Collateral assignment

The two structures

• Collateral assignment — the lender has a claim on the death benefit up to the outstanding debt, and everything above that goes to your named beneficiary
• Naming the lender as beneficiary — the lender receives the whole death benefit regardless of the balance owed

Why assignment is the right answer

A loan amortises. A policy's death benefit generally doesn't. Ten years into a term loan, the debt may be a fraction of the coverage.

Under a collateral assignment, the lender takes what's owed and the balance goes to your family. Under a beneficiary designation, the lender takes all of it.

Lenders generally accept collateral assignment, and it's what you should ask for. If a lender insists on being named beneficiary, ask why.

How it works in practice

• You own the policy and continue to control it
• An assignment form is filed with the insurer, and the insurer records it
• The lender is notified if the policy lapses, which protects them and, incidentally, you
• On death, the lender submits its claim for the outstanding balance and the rest goes to your beneficiary
• When the loan is repaid, the assignment must be released — in writing, with the insurer

The release nobody remembers

When the loan is paid off, the assignment doesn't lift itself. Get a written release from the lender and confirm the insurer has recorded it.

Assignments left in place years after a loan was repaid cause real delays at claim time, when nobody at the lender knows what it refers to.

Practical points

• Size the policy to the loan and to your family's separate need, not just the loan
• Term coverage matched to the loan term is usually the efficient choice
• Start early — underwriting takes weeks and a closing won't wait
• Ask about temporary coverage while underwriting proceeds
• Keep the policy in force; a lapse can be a default under the loan agreement
• Review the assignment whenever the loan is refinanced or restructured