Simply Explaining Insurance #115- Collateral Assignment
This episode covers what a collateral assignment is in regards to a life insurance policy. This is a formal agreement that comes into play when a client takes out a loan.
Some financial institutions, require a borrower to take out a life insurance policy in the amount of the loan. This secures the loan in the event of the untimely death of the borrower.
Collateral assignment is different from naming the bank as the beneficiary of the policy. Instead, collateral assignment ensures that if you die, the insurance company will use the death benefit to repay the loan. Any remaining funds will go to your named beneficiary or beneficiaries. You remain the policy owner.
If you already have a life insurance policy with a face value greater than the loan amount, you can collaterally assign that policy by requesting the paperwork from your insurer. If you don’t have a life insurance policy, or you need additional coverage, you will need to apply for life insurance and go through underwriting. Once the policy is in force, you can request collateral assignment paperwork from the insurer.
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