What is the best life insurance company?

Finding the best life insurance company is important for you and your family. What works well for others might not fit your needs or current budget. First, find out how much life insurance you need by speaking with a financial advisor and using this life insurance calculator as a starting point. Similar to shopping for car insurance, you might want to look at customer service and claim reviews and the company’s financial strength ratings, then get quotes from several providers and ask for recommendations from people you trust.

What type of loans are collateral assignments usually associated with?

Life insurance can be used as collateral for auto or home loans, but it is also commonly used for small business loans. Often small business owners have to use most of their private money to fund their businesses. When it is time to expand, upgrade technology or maybe hire more staff, they may need a loan to invest in their business that won’t put their remaining personal finances at risk.

What are other common forms of collateral?

It is typical for borrowers to put up their real estate or vehicles as collateral since they are usually our most valuable assets. Some loan companies may accept cash in the form of money market accounts or certificates of deposit (CD), investments or valuable items such as jewelry, art and collectibles. Valuables are usually subject to an appraisal before they are accepted.

What are the two types of life insurance assignments?

Although we have talked above about collateral assignment of your life insurance policy to secure a loan, there is another type of assignment called absolute assignment. With collateral assignment, you still exercise control over the policy, and the assignment only exists as long as the loan is active. Absolute assignment, however, transfers all policy rights to the lender, who becomes the new owner of the policy. The original policyholder gives up their right to name beneficiaries or access the policy’s cash value. This arrangement is more like a sale of the policy, with the new owner assuming all rights and responsibilities over it.

Collateral assignment of life insurance

Written by

Mary Van Keuren,

Edited by

Natasha Cornelius, CLU,

Reviewed by

Tony Steuer,

Expert verified

Published on February 21, 2025 | 5 min read

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A businessowners shaking hands with an life insurance rep

Key takeaways

A life insurance policy may be used as collateral to secure a loan.
If you die before the loan is repaid, the lender will be repaid from the policy’s death benefit proceeds before beneficiaries can claim it.
Leveraging life insurance as loan collateral may limit your ability to borrow against the policy for other reasons.

Secured loans are a type of lending that requires collateral. For instance, when you get an auto loan, you use the car you’re purchasing as collateral against the loan. If you default, the lender can take your vehicle. While common collateral includes property and savings accounts, life insurance may also be used as a collateral asset in some cases. There are pros and cons to putting your life insurance benefits on the line to secure funding. Bankrate’s editorial team is here to explain the pros and cons of using life insurance as collateral.

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What is collateral assignment of life insurance?

A collateral assignment of life insurance is the process of using your policy as collateral for a loan. If you pass away before the loan is repaid, the lender can collect the outstanding loan balance from the death benefit of your life insurance policy. Any remaining funds from the death benefit would then be disbursed to the policy’s designated beneficiary(ies).

Why use life insurance as collateral?

Collateral assignment of life insurance may be a useful option if you want to access funds without placing any of your assets, such as a car or house, at risk. If you already have a life insurance policy, it can be a simple process to assign it as collateral. You may even be able to use your policy as collateral for more than one loan, which is called cross-collateralization, if there is enough value in the policy.

Collateral assignment may also be a credible choice if your credit rating is not high, which can make it difficult to find attractive loan terms. Since your lender can rely on your policy’s death benefit to pay off the loan if necessary, they are more likely to give you favorable terms despite a low credit score.

Pros and cons of using life insurance as collateral

If you are considering collateral assignment, here are some pros and cons of this type of financial arrangement.

Pros

You may be able to save money on your loan by using your life insurance as collateral for a secured loan versus resorting to an unsecured loan with a higher interest rate.
You will not need to place personal property, such as your home, as collateral, which you would need to do if you take out a secured loan. Instead, if you pass away before the loan is repaid, lenders will be paid from the policy’s death benefit. Any remaining payout goes to your named beneficiaries.
You may find lenders who are eager to work with you since life insurance is generally considered a good choice for collateral.

Cons

The amount that your beneficiaries would have received will be reduced if you pass away before the loan is paid off since the lender has first rights to death benefits.
You may not be able to successfully purchase life insurance if you are older or in poor health.
If you are using a permanent form of life insurance as collateral, there may be an impact on your ability to use the policy’s cash value during the life of the loan. If the loan balance and interest payments exceed the cash value, it can erode the policy’s value over time.

What types of life insurance can I use as collateral for a loan?

You may use either of the main types of life insurance — term and permanent — for collateral assignment. If you are using term life insurance, you will need a policy with a term length that is at least as long as the term of the loan. In other words, if you have 20 years to pay off the loan, the term insurance you need must have a term of at least 20 years.

Subcategories of permanent life insurance, such as whole life, universal life and variable life, may also be used. Depending on lender requirements, you may be able to use an existing policy or could purchase a new one for the loan. A permanent policy with cash value may be especially appealing to a lender, considering the added benefit of the cash reserves they could access if necessary.

Example of life insurance used as collateral

Let’s say you want to take out a $50,000 SBA 7(a) loan. This type of loan typically requires you to have enough life insurance to cover the entire cost of loan repayment. You would take out a $50,000 life insurance policy and assign it as collateral coverage. If you die when the balance on the loan is still $30,000, the lender would take $30,000 to cover this balance, and the remaining $20,000 in benefits would be released to your other named beneficiaries (often a spouse or adult children).

How do I take out a loan using a collateral assignment of life insurance?

If you already have enough life insurance to use for collateral assignment, your next step is to find a lender who is willing to work with you. If you don’t yet have life insurance, or you don’t have enough, consider the amount of coverage you need and apply for a policy. You may need to undergo a medical exam and fill out an application.

Once your policy has been approved, ask your insurance company or agent for a collateral assignment form, which you will complete and submit with your loan application papers. The form names your lender as an assignee of the policy — meaning that they have a stake in its benefits for as long as the loan exists. You will also name beneficiaries or a single beneficiary, who will receive whatever is left over from the death benefits after the loan is repaid.

Note that you will need to stay current on your life insurance premium payments while the collateral assignment is active. This will be stated in the loan agreement, and failure to do so could have serious repercussions. If your life insurance policy lapses, you will almost certainly be in violation of your loan contract. Not only could your lender now be allowed to increase your interest rate, but they could demand an immediate repayment of the loan in full.

Alternatives to life insurance as collateral

If you are considering a collateral assignment of life insurance, there are a few alternative funding options that might be worth exploring. Since many factors determine each option, working with a financial advisor may be the best way to find the ideal solution for your situation.

Unsecured loan

Depending on your situation, an unsecured loan may be more affordable than a secured loan with life insurance as collateral. This is more likely to be the case if you have good enough credit to qualify for a low-interest rate without having to offer any type of collateral. There are many different types of unsecured loans, including credit cards and personal loans.

Secured loan

In addition to life insurance, there are other items you can use as collateral for a secured loan. Your home, a car or a boat, for example, could be used if you have enough equity in them. Typically, secured loans are easier to qualify for than unsecured, since they are not as risky for the lender, and you are likely to find a lower interest rate than you would with an unsecured loan. The flip side, of course, is that if you default on the loan, the lender can take the asset that you used to secure it and sell it to recoup their losses.

Life insurance loan

Some permanent life insurance policies accumulate cash value over time that you can use in different ways. With a cash value policy, you may be able to partially withdraw the cash value or take out a loan against it. However, there are consequences to using the cash value in your life insurance policy — such as paying interest on loans and depleting your beneficiary’s death benefit — so be sure to discuss this solution with a licensed life insurance agent before making a decision.

Home equity line of credit (HELOC)

A home equity line of credit (HELOC) is a line of credit secured by your home. It allows you to borrow against the equity built up in your home up to your approved credit line. While HELOCs carry the downside of risking your home as collateral, you retain more control over the amount you borrow. You will have access to a line of credit that you can withdraw from as needed and only have to pay interest on the actual amount borrowed.

Frequently asked questions

Finding the best life insurance company is important for you and your family. What works well for others might not fit your needs or current budget. First, find out how much life insurance you need by speaking with a financial advisor and using this life insurance calculator as a starting point. Similar to shopping for car insurance, you might want to look at customer service and claim reviews and the company’s financial strength ratings, then get quotes from several providers and ask for recommendations from people you trust.
Life insurance can be used as collateral for auto or home loans, but it is also commonly used for small business loans. Often small business owners have to use most of their private money to fund their businesses. When it is time to expand, upgrade technology or maybe hire more staff, they may need a loan to invest in their business that won’t put their remaining personal finances at risk.
It is typical for borrowers to put up their real estate or vehicles as collateral since they are usually our most valuable assets. Some loan companies may accept cash in the form of money market accounts or certificates of deposit (CD), investments or valuable items such as jewelry, art and collectibles. Valuables are usually subject to an appraisal before they are accepted.
Although we have talked above about collateral assignment of your life insurance policy to secure a loan, there is another type of assignment called absolute assignment. With collateral assignment, you still exercise control over the policy, and the assignment only exists as long as the loan is active. Absolute assignment, however, transfers all policy rights to the lender, who becomes the new owner of the policy. The original policyholder gives up their right to name beneficiaries or access the policy’s cash value. This arrangement is more like a sale of the policy, with the new owner assuming all rights and responsibilities over it.