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What Is Collateral Assignment in Life Insurance?
<lingo>In life insurance, a collateral assignment is a type of agreement that allows a lender to be listed as the beneficiary of the policy. In some situations, a person is required to have this type of life insurance policy in place to cover the costs of a loan. It is a type of collateral used to pay for the borrowed proceeds from the loan. If the person dies while the loan is still owed and the life insurance policy is in place, the funds from the policy are used to pay off the loan.</lingo>
Collateral Assignment Briefly and Clearly Explained
In a collateral assignment, a life insurance policy is used to help a person obtain a loan. It works as a way to reduce the risks associated with lending. A lender may require it if there is some belief or concern that a person may die while they are repaying the loan or there is another high risk present that indicates a need for some type of collateral to repay what is owed.
In this type of arrangement, the life insurance company will pay out the proceeds to the primary beneficiary for up to the amount owed on the loan. The policy must list the lender as the primary beneficiary. Also, the person who is the borrower on the loan – the one who is legally responsible for repaying the debt – must be the covered party through the life insurance policy.
<twitter>In life insurance, a collateral assignment is a type of agreement that allows a lender to be listed as the beneficiary of the policy.</twitter>
In some situations, individuals may be able to use an existing life insurance policy and modify the beneficiary under this assignment process to reflect the lender. However, this can only be done if the loan’s value is under the dollar value associated with the policy. It also is a requirement that the term of the life insurance policy must be at least as long as the term for the loan repayment. If not, then it does not provide the lender with enough protection and is not likely to be accepted as a form of life insurance. When life insurance can be used like this, it can reduce lender risk and make loans more accessible.
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