Using Life Insurance as Collateral: What You Need to Know

You can use certain life insurance policies as collateral for a loan, but only if the policy has a cash value and the insurer permits assignment.

Which policies are eligible

Whole life, universal life, and variable universal life policies build cash value over time, making them assignable to a lender. Term policies lack cash value and cannot be used as collateral.

How lenders assign the policy

The lender requires a formal assignment document that names the bank as the primary beneficiary. If the loan defaults, the insurer pays the outstanding balance to the lender before any remaining death benefit goes to your heirs.

Typical loan terms and limits

Most banks lend up to 80‑90% of the policy's cash surrender value, with interest rates comparable to secured personal loans. Repayment periods vary, but many lenders require monthly payments and allow early repayment without penalty.

Risks and considerations

• Loss of death benefit if you cannot repay the loan.
• Reduced cash value for future policy loans or withdrawals.
• Potential tax implications if the loan is forgiven.

Steps to use your policy as collateral

1. Verify cash value and confirm the policy's assignability with your insurer.2. Shop for lenders that accept life‑insurance‑backed loans.3. Complete the assignment paperwork and provide policy statements.4. Review the loan agreement for interest, fees, and default clauses.