Collateral Assignment: Banking on Your Life Insurance Policy

 “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

Borrowing “from” vs. borrowing “against”

Grunge rubber stamp with text Loan Approved,vector illustrationThere’s a trick to borrowing money at favorable interest rates. The trick is having rock-solid COLLATERAL.

Collateral assigment also allows you to borrow money without having to jump through the usual qualification hoops. No income proofs or credit checks. You don’t have to demonstrate your ability to pay it back or defend your reason for borrowing it.

Collateral can work just as well as “money in the bank!” Perhaps even better if your collateral can grow tax-free while you borrow against it!

One of the significant advantages of a participating (dividend-paying) whole life insurance policy is 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.

You borrow against cash value, not from it. When you take a policy loan, you’re using your cash value 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 ITS 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…

Collateral Assignment

Often, a local BANK or even a credit union can provide a lending solution at a lower rate… using your life insurance policy as collateral, 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.

FAQs about Borrowing Against Life Insurance from a Bank 

Financing Magnifying Glass Words Load Mortgage

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:

  • Automobiles
  • 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 to explore collateral assignment!

Are You Curious to See How Much Cash Value a Policy Might Provide?

Contact Prosperity Thinkers 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!)

33 thoughts on “Collateral Assignment: Banking on Your Life Insurance Policy”

  1. I’m looking for a lender to assist me with getting a collateral assignment loan using my life insurance policy to secure the loan.
    P.S. a legit Lender I don’t have time for scammers.

  2. Hello, I am 65 years old, I have a policy with previous Transamerica now is called Ivari. The face amount is $400k and there is Cash value of about $150k , my question is, where can I do the collateral loan so I can use for my retirement? which bank or credit union will accept it. Or I can do collateral with Ivari. Please advice.

  3. Pingback: 5 Ways Your Business Can Benefit from Life Insurance (Part 1) |

  4. With a collateral assignment with a life insurance policy, will there be a credit check done? Thanks

    1. Collateral should not require a credit check. Definitely not when borrowing from the life insurance company with a policy loan. (A bank could possibly require a credit check… so inquire before applying if that is a concern.)

    1. Yup! (Unless of course it has already been collateralized.) There is likely a limitation, such as 90% of cash value.

  5. I have a universal life policy with a payout value of $115,000 but currently has little cash out value.

    I am 71 and in poor health. My husband would like to retire to spend quality time with me.

    Can I use the face value of my policy as colleteral for a loan?

    1. Hi Kay, typically just the cash value can be used as loan collateral or withdrawal. Perhaps that can help a bit.

  6. i would like to borrow money againsts two of my life insurance policy. universal life and whole life. im 62 yrs old. i have means to pay the loan. i would like to borrow money so i can pay off some debts.i would like to live stress free since im semi retired. which bank can lend me money and if you can help me

  7. my life insurance co issued an ‘assignment of life insurance policy as collateral’ form which supports loans against my term policy. I just need to find the right lender….

    1. Hi Jafari, we aren’t aware of any lenders that lend on term policies, sorry! It might be that the clause supports the policy being used as collateral for a business loan. That doesn’t mean you’re given a loan based on the policy, it means that an institution might give you a loan based on your ability to repay (based on a business plan or your current income), and they would be reimbursed should something happen to you. In such a case, life insurance is a condition of a loan, not the collateral. (I can’t say for sure if this is what it means, I’ve just never heard of a term policy being used as collateral.) Kate

  8. Can collateral assignments be used towards personal loans or only mortgage or business? I’m trying to consolidate all debt.

    1. Hi Diana, I’m sorry this slipped through the cracks… if you are asking if you can do a collateral assignment loan on unsecured loans or credit card debt, the answer is no, as “collateral assignment” needs to have collateral to work 🙂 But if you are asking if you can borrow against your life insurance policy to consolidate unsecured loans, the answer is YES – the policy is the collateral. I hope that helps. Kate

    1. Hi Sandra, see for banks that we understand may loan against cash value.

    1. Hi A. You can’t borrow against term life insurance, only life insurance with cash value such as whole life.

  9. Hi, I have a EAS-CPF Savings policy with AIA Singapore since Feb 1997.
    The maturity date is 01 Feb 2019,
    which will have an estimated paid out
    of $93,276. My last premium payment
    is on 01 Feb 2018.
    I am in need of some cash & had
    recently spoken to AIA. There is no
    loan options from this policy except
    to terminate the policy.
    Upon termination I will only get back
    $69,914.00 which is a lost of almost
    $23,362.00. I only have one last premium payment of $2648.00 as
    final payment in 01 Feb 2018 but the
    payout will only be in 01 Feb 2019.
    Can I use this policy as a collateral
    to take up a loan from a bank?
    And repay this loan in full when my
    policy matures in 01 Feb 2019.
    Thank you for your kind assistance.
    Have a pleasant day.

  10. I have term life insurance policy that doesn’t expire until age 95 which I have had for 16 yrs. Am I not able to use this as collateral for a loan?

    1. Hi Lori, term insurance has no cash value and that is what is used as loan collateral. If it was something like a business loan, your earning ability/future income would be the collateral, however, life insurance would also be a condition of the loan and your term policy would meet the requirement. Hope that helps.

    1. Hi Robert, Sorry for the delay; we were in the process of updating our list when you left the comment and it is now updated. This list should prove helpful!

  11. Meshack Nchupetsang

    So if one does not have an insurance policy and they get one. How long should one wait before using the policy as a collateral after opening it?

  12. Can commercial resl estate be used as collateral for a business loan? If so, where would be the best place to go to apply for the loan.

    1. Marie, the best places for loans are small community banks and credit unions. Check with SBA too – the Small Business Administration. Sometimes they help find banks that will lend. And yes, commercial real estate can be used for collateral, of course based on valuation/equity. Good luck!

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