It is becoming increasingly challenging to raise sufficient and acceptable collateral assignment for loans. A few years back, the credit crunch swept over the globe, especially in the US. Many banking and non-banking institutions have now tightened their requirements for a loan.In the past almost anything could pass for collateral. Today, your vehicle logbook or land title deed may not pass the test.
However, a new concept referred to as collateral assignment can help one secure a loan without much trouble. If you have a life assurance policy – and almost everybody does – you can use to get a loan from any financial institution.
What Is the Collateral Assignment?
The collateral assignment is a document that allows the death benefit of a life insurance policy to be used as security for securing a loan. It serves as a safety cushion for the lender if the policyholder meets an untimely death. When the unfortunate happens, the lender recovers their money by deducting from the sum of the policy of the deceased.
When the insured passes on, the insurance company first effects payment to the lender, in whose possession the policy lies. The rest of the proceeds of the claim then go over to the beneficiaries.
Who Uses a Collateral Assignment?
Two people can use collateral assignment: the life insurance policy holder and the lender. The insurance policy holder may require additional funding for whatever projects they may have. Financial institutions may slap stringent requirements on individuals who possibly have medical complications that threaten to cut their lives short at any moment. They would, therefore, require raising collateral using their insurance policy.
Lenders also use the collateral assignment as a safety net against the possible death of their clients. There cases when the death of a customer result into complications that may make it difficult for the lender to recover their loans. Moreover, other forms of collateral, like business assets, may be too volatile for lenders. The business may collapse upon the death of the borrower, or experience managerial or financial problems and, hence, may not be able to settle any outstanding debts.
How to Obtain Collateral Using your Insurance Policy
Various types of life insurance policies can fulfill the requirements for collateral. They include term insurance, whole life insurance, and second to die insurance. A prospective borrower can use any existing life insurance policy to meet the requirements of the lender as long as the death benefit of the policy is enough to cover the loan adequately.
The next step is to get in touch with the insurance company for permission to use the policy as collateral for a loan. The insurance company then proceeds to issue the lender with a written notification to the effect that the assignment has been filed.
The lender, on the other hand, must ensure that the life insurance policy in question has no other attachments to it before releasing the loan. They must also check if the policy has a cash surrender value should the policyholder decide to terminate the insurance contract. The cash surrender value refers to the amount of money the insurance company will give out to the policy holder if they choose to end the contract before maturity.
When setting collateral, the lender should know that the insurance company can take a week or more. If the situation is urgent, the lender may consider expediting the process depending on whether the insurance company allows it. It is prudent to ensure that the life insurance premiums are p to date and that the insured has been paying for not less than six months.
How to Use Collateral Assignment
- Securing loans: You can use your insurance policy as additional security for a loan, especially from other businesses. Companies prefer this kind of arrangement because it promises ready cash. should the borrower succumb in any way before they have cleared repayment of the loan, they are covered. It is also useful when other forms of security. These include personal possessions or assets these fail to raise sufficient wherewithal to offset the credit.
- Make credit purchases: There are times when you want to buy an asset urgently but can’t raise enough money to effect the purchase. The seller may not be interested in any other form of security because they are afraid something may happen and you default on payment. The best alternative is to use your life insurance policy as collateral to buy that essential item.
- Pay off other loans: You can also use the life insurance policy as collateral for other loans. Say you have a long-standing loan that you are unable to clear within the required time. You can use your life insurance contract to pay it off. The other option would be to risk attachment of property due to repayment default.
- Compensation to beneficiaries: Collateral assignment is a sure way of ensuring both you and the beneficiaries get something out of the life insurance cover. As you continue paying the premiums, you can benefit from the insurance contract. One can do that by taking a loan off it so that in the unfortunate event of death, the beneficiaries can enjoy the rest of the proceeds.
- Start a business: Here’s a tip: make an investment for the loved ones you are likely to leave behind. Secure a loan to start a business and leave it there. Approach the insurance company and let them know you need collateral.
Summing Things Up
The collateral assignment is a process of appointment a lender as one of the primary beneficiaries of the death benefit due to a life insurance contract holder. Both the lender and the borrower have to look into the viability of the process before entering an agreement. The borrower must notify the insurance company while the lender checks that all information about the policy is up to date. Most types of life insurance policies qualify for collateral consideration. You can use your collateral to secure loans, pay off other loans and make investments. Do you have any queries or further details to add? Feel free to contact us.
Images taken from depositphotos.com.