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Life insurance as collateral for business loans

Lenders accept many forms of collateral. Find out if you can use life insurance to secure your business loan.

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Aliyyah Camp
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Coming up with collateral to use in backing a business loan can be difficult when you’re first starting out. The loan you’re looking for might be to merely get your business on its feet, or your industry might not include the valuable equipment traditionally used as collateral.

You have options to consider for collateral outside of equipment and real estate. Find out what you need to know about using life insurance as collateral for a business loan, including what to watch out for.

Can I use life insurance as collateral for a business loan?

The short answer is yes, some business loans accept life insurance as collateral. Some lenders for SBA loans even suggest that you have a life insurance policy to back it.

When you use a life insurance policy as collateral, you designate that the lender can collect some or all of the policy during the life of the loan. If something were to happen to you while there’s still a balance on the loan, the lender could make a claim against your policy.

What is collateral assignment of a life insurance policy?

Nobody likes to dwell on the inevitable. But you may be able to secure a business loan with your life insurance policy by completing a collateral assignment form.

This form doesn’t designate the lender as a beneficiary. Instead, it gives the lender a lien on the policy as long as there is a balance left on the loan you’re securing. Once the loan is repaid in full, life insurance rights transfer back to you.

Cautions to consider when securing a business loan with life insurance

As with putting down any collateral for a loan, there’s some risk associated with using your life insurance policy as security.

  • If your loan has a balance, your family won’t get everything. In the event of your death, the lender gets first claim to your life insurance payout. Any remaining balance on your payout goes to your beneficiaries, but there could be nothing left, depending on the amount of the loan.
  • Your loan approval could depend on your policy. If you sign up for an SBA loan that requires a life insurance policy, you may not get your funds until you provide proof of your policy.
  • You may need to surrender your policy. Default isn’t something you plan on, but it can happen. Should you default on your loan, your life insurance plan would be cashed out for its worth and you’d still owe any remaining difference to the lender.

Want an unsecured business loan? Compare your options

Tips on choosing the right life insurance policy

Here’s what to consider when deciding on a life insurance policy:

  • How long you need the policy. If you only want life insurance over the life of your loan, purchase a term life policy. These offer temporary coverage for a set period of time — 1, 5, 10, 15, 20, 25, 30 or 35 years.
  • The state of your health. If you’re a smoker or in a dangerous line of work, you’re considered to have a lower life expectancy — which can bump up your rates. In this case, look for an insurer with more lenient underwriting guidelines to accommodate your lifestyle.
  • Whether your work provides coverage. If you work for a company outside of your business, your employer may offer life insurance as part of its benefits package. However, group life insurance typically isn’t portable — so you’ll lose your coverage if you change jobs.
  • The cost of the policy. Term life insurance is the cheapest policy available, while permanent policies — like whole life — are notorious for large commissions and fees. Don’t be afraid to ask questions to learn how much you’re really paying, including exactly what your payments fund.
  • How much insurance you need. Coverage of $100,000 will cost less than coverage of $10 million, for example. Calculate how much life insurance you’ll need so that you aren’t paying extra for unnecessary coverage.

Frequently asked questions about life insurance as collateral

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7 Responses

    Default Gravatar
    ZeliaSeptember 24, 2018

    Can I lend against my policy by emerald life funeral insurance and wealth creator

    Reply
      Avatarfinder Customer Care
      JoshuaSeptember 25, 2018Staff

      Hi Zelia,

      Thanks for getting in touch with finder. I hope all is well with you. :)

      The answer to your question is yes. It is possible for you to use your Emerald insurance as your collateral. However, please make sure that there are some risks that you need to consider before you go through this process. Please review the information found on this page and review the criteria, details of the loan product you are interested in. Contact the lender directly to discuss your loan options and eligibility.

      I hope this helps. Should you have further questions, please don’t hesitate to reach us out again.

      Have a wonderful day!

      Cheers,
      Joshua

      Reply
    Default Gravatar
    CharlieSeptember 10, 2018

    Does the life insurance has to be term or accidental only? Or does it have to be whole life insurance in order for the bank to accept the life insurance as collateral?

    Reply
      Avatarfinder Customer Care
      JhezSeptember 12, 2018Staff

      Hello Charlie,

      Thank you for your comment.

      Upon research, you can’t borrow against term life insurance, only life insurance with cash value such as whole life can be used as a collateral. This is because the whole life insurance policy builds cash value that you can borrow against at any time, for any reason, without a credit check or even an application process.

      Should you wish to have real-time answers to your questions, try our chat box on the lower right corner of our page.

      Regards,
      Jhezelyn

      Reply
    Default Gravatar
    ElizabethMarch 30, 2018

    I would like to get a loan using my life insurance as collateral. I need to find someone to accept me.

    Reply
      Default Gravatar
      LiezlMarch 30, 2018

      Hi Elizabeth,

      Thanks for reaching out to us at finder!

      Depending on the loan amount you’re looking for and the purpose of the loan, there are lenders that might offer you loan secured by your life insurance. That guide also listed other collateral generally accepted by lenders for different types of loans. If you want to find more about the loan offer and its eligibility criteria, simply click on the lender’s name.

      Warm regards,
      Liezl

      Reply
      Default Gravatar
      joelmarceloMarch 30, 2018

      Hi Elizabeth,

      Thanks for leaving a comment.

      As of now, there are only OnDeck Small Business Loans who can approve you for a loan using your life insurance. You can click the “Go to site” button to start your application and discuss your options with them.

      Cheers,
      Joel

      Reply
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