Did you know your life insurance policy can help you get a loan?
Lenders widely accept life insurance as collateral because of the guaranteed funds, so if the worst happens, they’re still going to get repaid.
Once the loan is paid off, you can cancel the policy or keep it going and continue to protect your family.
Let’s say you purchase $300,000 of term life insurance coverage.
After you die, both the bank and your children make claims with the insurance company for the death benefit.
The bank would have the right to the money that is still owed to them above anything your children would receive. That means they will be paid before the rest of the death benefit is released to the beneficiaries (in this case, your children).Essentially, the assignment is subject to the negotiations and agreement between you and the lender.The collateral assignment of a life insurance policy is conditional.Again, as long as the loan is paid off before the borrower dies, the assignment is removed and the lender has no access to the death benefit. A term life insurance policy is a great (and inexpensive) option, too.Plus, some lenders only require the loan for a certain period of time that coincides with the term of the loan — five years, seven years, oftentimes a 10-year term policy works.Also, your access to the cash value (let’s say you have a whole or universal life policy) is restricted in an effort to protect the collateral.If the loan is paid off before your death, the lender will no longer be the beneficiary of the death benefit.A permanent life insurance policy with a specific cash value allows the lender access to that amount as repayment of the loan if the borrower were to default.The policy owner’s access to the cash value is limited as a safeguard on the collateral.Some lenders will consider using an existing life insurance policy for an assignment.Others may say you need a new policy for their purposes.