.

1. Unsecured Loans – In some cases, opting for an unsecured loan might be more affordable than the collateral assignment of life insurance with a secure loan. For example, applicants with a good credit score can access loans with a low-interest rate without collateral.

2. Cash Value Life Insurance – Some life insurance policies allow cash value accumulation over an extended period. Such cash value can be deployed in various ways, including taking a loan against it. But this option can sometimes be complicated. You should always discuss this with your Ottawa Certified Finance Professional for expert guidance.

3. Home Equity Line of Credit (HELOC) – With HELOCs, you can access funds more flexibly than traditional secured loans. Collaterals – usually your home – is in play here, but you get more control over the loan amount. You will be granted a line of credit where you can withdraw (borrow) the amount you need at any point, and interests are only payable on the withdrawn (borrowed).

Finally…

If you satisfy the conditions, a collateral assignment of life insurance should be your preferred way of accessing emergency funds. However, in cases where you do not, you should consider the alternative options listed above.

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