Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Leslie Kasperowicz holds a BA in Social Sciences from the University of Winnipeg. She spent several years as a Farmers Insurance CSR, gaining a solid understanding of insurance products including home, life, auto, and commercial and working directly with insurance customers to understand their needs. She has since used that knowledge in her more than ten years as a writer, largely in the insur...

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Reviewed by Leslie Kasperowicz
Farmers CSR for 4 Years

UPDATED: Oct 29, 2021

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The Brief

  • Many lenders allow you to use your life insurance policy as collateral for a loan
  • The lender becomes the temporary beneficiary of the death benefit on your loan
  • Once the loan is repaid, the lender is removed from your policy
  • If you die before the loan is paid off, the lender is repaid whatever they’re owed

When you first consider getting life insurance, it’s usually from a desire to provide financial security for your loved ones after your death. However, many people don’t realize that their policies can be used as collateral for a loan.

Companies are often excited to use a life insurance policy for collateral on a loan because they know their loan is guaranteed to be paid.

The most common type of insurance that can be used as collateral is whole life insurance. Companies often include a cash accumulation with their whole life plan.

If you’re interested in life insurance companies that allow assignment of collateral,  enter your ZIP code in our free tool above to compare life insurance quotes from local companies.

Which life insurance companies allow assignment of collateral?

People have been using their life insurance policy as collateral for a long time. For many people, the use of a whole life policy for collateral is a key reason they purchase coverage.

The process is simple: a borrower offers a portion of their death benefit as a collateral assignment for a loan. This is a conditional assignment — as soon as the loan is paid, the lender is removed from the policy.

Lenders prefer using a policy as collateral because the loan is guaranteed to be repaid, one way or another. If you pass away during the term of the loan, they’ll be paid out. If you default on the loan, they can lay claim to the cash value of your policy.

Because of the nature of using your policy as collateral, most life insurance companies pay little attention to what you borrow.

Most lenders accept whole life policies as collateral, so a good place to start looking is the average life insurance rates with the best whole life insurance companies.

Here is a list of rates for $100,000 in whole life insurance for men:

Average Whole Life Insurance Rates for a Male with $100,000 in Coverage

Companies50-Year Rates55-Year Rates60-Year Rates65-Year Rates
Foresters Financial $15.31$20.83$34.04$43.66
MassMutual$16.97$24.10$35.50$61.68
AIG $17.01$26.62$38.22$55.07
AAA $17.78$22.53$37.14$59.93
Mutual of Omaha$18.88$27.65$41.67$59.73
Assurity $20.10$28.45$44.20$67.08
TransAmerica $20.21$30.10$42.66$71.29
Prudential$21.88$28.18$37.72$58.45
State Farm $26.54$34.45$51.50$83.09
Liberty Mutual $40.32$55.35$95.58$141.93
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Here is a list of rates for $100,000 in whole life insurance for women:

Average Whole Life Insurance Rates for a Female with $100,000 in Coverage

Companies50-Year Rates55-Year Rates60-Year Rates65-Year Rates
Foresters Financial $13.13$17.41$25.46$34.39
MassMutual$14.62$20.28$28.19$42.64
AIG $15.04$20.96$25.58$44.93
AAA $15.40$18.83$25.61$37.93
Assurity $16.53$22.97$32.71$49.76
Mutual of Omaha $16.73$21.97$29.20$46.57
TransAmerica$17.46$25.89$36.98$59.94
Prudential$21.27$23.80$29.49$41.13
State Farm $23.49$29.67$40.98$59.51
Liberty Mutual$32.94$39.15$59.76$81.27
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As you can see, the younger you sign up for a policy, the cheaper your monthly rates will be.

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What is considered the collateral on a life insurance policy loan?

The collateral of a life insurance policy loan is the simple process of assigning a lender as the temporary primary beneficiary of your insurance, making them the beneficiary of your death benefit.

The only person that can use their policy to take out a loan is the owner of the policy. That might not be the person who is insured.

For example, a husband can own a life insurance policy for his wife. In this case, the husband — not the wife — is the only person who can use it for a loan.

If you die before your loan is paid off, the lender will receive as much of your life insurance death benefit as they need to cover your loan. After the loan is paid off, the rest of your life insurance benefit goes to the original beneficiary or beneficiaries.

Once the loan is repaid in full, the lender is removed from your policy.

How to Use Your Policy as Collateral

The process of using your life insurance as collateral is surprisingly simple. Most of the paperwork is done between borrower and lender, mostly leaving the insurance company out of the process.

Once you and a lender agree on using your policy for collateral, you need to notify your insurance company. It’ll help you set the lender up as a conditional beneficiary.

That is where your insurance company’s involvement is likely to end.

Other than that, the requirements are simple. Your policy needs to stay current. Some lenders may want you to sign up for a new policy that would start at the same time as your loan, while some will work with a plan you currently have.

While there aren’t many life insurance companies that don’t allow assignment of collateral, some lending companies won’t work with a term policy.

Often, term policies don’t last as long as the loan and don’t accumulate a cash value like whole life does, which means it can’t be used in case of default.

However, if you end up buying term life, you can probably find a lender that will work with you no matter what your policy looks like.

Is using your life insurance for collateral safe?

For the most part, using your life insurance for collateral is perfectly safe. However, there is one major thing you should watch for.

Take this collateral assignment of life insurance sample as a cautionary tale:

When you go to a bank to use your policy as collateral to secure a loan, they will ask you to make them the primary beneficiary. Since that is why you’re there, you agree. The paperwork is signed, and you’ve secured your loan.

If you were to die before the loan was paid off, your entire death benefit would be paid to the bank — none would go to the people you bought the policy for in the first place.

It’s critical that you use a conditional collateral assignment. If you die before the loan is paid off with the lender as conditional and not the primary beneficiary, they are only entitled to as much money as is needed to pay off the loan.

How to Find Life Insurance Companies That Allow Assignment of Collateral

It’s exciting to know you can use your life insurance policy to secure a loan, especially since your intended beneficiaries are still protected in the future.

Affordable life insurance companies that allow assignment of collateral can provide you with the funds you need. If you’re ready to explore possible quotes, enter your ZIP code below to get started.