“Many consumers forget a life insurance policy is another tool they can use as an asset to borrow money.”
– Larry Ziegenfuss, Senior Vice President, Conestoga Bank
There’s a trick to borrowing money at favorable interest rates. The trick is having rock-solid COLLATERAL that is just as good as (or better than) “money in the bank.”
There’s also a trick to borrowing money without having to demonstrate income, prove your credit-worthiness, show your ability to pay it back, and defend your reason for borrowing it.
One of the significant advantages of a participating (dividend-paying) whole life insurance policy is exactly this: the policy builds cash value that you can borrow against at any time, for any reason, without a credit check or even an application process.
Some people think, “Of course you don’t have to jump through hoops… it’s YOUR money!”
And they might wonder why someone would pay interest to borrow “their” money.
But this is incorrect.
When you borrow against an asset, you’re using it as collateral.
Pawn shops do this when people bring in Grandmother’s diamond jewelry. (And an interest rate of 5% might seem reasonable, until you learn it’s 5% PER MONTH!)
Financing institutions make car loans with the car as collateral… IF you have reasonable credit, and a decent payment history, and proof of a steady income.
Banks and mortgage lenders make loans using homes as collateral… IF you have good credit, a down payment, and proof of a sufficient, stable income.
Likewise, life insurance companies also lend money, using policies with cash value as collateral. They lend AGAINST the cash value. Meanwhile, just like you get to drive your car or live in your house even with a loan against it, you get to use the money you are loaned while the money used as collateral keeps doing IT’S job… of growing and earning more money!
There are many upsides to this scenario.
You can borrow from the insurance company and access money
- without waiting until you’re 59-1/2
- without proving it is for an “allowable” reason
- without having to “qualify”
- without having someone else determine your re-payment schedule
- without paying penalties and taxes (you will pay interest), and
- without wondering if the loan will be approved.
The potential downside to borrowing from insurance companies for those with excellent credit, is that an 8% interest rate might not seem very competitive. (8% is approximately the amount the rate typically charged at the time of this writing for fixed rate life insurance loans.)
But there is often another option…
Often, a local BANK or even a credit union can provide a lending solution at a lower rate… using your life insurance policy ascollateral, much as you would if you borrowed straight from the life insurance company.
It could not only be a good deal for you, it’s a good deal for the bank, too. A well-collateralized loan is a safe bet, and the bank can earn perhaps 4% annually on an extremely conservative loan with virtually no risk.
The Net Effect
Now, it’s always good to get a low interest rate when you’re on the borrowing end, but here is where things can get VERY INTERESTING.
If you can obtain a bank loan at an excellent rate, say, 4%, and if your life insurance cash value is earning at a net rate of 4 or 5% (actual rate varies according to company, age and health), then your collateralized cash value can actually earn as much or more than the interest rate you’re paying the bank.
In such situations, the COST of borrowing against your cash value is literally cancelled out by the GAINS of the policy. (Sometimes, you even come out ahead!)
Seen another way, the policy is actually generating cash to make the loan payments with!
THIS is why we rarely recommend withdrawing cash value when you need money… borrow against it instead, and it will continue to work for you!
This is why it is so powerful to be able to provide your OWN financing as you go through life. We have enormous needs for FUNDING throughout our lives, from our first car to credit cards to our last home mortgage, and the more we can eliminate bankers from our personal economy while still keeping cash MOVING and CIRCULATING – and under our own control – the more prosperous we’ll be.
This strategy is known in some circles as “Infinite Banking,” a term coined by Nelson Nash, or “Bank on Yourself,” as described by Pamela Yellen. It is also one of many strategies described in my Live Your Life Insurance book.
Common Questions about Borrowing Against Life Insurance from a Bank
What banks will lend against cash value?
Banking institutions we’ve seen lending against whole life policies include those on this list. (We cannot guarantee accuracy, this list includes sources recommended to us and we don’t have personal experience with most of them, just reliable recommendations at the time the recommendation was made.)
We also recommend that you check with your local bank or credit union, as many banks will loan against a cash value account. The going rate at this writing is around prime (3.5 – 4%), with SBA loans running a little higher.
Does the lender become the beneficiary?
No. Through collateral assignment, the lender is guaranteed only the outstanding amount of the loan should you die or default. In the unlikely event of death, the beneficiaries would receive the remaining death benefit after the loan balance had been paid.
Do I have to be the insured?
Not necessarily. When cash value is securing the loan, it does not matter who the insured is, only that the person using the policy for collateral is the policyholder.
How long does it take?
It can take 10 days or even a little longer for the paperwork to be processed and for you to receive you loan, but it can vary bank to bank.
What kinds of policies are best for using as collateral?
Although lenders may accept several types of life insurance as collateral, we prefer participating whole life insurance policies, Why? Although borrowing can work with just about any life insurance policy that builds cash value, some policies do not guarantee a minimum amount of cash value… or can even LOSE cash value!
Indexed policies that mimic to some extent the gains of the stock market guarantee a minimum interest rate (sometimes as low as zero). But contrary to popular belief, indexed policies such as Indexed Universal Life (IUL) can and do lose money if and when the policy costs (such as fees and the cost of insurance) outweigh the gains.
Worse yet, we’ve seen Universal Life policies in which costs have drained all cash value and actually become worthless (although not all UL policies are in danger of imploding, as we call it.)
What else can be used as collateral?
It all depends on the bank, the type of loan, and what qualifications are required. Any asset that your lender accepts as collateral (and which is allowed by law) can serve as collateral.
In general, lenders prefer assets that are easy to value and turn into cash. Some common forms of collateral include:
- Real estate (including home equity)
- Cash accounts
- Machinery and equipment
- Some types of investments
- Insurance policies
- Future payments from customers
Retirement accounts such as IRAs are often not allowed to serve as collateral, as we discuss in “The Leverage Test.”
Some banks even offer insurance-secured loan OR lines of credit. These lines of credit can be very advantageous to business owners, as we’ll discuss further in a future blog post describing the many surprising business applications of life insurance.
If your local bank does not lend against life insurance cash value, try these resources.
Are You Curious to See How Much Cash Value a Policy Might Provide?
Contact Partners for Prosperity and request a no-obligation illustration today. We have specialized in high-cash value, dividend paying whole life insurance (along with alternative investments) for 25 years (even before Partners for Prosperity!)
A collateral assignment of life insurance is a contract that allows the death benefit of a policy to be used as collateral, this is usually used in business loans (but also equipment,structured settlement buyouts and other loans).
In the untimely event of the death of the person who is named on the life insurance policy, the lender who has the insurance policy assigned as collateral gets paid first.
A collateral assignment will always take precedence over beneficiary claims for the proceeds of the death benefit. When a business owner applies for a business loan and wants to use their death benefit as collateral, the loan company must then ascertain whether, should this owner die, will it affect the business and cause the loan to default.
The death benefit on the life insurance policy is there as security that the lender will get the loan repaid should this happen. It is important to remember, that although only the policy owner can pledge the death benefits of a policy to the lender, they may not necessarily be the individual named on the policy. This individual could be their spouse or even the director of the company.
When setting up collateral assignment of life insurance, it is very important to remember that the lender should never be named as beneficiary on the policy. The beneficiaries should be the loved ones of the person named on the policy, as should the named person die the loan will get paid off first and then the collateral assignment is released and remaining amount of the death benefit will be paid to these beneficiaries.
In order to set up collateral assignment of life insurance, there is no particular type of life insurance policy required by a lender; the only stipulation is that the actual life insurance policy itself must be assignable.
There are various types of life insurance policies that are acceptable for collateral assignment, some examples are:
This type of insurance is death cover for a fixed term of one or more years. It has no surrender value or equity and any benefits are only paid out if the insured person dies. A term insurance policy is going to be the most affordable type of insurance plan. If you want to get the cheapest life insurance, a term plan is going to be the best option.
With a term insurance policy, you can buy a plan that matches the need of your family. If you have 20 years left on your mortgage loan, then you can buy a 20-year term insurance plan. Because these are not a permanent form of coverage, they’re going to be much cheaper than other options.
Universal Life Insurance or Whole Life Insurance
This type of life insurance allows the insured person to tailor the life insurance to suit their needs and lifestyle, it is a permanent type of insurance and death benefits are paid out if the insured person dies.
If you’re looking to get permanent coverage that will never expire, a whole life plan is an excellent option. With these plans, as long as you continue to pay the premiums for the plan, you’ll have life insurance coverage. Because these plans will never expire, they are going to be more expensive than a term life insurance plan.
Another advantage of these plans is that they build cash value inside of the plan. The longer that you pay the premiums for the plan, the more value that is going to be built upside of your insurance policy. You can use the cash value of the plan to invest or pay the premiums.
Second To Die Insurance
This is a type of insurance policy which insures two people, usually a husband and wife. The death benefit on this type of policy is not paid out until the second person dies however.
Seeking Life Insurance Coverage
When you’re looking to get life insurance coverage with a collateral assignment, it’s important that you’re getting the right type of plan to protect your family and satisfy the collateral needs. Each type of plan has different advantages and disadvantages that you’ll need to consider to ensure that you’re getting the best plan.
If the loan has been taken out using a collateral assignment of the life insurance policy when the loan is repaid in full and if the person insured on the policy is still living, then the lender relinquishes all rights to any death benefit on the policy and they will return all documents.
An existing life insurance policy can be used to satisfy the lenders requirements as long as the amount of death benefit on the policy is enough to cover the loan amount required. The loan policy holder, must always make sure that the life insurance company is aware of and will allow the use of the policy as collateral for a loan.
Most life insurance companies will have strict rules that must be followed to ensure the collateral assignment of the life insurance policy will be allowed and they must always be informed that the assignment has been made. The life insurance company will need to submit written notification to the lender that the collateral assignment of life insurance has been filed. This could be as a separate cover letter with a copy of the executed collateral assignment form or a just a stamped filed copy of the collateral assignment form itself.
The lender will also need to make further checks before allowing the loan to go ahead. They will need to check that there is no collateral assignment of the life insurance policy already in place and that all life insurance premiums are not only up to date, but have also been made for a period of at least six months.
Also, they will check that if the policy has a cash surrender value, there have been no borrowings secured against that and that the original life insurance policy is not required in order to make a claim. Some types of loan have a cash surrender value, this is the amount that an insurance company will pay out to the policy holder if the life insurance policy is terminated before it reaches maturity. If there is a filed collateral assignment for life insurance against the policy, any monies paid out will be used to pay off the balance of the loan before either the policy holder or their beneficiaries.
When a life insurance company sets a collateral assignment of life insurance, this usually takes in the region of seven to ten days to be filed and acknowledged, however some companies may expedite this if the collateral assignment is required more urgently. When taking out life insurance at the same time as assigning the collateral, the collateral assignment form must be submitted with the life insurance application, so make sure you choose a life insurance agent who thoroughly understands the collateral assignment process.
There’s a reason people come to us for a collateral assignment. Companies like SelectQuote Insurance Services and Zander Insurance are high volume call centers and typically don’t see collateral assignments all the way through (so we’re told).
Our company Rootfin, provides Life Insurance coverage in over 50 states and we represent over 60 Life Insurance providers, however we are an independent and impartial company.
When you’re shopping for life insurance coverage, regardless if you’re going to be adding a collateral assignment to the plan, it’s important that you get the best plan to meet your needs. The best way to do that is by working with an independent insurance agent. Unlike a traditional insurance agent, independent brokers work with dozens of highly rated companies across the nation, which means that we can bring all of the best plans directly to you.
Perhaps you’re concerned because of health conditions such as someone looking for life insurance with diabetes; if so, we can connect you with companies who can offer the best coverage at affordable prices.
Every insurance company is different, which means that you could get varying rates depending on which company that you get the quote from. Instead of wasting your time calling the companies, let our agents do all of the hard work for you.
We always strive to provide the best service we can and take pride in the fact that we try to build a relationship with each of our prospective clients built on trust and an understanding of their individual needs. Our team of experienced life insurance agents have a thorough understanding of the needs of the collateral assignment process and will be able to guide you through this process and ensure that all the requirements of the loan company are met.
We know that navigating the life insurance waters can be difficult, especially when you have to add additional features like collateral assignment, but we are here to make the process as quick and simple as possible. If you have any questions about life insurance, please contact one of our agents today. We would be happy to answer those questions and ensure that you’re getting the lowest rates available. Because you never know what’s going to happen tomorrow, you shouldn’t wait to get the insurance protection that you and your family will need.