The collateral assignment of life insurance is a type of collateral that lenders extract from borrowers as a basis or condition for lending them money. It is a sort of security for the lender that ensures his or her money will be repaid. This collateral is obtained by the lender from the borrower when the lender needs extra assurance that the borrower will repay the debt. A life insurance can be assigned to anyone by the owner of the insurance, which is what makes this ideal to borrowers.
A lender might insist on a collateral assignment of life insurance when he or she is not sure that the borrower will repay the money. It may be a condition for the disbursement of a loan. In this case, the borrower will take out a life insurance policy and name the lender as a beneficiary. If the borrower passes away before repaying the loan, the lender will retrieve that money from the dividends of the life insurance policy.
The lender may only recover the money owed him or her and no more. If there is any money left after the lender has extracted the debt owed him or her, the money will be paid to the other beneficiaries of the life insurance — usually the family members of the borrower. If the borrower did not name anyone other than the lender as a beneficiary, the balance will be applied to the estate of the borrower.
Most insurance companies are conversant with collateral assignment of life insurance, and each company has its own policies for such coverage. Some insurance companies will seek to contact the lender directly in order to find out exactly how much he or she expects to get from the collateral assignment of life insurance should the owner of the insurance die. They may also want to know what kind of terms the lender is attaching to the collateral assignment of life insurance. Insurance companies do this to avoid any surprises should such an event occur.
If the borrower is able to repay the money owed the lender, then the lender will not be entitled to any money from the life insurance policy. The agreement between the borrower and the lender in respect of the collateral assignment of life insurance usually contains a clause that the claim of the lender as a beneficiary to the life insurance becomes void upon the full repayment of the debt owed. The life insurance policy merely serves as a backup in case the borrower defaults on the repayment of the loan or in case the borrower dies before paying the lender all of the money owed.