What Is a Collateral Assignment?

The term "collateral assignment" is one that is often used in the life insurance industry. Here are the basics of a collateral assignment.

Borrowing Money

If you invest in a whole life insurance policy or some other type of policy that accumulates cash value, you have an asset that you can use. If you need to borrow money, you can potentially borrow money against the value of your life insurance policy. 

Collateral Assignment

If you decide that you want to borrow money against your life insurance policy, you can use what is called a collateral assignment in order to accomplish this. When working with a lender, you can assign the benefits of your life insurance policy to them in order to secure a loan. If you are unable to repay the loan, the lender can simply cash in the life insurance policy and take back what is owed. At that point, you would be able to get the difference between what your policy was worth and what the lender was owed. Lenders also like doing this because if the individual that borrowed the money passes away, the lender is going to be able to collect from the death benefit of the policy.

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