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SBA Loans: Insurance Requirements and Considerations

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When underwriting and servicing SBA loans, it is important for lenders and CDCs to ensure appropriate insurance coverages are in place to protect the collateral. The SBA does require some types of insurance coverages to be in place on all loans. However, it is the responsibility of lenders and CDCs to carefully consider whether other types of insurance coverage should be in place to help minimize risks and increase chances of recovery on all SBA loans.

Hazard Insurance

As a condition for the loan, the SBA requires borrowers to maintain hazard insurance on all pledged collateral. If the borrower’s business is located in a state that requires additional coverage, such as wind, hail, or earthquake, the borrower must provide a separate policy. 13 CFR § 120.160 ; SOP 50 10 5(K).

Lenders and CDCs are required to ensure that all collateral with a recoverable value is adequately insured in order to protect the ability to recover on the SBA loan. The hazard insurance coverage requirements should be set out in the loan authorization and should not be terminated or reduced, unless the insured assets have been sold or have significantly depreciated. If a borrower allows the insurance coverage to lapse, lenders and CDCs can force-place insurance, if it is consistent with prudent lending practices. Lenders and CDCs who continue insurance coverage can treat the cost of insurance as a recoverable expense. SOP 50 57 2 ; SOP 50 55.

The borrower should name the SBA or the lender/CDC as the loss payee on their hazard insurance policy. As a general rule, the proceeds should not be released unless supporting documentation has been submitted, which verifies that the insured collateral has been properly repaired or replaced, and that no construction or repair related liens have been filed against the property. This is particularly important for insurance checks over $10,000. In the event the borrower does not have appropriate supporting documentation, the lender or CDC must control and monitor the release of insurance proceeds. The lender or CDC can release the insurance proceeds pursuant to an escrow agreement approved by legal counsel, or otherwise allow the borrower to open a federally insured joint savings or custodial account with the lender/CDC and make progress payments. SOP 50 57 2 ; SOP 50 55 .

Real Estate Insurance

If the SBA loan is secured by real estate, lenders and CDCs should request proof of real estate insurance. The real estate insurance policy must:

(a)  Have coverage in the amount of the full replacement cost; (b)  If full replacement cost is not available, the coverage must be for the maximum insurable value; (c)  Contain a “mortgagee clause” in favor of the lender/CDC and provide that any action or failure to act by the mortgagor or owner of the insured property will not invalidate the interest of the lender/CDC/SBA; and (d)  Provide at least 10 days prior written notice to lender/CDC of policy cancellation.

SOP 50 10 5(K).

Personal Property Insurance

  Likewise, if the SBA loan is secured by personal property, lenders and CDCs should request proof of personal property insurance. The personal property insurance policy must:

(a)  Have coverage in the amount of the full replacement cost; (b)  If full replacement cost is not available, the coverage must be for in the maximum insurable value; (c)  Contain a “lender’s loss payable clause” (or a substantial equivalent) in favor of the lender/CDC and provide that any action or failure to act by the borrower or owner of the insured personal property will not invalidate the interest of the lender/CDC/SBA. (d)  Provide at least 10 days prior written notice to lender/CDC of policy cancellation.

Life Insurance

For loans that are processed under standard 7(a) loans over $350,000 or 7(a) small loans that do not meet the minimum acceptable credit score, lenders may follow their internal policies for similarly sized non-SBA guaranteed commercial loans when deciding whether life insurance is appropriate. However, if the 7(a) loan is not fully secured by collateral, or if the loan is a 504 loan, the SBA requires life insurance for the principals of sole proprietorships, single member LLCs, or for businesses otherwise dependent on one owner’s active participation. Lenders and CDCs may factor in the available collateral when determining the appropriate amount of life insurance required. SOP 50 10 5(K).

If a life insurance policy is required by the loan documents, this requirement should not be modified or terminated unless the reason for requiring the policy no longer exists. Lenders and CDCs should set up an escrow account to ensure that the borrower pays the premiums on the policy. If the premium payments are not made, lenders and CDCs can decide whether to continue coverage based on prudent lending practices and treat the cost as a recoverable expense. SOP 50 57 2 ; SOP 50 55 .

As a general rule, the proceeds from the assignment of a life insurance policy should be applied to the principal balance of a loan, without a subsidy recoupment fee. All or part of the life insurance proceeds should be released if the death of the insured will have no significant impact on the management of the business, and:

(a)  The proceeds are needed for a valid business purpose; (b)  The proceeds are needed to prevent financial hardship; or (c)  Based on the strength of the business, there is no reason to anticipate that the loan will not be repaid in full.

Lenders and CDCs may also decide to place the insurance proceeds in an escrow account for distribution after the lender/CDC has had the opportunity to observe the borrower’s on-going operations and is able to make a prudent decision. SOP 50 57 2 ; SOP 50 55 .

Flood Insurance

The SBA requires all borrowers to obtain flood insurance if any collateral is located in a special flood hazard area. Collateral is in a special flood hazard area if it is located in a Federal Emergency Management Agency designated special hazard area, and the community participates in the National Flood Insurance Program (“NFIP”). It is the responsibility of lenders and CDCs to notify borrowers if flood insurance must be maintained for the life of the loan. The flood insurance policy must be at least equal to the outstanding principal balance of the loan or the maximum limit of coverage available under the National Flood Insurance Act of 1968, whichever is less. The policy must contain a “mortgagee clause/lender’s loss payable clause” (or a substantial equivalent) in favor of the lender/CDC. This clause must provide for at least 10 days prior written notice to the lender/CDC of policy cancellation. 13 CFR § 120.170 ; SOP 50 10 5(K).

Sometimes, personal property collateral is located in a non-collateral building, which is located in a special flood hazard area. In this case, the lender or CDC must require the borrower to obtain flood insurance for the personal property collateral. However, the lender or CDC may waive this requirement if: (a) it uses prudent lending standards to determine that flood insurance is not economically feasible or not available; and (b) it includes a written justification in the loan file that fully explains why flood insurance is not economically feasible or available, and the steps taken to come to this decision. SOP 50 10 5(K).

Whenever a borrower makes a servicing request, lenders and CDCs must review the adequacy of flood insurance and the need for flood insurance. Lenders and CDCs should decline all servicing requests until the borrower obtains proper flood insurance. If, at any time during the life of the loan, collateral is not adequately covered by flood insurance, lenders and CDCs must instruct the borrower to obtain proper flood insurance within 45 calendar days. If the borrower fails to do so within 45 days, lenders and CDCs must purchase flood insurance on the borrower’s behalf and treat the cost as a recoverable expense. In the event a borrower is no longer able to obtain flood insurance because the community dropped out of the NFIP, lenders and CDCs must keep the documentation establishing why the property is no longer covered by flood insurance in the loan file. SOP 50 57 2 ; SOP 50 55 .

Other Types of Insurance to Consider

Lenders and CDCs must carefully consider whether other types of insurance coverage should be in place on each SBA loan. Other types of insurance to consider include:

(a)  Marine insurance; (b)  Malpractice insurance; (c)  Workers’ compensation insurance; (d)  Dram shop insurance; (e)  Liability insurance; (f)  Product liability insurance; and (g)  Any state specific insurance requirements.

Consequences of Failure to Ensure Collateral is Insured

Failure to ensure proper and adequate insurance coverage is in place may lead to a “Repair” on 7(a) loans. A Repair is defined as “an agreement between SBA and a 7(a) lender as to a specific dollar amount to be deducted from the funds SBA pays on the lender’s guaranty in order to fully compensate SBA for an actual or anticipated loss caused by the lender’s actions or omissions.” SOP 50 57 2 .

Lenders and CDCs should use prudent lending standards to ensure that appropriate insurance coverages are in place to minimize risks and ensure maximum recovery on SBA loans. In most cases, several types of insurance coverage will be required on each SBA loan. To avoid any potential issues, it is imperative that lenders and CDCs keep all decisions on insurance requirements in the loan file.

• Brandon C. Meadows, Esquire
• Melissa Murrin, JD Candidate

Continued reading in the series:

• Which Liquidation Actions Require SBA’s Pre-Approval: Part 1 – SBA 7(a) Loan Liquidation
• Which Liquidation Actions Require SBA’s Pre-Approval: Part 2 – SBA 504 Loan Liquidation
• Classifying SBA Loans in Liquidation Status
• How SBA Lenders Ensure Expense Recovery in Loan Liquidation and Litigation
• What Responsibility and Authority do SBA Lenders Have in Servicing and Liquidating Loans?
• Loan Modification and Deferment Requirements for SBA Lenders
• SBA Loan Site Visits: How to Prepare and What to Expect
• SBA Loans: How to Maximize Recovery by Liquidating Real Property
• SBA Loans: How to Maximize Recovery by Liquidating Personal Property
• How to Maximize Recovery on a SBA Loan by Negotiating a Workout Agreement
• Assumption, Assignment and Sale of SBA Loans
• SBA Loans: Offers in Compromise

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What Is a Collateral Assignment of Life Insurance?

Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University.

A collateral assignment of life insurance is a conditional assignment appointing a lender as an assignee of a policy. Essentially, the lender has a claim to some or all of the death benefit until the loan is repaid. The death benefit is used as collateral for a loan.

The advantage to using a collateral assignee over naming the lender as a beneficiary is that you can specify that the lender is only entitled to a certain amount, namely the amount of the outstanding loan. That would allow your beneficiaries still be entitled to any remaining death benefit.

Lenders commonly require that life insurance serve as collateral for a business loan to guarantee repayment if the borrower dies or defaults. They may even require you to get a life insurance policy to be approved for a business loan.

Key Takeaways

• The borrower of a business loan using life insurance as collateral must be the policy owner, who may or may not be the insured.
• The collateral assignment helps you avoid naming a lender as a beneficiary.
• The collateral assignment may be against all or part of the policy's value.
• If any amount of the death benefit remains after the lender is paid, it is distributed to beneficiaries.
• Once the loan is fully repaid, the life insurance policy is no longer used as collateral.

How a Collateral Assignment of Life Insurance Works

Collateral assignments make sure the lender gets paid only what they are due. The borrower must be the owner of the policy, but they do not have to be the insured person. And the policy must remain current for the life of the loan, with the policy owner continuing to pay all premiums . You can use either term or whole life insurance policy as collateral, but the death benefit must meet the lender's terms.

A permanent life insurance policy with a cash value allows the lender access to the cash value to use as loan payment if the borrower defaults. Many lenders don't accept term life insurance policies as collateral because they do not accumulate cash value.

Alternately, the policy owner's access to the cash value is restricted to protect the collateral. If the loan is repaid before the borrower's death, the assignment is removed, and the lender is no longer the beneficiary of the death benefit.

Insurance companies must be notified of the collateral assignment of a policy. However, other than their obligation to meet the terms of the contract, they are not involved in the agreement.

Example of Collateral Assignment of Life Insurance

For example, say you have a business plan for a floral shop and need a $50,000 loan to get started. When you apply for the loan, the bank says you must have collateral in the form of a life insurance policy to back it up. You have a whole life insurance policy with a cash value of $65,000 and a death benefit of $300,000, which the bank accepts as collateral.

So, you then designate the bank as the policy's assignee until you repay the $50,000 loan. That way, the bank can ensure it will be repaid the funds it lent you, even if you died. In this case, because the cash value and death benefit is more than what you owe the lender, your beneficiaries would still inherit money.

Alternatives to Collateral Assignment of Life Insurance

Using a collateral assignment to secure a business loan can help you access the funds you need to start or grow your business. However, you would be at risk of losing your life insurance policy if you defaulted on the loan, meaning your beneficiaries may not receive the money you'd planned for them to inherit.

Consult with a financial advisor to discuss whether a collateral assignment or one of these alternatives may be most appropriate for your financial situation.

Life insurance loan (policy loan) : If you already have a life insurance policy with a cash value, you can likely borrow against it. Policy loans are not taxed and have less stringent requirements such as no credit or income checks. However, this option would not work if you do not already have a permanent life insurance policy because the cash value component takes time to build.

Surrendering your policy : You can also surrender your policy to access any cash value you've built up. However, your beneficiaries would no longer receive a death benefit.

Other loan types : Finally, you can apply for other loans, such as a personal loan, that do not require life insurance as collateral. You could use loans that rely on other types of collateral, such as a home equity loan that uses your home equity.

What Are the Benefits of Collateral Assignment of Life Insurance?

A collateral assignment of a life insurance policy may be required if you need a business loan. Lenders typically require life insurance as collateral for business loans because they guarantee repayment if the borrower dies. A policy with cash value can guarantee repayment if the borrower defaults.

What Kind of Life Insurance Can Be Used for Collateral?

You can typically use any type of life insurance policy as collateral for a business loan, depending on the lender's requirements. A permanent life insurance policy with a cash value allows the lender a source of funds to use if the borrower defaults. Some lenders may not accept term life insurance policies, which have no cash value. The lender will typically require the death benefit be a certain amount, depending on your loan size.

Is Collateral Assignment of Life Insurance Irrevocable?

A collateral assignment of life insurance is irrevocable. So, the policyholder may not use the cash value of a life insurance policy dedicated toward collateral for a loan until that loan has been repaid.

What is the Difference Between an Assignment and a Collateral Assignment?

With an absolute assignment , the entire ownership of the policy would be transferred to the assignee, or the lender. Then, the lender would be entitled to the full death benefit. With a collateral assignment, the lender is only entitled to the balance of the outstanding loan.

The Bottom Line

If you are applying for life insurance to secure your own business loan, remember you do not need to make the lender the beneficiary. Instead you can use a collateral assignment. Consult a financial advisor or insurance broker who can walk you through the process and explain its pros and cons as they apply to your situation.

Progressive. " Collateral Assignment of Life Insurance ."

Fidelity Life. " What Is a Collateral Assignment of a Life Insurance Policy? "

Kansas Legislative Research Department. " Collateral Assignment of Life Insurance Proceeds ."

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Life Insurance for SBA Loans: What You Need to Know

• March 8, 2024

When you’re applying for alternative financing like an SBA loan, you may need a life insurance policy before your loan can close. Many small business owners are surprised when this requirement comes up, and it can potentially delay your loan application if you’re not ready for it, but it’s an important part of the SBA lending process.

Explore why you’ll need life insurance for SBA loans, what you’ll need to do to meet the requirement, and more.

Why do lenders require life insurance for SBA loans?

Your lender may require you to have life insurance before closing on your loan because it protects everyone involved if you (or a business partner) pass away.

While this is a circumstance that no one wants to imagine, it’s a reality in small business lending. Many small businesses are owned and operated by one owner or partnership. If the sole owner or a business partner passes away, it may mean that the business will no longer be in operation.

Life insurance for SBA loans and other loans not only protects your lender’s interest, it protects your family from taking on your outstanding business loan. Instead, the life insurance policy will pay off the loan.

When do you need life insurance for an SBA loan?

Every small business loan is different, so there’s no blanket answer for when life insurance will be required for your loan. Here are some general guidelines regarding life insurance for SBA loans to help you get a better sense of this requirement:

• An SBA 7(a) loan typically requires life insurance for the full loan amount. However, in certain cases, the life insurance requirement may be reduced or waived if you’ve pledged significant collateral or have a succession plan in place to continue operations.
• For an SBA 504 loan , life insurance is typically only required if your collateral doesn’t fully cover the loan. In some SBA 504 loan deals, the property or equipment you’re purchasing with the loan is enough.

Should you use an existing life insurance policy or take out a new one?

If you already have a life insurance policy (and your insurer allows it), you can assign part of your policy as collateral coverage. You could also take out a new policy that includes your lender as an assignee on the policy.

With a term life insurance policy , your lender may require that the term of the policy matches the term of the loan to ensure full coverage throughout the life of the loan.

If your business has multiple owners who are active in its operations, then the assignment can be split evenly. For example, if two active owners apply for a $1 million small business loan, then each owner would only need to assign $500,000 of their individual life insurance policies. If you’re the only one that’s active in the business’s operations, then you’ll need to assign the entire $1 million to your lender.

If your business can continue to run even if you (or your business partner) pass away, then the life insurance requirement may be waived. This can only be done at the SBA’s or your lender’s discretion.

How to keep your loan process on track when life insurance is required

When you’re applying for a small business loan, ask your lender if life insurance is required as soon as you get started with the process. If it is, ask for the specifics, such as the amount that will need to be assigned. You should also:

• Determine whether you’ll use an assignment from an existing policy or take out a new one. Get either process started right away with an insurer of your choice.
• Reach out to your insurance provider to make sure assigning an existing policy (if you have one) is possible based on information from your lender’s closing attorney.

Setting up a new life insurance policy can take some time, so you should start it early in the application process. Keep in mind that your insurer may require a doctor’s appointment, which can take time to complete (and if multiple owners need appointments, this can take even longer), so give yourself as much time as possible.

If you’ve never applied for a life insurance policy, reach out to your local insurance broker or ask for a referral from other business owners in your network.

Whether it’s a new or existing policy, work with your insurance provider to complete a collateral-assignment agreement before the loan closing.

Life insurance for SBA loans: Extra protection for your lender and your family

The life insurance requirement for SBA loans and other financing options gives you, your lender, and your family an extra layer of financial protection and peace of mind. When you apply for an SBA loan with Pursuit, you’ll have full transparency on what’s required to get to the closing table.

Our expert lending team will answer your questions and keep you updated on what’s next throughout the application process and beyond.  Ready to take the next step? Reach out to us to learn more about our small business loan options available to small businesses in New York , New Jersey , Pennsylvania , and Connecticut .

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Secured loans are often used by individuals needing financial resources for any reason, whether it’s to fund a business, remodel a home or pay medical bills. One asset that may be used for a secured loan is life insurance. Although there are pros and cons to this type of financial transaction, it can be an excellent way to access needed funding. Bankrate’s insurance editorial team discusses what a collateral assignment of life insurance is and when it might—or might not—be the best loan option for you.

What is collateral assignment of life insurance?

A collateral assignment of life insurance is a method of securing a loan by using a life insurance policy as collateral . 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.

• It may be an affordable option, especially if your life insurance premiums are less than your payments would be for 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.
• 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.

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.

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. If you have such a policy, you may be able to partially withdraw the cash value or take a loan against your cash value. However, there are implications to using the cash value in your life insurance policy, so be sure to discuss this solution with a life insurance agent or your financial advisor before making a decision.

Home equity line of credit (HELOC)

A home equity line of credit (HELOC) is a more flexible way to access funds than a standard secured loan. While HELOCs carry the downside of risking your home as collateral, you retain more control over the amount you borrow. Instead of receiving one lump sum, you will have access to a line of credit that you can withdraw from as needed. You will only have to pay interest on the actual amount borrowed.

Frequently asked questions

What is the best life insurance company, what type of loans are collateral assignments usually associated with, what are other common forms of collateral, what are the two types of life insurance assignments.

Related Articles

What is collateral insurance and how does it work?

What does life insurance cover?

What is an irrevocable beneficiary?

Life insurance death benefits

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What Is Collateral Assignment of Life Insurance?

Quality Verified

Updated: December 14, 2023

• How It Works
• Overview of Application Process
• Pros and Cons
• Impact on Beneficiaries
• Alternatives

Related Content

Advertising & Editorial Disclosure

Collateral assignment of life insurance is an arrangement where a policyholder uses the face value of their life insurance policy, which can be a term or permanent life insurance policy, as collateral to secure a loan. If the policyholder dies before the loan is paid off, the lender is prioritized to receive a portion of the death benefit equivalent to the outstanding loan balance. The remaining benefit then goes to the policy's beneficiaries.

• Collateral assignment involves using a life insurance policy as security for a loan , where the lender has a claim on the death benefit if the borrower defaults or passes away before repaying the loan.
• The lender receives priority over the death benefit , which means they are paid first from the policy's payout before any beneficiaries if the loan remains unpaid.
• Various life insurance policies, including term, whole and universal, can be used for collateral assignment , depending on the insurance company's policies and the policy's value.
• If a life insurance policy lapses or is canceled during a collateral assignment, it can breach the loan agreement , potentially resulting in immediate loan repayment demands.
• After the loan is fully repaid, the policyholder must formally release the collateral assignment to restore the policy to its original status and ensure beneficiaries receive the full death benefit.

How Collateral Assignment of Life Insurance Works

The collateral assignment allows you to use your life insurance policy as security for a loan. The process involves legally designating your policy as collateral, which means if you pass away before fully repaying the loan, the lender can claim the death benefit to cover the remaining balance. You start by choosing either a term policy or whole life insurance and then complete a collateral assignment agreement. This agreement is legally binding and sets the terms for the lender to access the death benefit .

For your beneficiaries, this arrangement means the death benefit they receive could be reduced. If you die with an outstanding loan balance, the lender is paid first from the policy's proceeds. Any remaining amount goes to your beneficiaries only after the loan is settled.

For example, a policyholder with a $500,000 policy was assigned as collateral for a $200,000 loan. If the policyholder dies before settling the loan, the lender will receive $200,000 from the policy's death benefit. Meanwhile, the remaining $300,000 gets disbursed to the policy's beneficiaries.

Applying for Collateral Assignment

Applying for collateral assignment is a process moderated by your life insurance company designed to secure loans using your life insurance policy as collateral. It involves a series of steps:

Obtain a Collateral Assignment Form

Request a collateral assignment form from your life insurance provider. This form is crucial for designating the lender as a beneficiary for the loan amount. Ensure you obtain the correct form, as forms vary based on policy type and insurer.

Fill Out the Form Correctly

Complete the form with accurate details, including policy number, loan amount and lender information. Pay close attention to all sections to avoid errors that could delay or invalidate the assignment. Incomplete or incorrect information can lead to processing delays or rejection.

Signed by Both Policyholder and Lender

Ensure both the policyholder and lender sign the form, confirming the agreement. This dual signature legally binds both parties to the terms of the collateral assignment. Any discrepancy in signatures may question the form's validity.

Submit Completed Form

Submit the signed form back to the insurance company for processing. Consider using a traceable delivery method for submission to confirm receipt. Delays in submission can impact the timeline of the loan approval process.

Await Approval or Rejection From Insurance Company

Wait for the insurer to review and approve or reject the collateral assignment. The insurer may request additional information or clarification, which can extend the approval timeline.

Receive a Letter of Acknowledgment

You and your lender will receive a letter of acknowledgment from the insurer if your collateral assignment application is approved.

Obtaining Required Documentation

The required documentation for collateral assignment of life insurance is straightforward. Typically, you'll need to provide two main types of documents:

• Collateral Assignment Form: This form is critical because it officially transfers a portion of your life insurance policy benefits to the lender as collateral. It demonstrates to the lender that you have taken the requisite steps to secure your loan against your life insurance policy.
• Original Life Insurance Policy and Proof of Loan: Lenders may require your original life insurance policy to ensure it is valid and enforceable. Proof of the loan agreement or obligation, such as a mortgage note or other loan document, is also commonly required. This establishes the legitimacy of your loan and substantiates the collateral assignment.

Pros and Cons of Collateral Assignment

Utilizing a life insurance policy for collateral assignment can offer a range of benefits and potential drawbacks. This method allows you to secure loans and is often safer than using physical assets as collateral. However, you should also note the inherent risks, primarily that the lender retains the first right to your policy’s death benefit upon your death.

Impact of Collateral Assignment on Beneficiaries

While the collateral assignment of life insurance has its benefits, it’s important to remember that it can impact the amount your beneficiaries receive. If you pass away with an outstanding balance on your loan:

Your Lender Will Be Paid First

In the collateral assignment arrangement, the lender is designated as the primary beneficiary for the outstanding loan amount. This means if you pass away before fully repaying the loan, the lender is entitled to receive payment from the death benefit first. The amount collected by the lender is limited to the remaining loan balance.

Any Remaining Death Benefit Will Be Disbursed to Your Beneficiaries

After the lender's claim is satisfied, the remaining death benefit is disbursed to your policy’s designated beneficiaries. The amount they receive depends on the loan balance at the time of your death. If the loan balance is substantial, your beneficiaries will receive significantly less than the policy's full death benefit.

Alternatives to Collateral Assignment

Alternatives to collateral assignment include personal loans , home equity loans , or surrendering the life insurance policy for its cash value. None of these options require using life insurance as collateral. Each option offers different benefits and risks compared to using life insurance as collateral.

These questions covers various topics related to collateral assignments, including the requirements, implications for beneficiaries and what happens under various scenarios.

How does collateral assignment differ from naming a beneficiary?

Collateral assignment allows a lender to claim the life insurance death benefit for an outstanding loan amount while naming a beneficiary designated who receives the death benefit. The lender's claim is prioritized over the beneficiaries' in collateral assignment.

Can any type of life insurance policy be used for collateral assignment?

Most types of life insurance policies, including term, whole and universal life, can be used for collateral assignment, provided the insurance company allows it and the policy has sufficient value.

Can the policyholder still change beneficiaries after a collateral assignment?

Yes, the policyholder can change beneficiaries after a collateral assignment, but the lender's right to the death benefit amount remains until the loan is repaid.

What happens if I cancel my life insurance before paying off the debt collateralized with my policy?

Canceling your life insurance policy before repaying the debt can lead to a breach of the loan agreement. This action may prompt the lender to increase your interest rate or demand immediate repayment of the outstanding loan balance.

These related sections offer additional insights into concepts and alternatives connected to collateral assignments and life insurance:

Using Collateral for a Personal Loan — This link explains how to use various types of collateral for securing a personal loan, providing a broader context to the specific use of life insurance as collateral.

Term vs. Permanent Life Insurance — This resource compares term and permanent life insurance, helping to understand which types of policies can be used for collateral assignments.

Permanent Life Insurance — This page details permanent life insurance, a type commonly used in collateral assignments due to its cash value component.

Life Insurance Calculator — This page lets you calculate the appropriate amount of life insurance coverage needed, which is crucial when considering using a policy for collateral.

About Nathan Paulus

Nathan Paulus is the Head of Content Marketing at MoneyGeek, with nearly 10 years of experience researching and creating content related to personal finance and financial literacy.

Paulus has a bachelor's degree in English from the University of St. Thomas, Houston. He enjoys helping people from all walks of life build stronger financial foundations.

Collateral Assignment of Life Insurance: Everything You Need to Know

• August 8, 2023

Life insurance isn’t just about peace of mind for the future; it can also serve as a lifesaver when you’re looking for ways to secure a loan. This clever maneuver is known as a collateral assignment of life insurance. It’s a deal between you and your lender where your life insurance policy, specifically the cash value component, is used as collateral for a loan.

When assigning your life insurance policy as collateral for a loan, the lender will become a temporary beneficiary of your policy. If the assigner dies before repaying the loan, the lender can claim the death benefit up to the outstanding loan balance. If the policyholder defaults, the cash value of the policy will be collected.

Who can benefit from the collateral assignment of life insurance?

If you need to secure a loan but don’t have typical assets like a house or significant savings, collateral assignment of life insurance could be your ticket. It’s great for small business owners, entrepreneurs, and folks with sizable insurance policies but limited liquid assets. 

To use a life insurance policy as collateral, the policy term should be at least as long as the loan duration and should possess a cash value component equal to the loan amount.

What types of life insurance can be used as collateral?

To make this work, you’ll need a permanent life insurance policy that has a cash value component. This includes options like whole life, universal life, and variable life insurance. Unfortunately, term life insurance doesn’t quite make the cut, as it lacks a cash value.

How to use life insurance as collateral for a loan?

1. Ensure the lender accepts life insurance as collateral.

2. Apply for the collateral assignment through the bank or directly with the insurer. 

3. Fill out an “assignment of Life Insurance Policy as Collateral form” provided by your insurer. 

4. Submit the form to the insurer, and wait for approval.

5. Once the collateral assignment is approved, notify your bank or lender. 

6. Bank or lender will set the loan terms such as the interest rate, payment terms, and other obligations.

Is life insurance as collateral widely accepted? Do all banks accept it?

Typically, permanent life insurance policies such as whole life and universal life, which have a cash value component, can be used as collateral. Lenders such as banks want security, and the cash value component of a whole life insurance policy provides this. This cash value grows over time and can be used if the borrower defaults on the loan, which decreases the risk for the lender.

How is the loan amount determined when using life insurance as collateral?

The borrowing capacity is determined as a proportion of the cash value, varying across different insurance companies. Typically, the permissible borrowing range hovers around 90% to 95%. Applying these percentages to a cash value of $50,000, one could potentially secure a loan amounting to $45,000 to $47,500.

What happens when you are unable to pay back the life insurance loan?

The cash value of your policy will be collected by the lender. If this is insufficient, the amount you owe is deducted from the death benefit when you pass away. In some instances, you might also incur a substantial tax bill.

Is the collateral assignment of the life insurance agreement permanent? 

No, the collateral assignment of the life insurance agreement is not permanent. It’s tied to the lifespan of the loan. Once the loan is fully repaid, the assignment can be released, and the life insurance policy returns to its original beneficiary arrangement.

What are the tax implications of using life insurance as collateral for a loan?

If the amount you borrow directly from the insurance company is equal to or less than the total insurance premiums you have paid, it is not subject to taxation. However, If you surrender your policy, or allow it to lapse, and the total amount of outstanding loans and interest surpasses what you have paid in premiums, there is a possibility of incurring a tax liability. In essence, you would be required to pay income tax on any investment earnings in that scenario.

Best Online Life Insurance Calculator

At Everyday Life Insurance , we specialize in finding the perfect policy to match your unique circumstances. Whether you’re a small business owner looking to back your loan or a stay-at-home mom working to provide for her family, we’re here to help. Use our online life insurance calculator to find the best plan for your finances, in just 15 minutes.

Disclaimer : The comments, opinions, and analyses expressed at Everyday Life are for informational purposes only and should not be considered individual investment, legal or tax advice.

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Life Insurance for SBA Loans: 5 Big Mistakes to Avoid & How to Apply

If you have applied for a Small Business Administration (SBA) loan and need life insurance to be approved, the advice below will help.

Life insurance is typically a necessary component of your SBA loan approval. You will want your life insurance policy to do two things:

• Satisfy your SBA loan requirements
• Be issued quickly

Below, we’ll discuss the 5 big mistakes we see people make when applying for life insurance for SBA loans. We’ll also show you how to avoid them.

Table Of Contents

5 big mistakes to avoid with life insurance for sba loans, how much does life insurance for an sba loan cost, how to apply for life insurance for your sba loan.

Here are the 5 big mistakes to avoid in getting life insurance for SBA loans.

Mistake #1: Legal Requirements are Ignored

Don’t ignore the fine print of your life insurance requirements to secure your SBA loan. According to SBA’s  SOP 50 10 5(B) (a lengthy document describing SBA’s loan requirements and process):

In other words, most  lenders will require the borrower to secure life insurance before the issuance of a small business loan can be finalized.

If the individual(s) is directly connected to the livelihood of the business, the lender will necessitate a life insurance purchase.

Most small business loan recipients are undoubtedly tied to the viability of their business . Chances are, in order for you to receive your loan, you will need to provide proof of appropriate life insurance coverage.

Mistake #2: The Collateral Assignment is Neglected

To set up life insurance for an SBA loan the right way, you must understand the collateral assignment.

What is a Collateral Assignment?

A collateral assignment is a designation of an entity (i.e. your lender) as a conditional recipient of some of the death benefit of your life insurance policy.

Concerning SBA loans, the collateral assignment entitles your lender to an amount of the death benefit that would pay off the balance of your loan, should something happen to you.

The remaining death benefit, once the loan has been repaid, would go to your other beneficiaries.

Why are Collateral Assignments Used?

Collateral assignments provide a safety net for the lender, negating some of the risks on their end.

What are the Steps to Set Up a Collateral Assignment?

Specific steps need to be taken to set up a collateral assignment properly:

• Apply for life insurance with an independent life insurance agent (they will access top no physical life insurance companies to find the best policy for your needs).
• List beneficiary for policy (i.e. spouse).
• Complete collateral assignment – a separate document to be signed and notarized.

Note  – a collateral assignment is different than your beneficiary. The collateral assignment allows your lender to receive only the portion of your death benefit that will pay off the loan.

The remaining death benefit goes to your beneficiary.

Do Not Name Your Lender as a Beneficiary

Your lender should only be entitled to the specific loan amount you owe, and not a beneficiary to your entire death benefit.

Let’s consider an example:

You secure a small business loan for $80,000. In the process, you take out a life insurance policy to satisfy the SBA loan requirements. Your life insurance policy’s face amount is $100,000.

You set up a collateral assignment for your lender for the specific amount of your loan. Should something happen to you, the collateral assignment is paid first and your beneficiary receives the balance of your death benefit. 

Bottom line  – collaborate with an expert independent life insurance agent to verify that your collateral assignment is set up properly.

Mistake #3: No Exam Life Insurance is Not Considered

Often, life insurance is needed in a hurry to secure your SBA loan. No exam life insurance (non-med) typically shaves weeks off the application process.

No exam life insurance is life insurance issued without the medical examination of the applicant.

How Do I Buy No Exam Life Insurance?

While each carrier uses its own process, you can expect the following general steps:

• Submit application (usually electronically/over the phone)
• Your interview will include basic questions about your health, medical history, lifestyle, and occupation
• Application decision

Is No Exam Life Insurance More Expensive?

The cost of no exam life insurance is, in many cases, competitive with fully underwritten life insurance.

As an example, here are quotes for a healthy 35-year-old male for a 20-year term no exam policy for $100,000:

• No Exam: $10.41/month
• With Exam: $9.12/month 

With such a small difference in cost, most find it worth it to opt for the no exam policy. Remember, quotes are examples only, and your specific quote may vary.

Why SBA Loan Applicants Choose No Exam Life Insurance

• No exam life insurance can be issued within a day, instead of the weeks that traditional policies take. This means your SBA loan can be finalized much faster.
• Prices are competitive in many instances.
• You get to skip everything involved in the medical exam like nurses, needles, and liquid samples.

Mistake #4: The Policy Face Amount (and Term) is Not Appropriate

Your life insurance policy must correspond with your SBA loan.

SOP 50 10 5(B)  states:

Your required life insurance policy must be for an amount that will pay off your SBA loan. Additionally, the policy must be for a term that lasts as long as your SBA loan term.

In other words, avoid purchasing a policy that’s for too little or for too short of a term length.

Consider this example:

You are in the process of obtaining an SBA loan for $90,000. Your loan repayment plan will last for 20 years. As a requirement for your loan, you purchase a 20-year term, no exam life insurance policy for $100,000.

You complete a collateral assignment for your lender. Should something happen to you, the loan would be paid off and the balance of the death benefit would be paid to your beneficiary. 

Mistake #5: You Don’t Partner with an Independent Life Insurance Agent

Think of an independent agent as someone sitting on the same side of the table as you. They have your best interest at heart because they’re not held captive to a particular life insurance carrier.

Independent agents shop the top-rated carriers to find the best policy at the best price to fit your needs.

There is no one-size-fits-all life insurance policy. You’ll want to partner with someone who can evaluate your needs and find the best carrier and specific policy for you.

For a general idea of cost, evaluate the following quotes.

Quotes are for 10-year term no exam life insurance policies.

Keep in mind, most SBA loans are limited to 10 years, except for real estate acquisition or construction (source: U.S. SBA Loan Fact Sheet ).

10 Year Term Life Insurance Quotes For Male 30 - 39 Years

10 year term life insurance quotes for female 30 - 39 years, 10 year term life insurance quotes for male 40 - 49 years, 10 year term life insurance quotes for female 40 - 49 years, 10 year term life insurance quotes for male 50 - 59 years, 10 year term life insurance quotes for female 50 - 59 years.

Most SBA loans require a life insurance policy. Fortunately, there’s never been a better time to purchase life insurance, especially without a medical exam.

To quickly secure a life insurance policy for your SBA loan, do two things:

• Partner up: Collaborate with an independent agent (that’s us) to find the best policy at the most competitive price.
• Note  – Should you have any questions about life insurance for SBA loans, an expert independent agent will guide you through the process.

To get started, simply fill out our instant no exam quote tool .

About Heidi Mertlich

Heidi is an independent life insurance agent and the founder of No Physical Term Life. She has specialized in helping clients find life insurance with no medical exam required since 2015.

Aswin Patel

No exam life insurance quote to secure SBA loan. Loan amount is $250,000.

Heidi Mertlich

Thank you for getting in touch, Aswin. We are happy to help you secure coverage for an SBA loan. To get started, simply fill out our free quoting tool.

Dedrick Harbor

I have a policy. I am ready to request a collateral assignment. What are the proper steps?

Bennett Bier

You can request a collateral assignment form from the current carrier. Many people reach out to us to add more coverage so their family still has the protection they need as well. You can reach us at 800-611-9622.

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What Is Split-Dollar Life Insurance?

Split-dollar life insurance refers to a permanent life insurance policy held by two parties, usually an employer and employee, who split the premiums and the proceeds of the policy.

Table of Contents

What Is a Split-Dollar Life Insurance Policy?

How does split-dollar life insurance work.

• How Much Does It Cost?

Key Takeaways:

• With a split-dollar life insurance policy, two parties split the cost of the premiums and share the policy benefits.
• Employers may use a split-dollar life insurance policy to attract and retain employees.
• Individuals with high-value estates can purchase a split-dollar life insurance policy to help reduce estate taxes for their beneficiaries.

A split-dollar life insurance policy is a policy wherein two parties share the premium costs as well as the policy benefits. Most often, a split-dollar insurance policy is held between an employer and an employee. Employers sometimes purchase these policies as part of a benefits package to attract and retain high-value employees.

However, they also could provide valuable funds in the event the employee dies. For instance, the funds could add much-needed capital to business operations if a CEO dies, leading to a decrease in stock prices. At the same time, the employee’s portion of the death benefit could aid their family following the loss of their income.

Not as common following a 2003 IRS ruling that said only privately owned companies can loan money to their executives, a split-dollar life insurance policy works in two different ways with regard to the purchase, premiums, any cash value, and the beneficiaries.

Collateral Assignment/Loan Regime

With a collateral assignment/loan regime, the employee owns the policy. This is also sometimes referred to as a leveraged split-dollar plan. The employer loans the premium amount to the employee to pay the premiums. Depending on the terms of the loan, the employee has to pay on taxable income derived from the premium loan. If the employee departs the company or the work agreement expires, the employee repays the loan for the premium costs and owns the policy in its entirety. If the employee dies, the employer receives the loan balance from the death benefit with the remaining going to the beneficiary.

Not all companies can participate in this type of split-dollar life insurance structure as the Sarbanes-Oxley Act made it illegal for a public company to loan money to its executives.

Endorsement Agreement

With an endorsement agreement, the employer owns the policy and the employee chooses the beneficiary. The employer pays the premiums, which are considered taxable income for the employee as is any of the employee’s interest in the policy’s cash value. If the employee leaves the company, the employer can transfer the policy to them or give them the option to purchase it. In the event of the employee’s death, the employer receives either the amount equal to the premiums paid or the policy’s cash value, whichever is greater. The employee’s beneficiary receives the remaining balance of the death benefit.

How Much Does a Split-Dollar Life Insurance Policy Insurance Cost?

As with all insurance policies, there are several factors that determine the cost of a split-dollar life insurance policy. These include:

• Type and amount of coverage. The more purchased, the higher the premiums are.
• The health, age, and gender of the insured . In general, if you are relatively young and healthy you will pay less for the same amount of coverage than someone older and with health issues. Women also typically pay less for life insurance than men.
• Amount of any deferred compensation the employer includes with the policy . 
• The cash value potential of the policy . If the policy allows you to add the cash value to the death benefit, the premiums will be higher than if the cash value is separate from the death benefit.

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How Do I Buy Split-Dollar Life Insurance?

When purchasing a split-dollar life insurance policy through an agreement between an employer and employee, both parties need to agree on the type of policy they want. Next, they need to agree on the terms, such as who will own the policy, how long the agreement will last, and who the beneficiaries are. These terms need to be outlined in a written document and signed by both parties.

The employer and employee will complete and sign an application for the life insurance policy. If necessary, the employee will undergo a medical exam. Once the insurance policy application is approved, both parties follow the agreement for payment and management of the split-dollar life insurance policy.

Individuals also have the option to purchase a split-dollar life insurance policy as part of their estate planning. Wealthy individuals can purchase a private split-dollar life insurance policy with the benefits going into a tax-advantaged trust known as an irrevocable life insurance trust (ILIT). Because an ILIT is not considered part of the estate, taxes will not have to be paid on the funds.

When considering a split-dollar life insurance policy, it’s important to speak to a financial advisor or estate planner to determine if it’s the right choice for your financial future.

Between employers and employees, there are three ways for a split-dollar life insurance agreement to end. The first is if the employee leaves the company, the employer could terminate the agreement. The second is if there is a specified termination date in the agreement. The third is if the employee dies, and the death benefit is disbursed as agreed.

Whether employee-owned or employer-owned, the employee can name the beneficiary of the life insurance policy under a split-dollar life insurance agreement. However, the beneficiaries likely will not receive the entire death benefit of the policy. Under a collateral agreement, the death benefit is first used to repay the loan to the employer for the premiums, with the remaining balance going to the beneficiaries. Under an endorsement agreement, the death benefit is first used to repay the policy premiums or cash value, whichever is greater, to the employer. The remaining balance goes to the beneficiary or beneficiaries.

Both the employer and employee can benefit from a split-dollar life insurance agreement. Employer benefits could include:

• Protecting the company’s finances in the event it loses a high-value employee
• Attracting and retaining quality employees
• Low costs to purchase and maintain 
• Can recoup investment when agreement ends
• Flexibility in plan design to meet employer needs

Potential employee benefits include:

• Employer pays for life insurance premiums
• Employer may pay income tax expenses through a bonus 
• Could receive tax-free income through withdrawals and loans of cash value
• Beneficiaries won’t pay taxes on the death benefit 
• Flexibility in the plan design to tailor to employee needs

The policyholder of a split-dollar insurance agreement depends on the type of agreement made between the employer and the employee. For a collateral agreement, the employee is the policyholder of the agreement. For an endorsement agreement, the employer is the policyholder.

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