When you purchase life insurance, you typically do so to prepare for after your death. However, an insurance policy is an owned entity and, as such, can be sold or used as collateral for a loan in order to provide cash value to someone in need.
Just as there are many questions when considering which type of life insurance to get, there are also a lot of factors to consider if using that policy to access the cash you’ve invested in it. It’s important to understand terms like absolute assignment and collateral assignment, as well as weigh the differences in order to satisfy your particular financial needs.
What is absolute assignment of life insurance?
Absolute assignment in insurance involves signing over your entire policy to another person or entity. The person who is selling or gifting the policy is known as the assignor, and the individual or individuals who receive it are the assignee. The assignee takes full ownership of the policy, being held liable for any premiums and also having the authority to change or designate new beneficiaries.
What is a collateral assignment of life insurance?
Collateral assignment of life insurance essentially works like a standard loan. The insurance policy is “collateral” for a loan, and the person or organization that pays out that loan is the temporary beneficiary of the policy’s death benefit until the loan is repaid. The entity taking over the policy does so on a conditional basis and, therefore, doesn’t have the authority to make changes to it, re-sell it or take any of its cash value. Instead, the assignee can only draw on the death benefit if the policyholder defaults.
This type of approach is used by Life Credit, through the Living Benefit Loan program, which provides up to half of the value of a death benefit for a policy worth at least $75,000. This loan enables cancer patients and seniors to access immediate and unrestricted assistance to help reduce financial burden.
Absolute assignment vs. collateral assignment
If you’re facing a financial challenge and are considering drawing on the cash value of your life insurance policy, one of the most important things you can do is look at the big picture. An absolute assignment type of approach may allow you to generate a lot of quick cash, however, down the line, you or your family will not have any protection and cushion from a life insurance policy. This may be a policy that you have paid into for decades, so losing that value is a significant consideration.
Collateral assignment, on the other hand, enables policy holders to regain control of their own policy once a medical or other crisis has resolved. You can still access a policy’s cash value but then also are able to eventually again benefit from the long-term advantages of a life insurance policy. Most people are used to paying car loans, student loans and mortgages, so treating this agreement similarly and making the requisite payments can help people to not only address their immediate financial concerns but also ensure long-term success.