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Collateral assignment of life insurance

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Secured loans are often used by individuals needing financial resources for any reason, whether it’s to fund a business, remodel a home or pay medical bills. One asset that may be used for a secured loan is life insurance. Although there are pros and cons to this type of financial transaction, it can be an excellent way to access needed funding. Bankrate’s insurance editorial team discusses what a collateral assignment of life insurance is and when it might—or might not—be the best loan option for you.

What is collateral assignment of life insurance?

A collateral assignment of life insurance is a method of securing a loan by using a life insurance policy as collateral . If you pass away before the loan is repaid, the lender can collect the outstanding loan balance from the death benefit of your life insurance policy . Any remaining funds from the death benefit would then be disbursed to the policy’s designated beneficiary(ies).

Why use life insurance as collateral?

Collateral assignment of life insurance may be a useful option if you want to access funds without placing any of your assets, such as a car or house, at risk. If you already have a life insurance policy, it can be a simple process to assign it as collateral. You may even be able to use your policy as collateral for more than one loan, which is called cross-collateralization, if there is enough value in the policy.

Collateral assignment may also be a credible choice if your credit rating is not high, which can make it difficult to find attractive loan terms. Since your lender can rely on your policy’s death benefit to pay off the loan if necessary, they are more likely to give you favorable terms despite a low credit score.

Pros and cons of using life insurance as collateral

If you are considering collateral assignment, here are some pros and cons of this type of financial arrangement.

• It may be an affordable option, especially if your life insurance premiums are less than your payments would be for an unsecured loan with a higher interest rate.
• You will not need to place personal property, such as your home, as collateral, which you would need to do if you take out a secured loan. Instead, if you pass away before the loan is repaid, lenders will be paid from the policy’s death benefit. Any remaining payout goes to your named beneficiaries.
• You may find lenders who are eager to work with you since life insurance is generally considered a good choice for collateral.
• The amount that your beneficiaries would have received will be reduced if you pass away before the loan is paid off since the lender has first rights to death benefits.
• You may not be able to successfully purchase life insurance if you are older or in poor health.
• If you are using a permanent form of life insurance as collateral, there may be an impact on your ability to use the policy's cash value during the life of the loan. If the loan balance and interest payments exceed the cash value, it can erode the policy's value over time.

What types of life insurance can I use as collateral for a loan?

You may use either of the main types of life insurance— term and permanent —for collateral assignment. If you are using term life insurance, you will need a policy with a term length that is at least as long as the term of the loan. In other words, if you have 20 years to pay off the loan, the term insurance you need must have a term of at least 20 years.

Subcategories of permanent life insurance, such as whole life , universal life and variable life, may also be used. Depending on lender requirements, you may be able to use an existing policy or could purchase a new one for the loan. A permanent policy with cash value may be especially appealing to a lender, considering the added benefit of the cash reserves they could access if necessary.

How do I take out a loan using a collateral assignment of life insurance?

If you already have enough life insurance to use for collateral assignment, your next step is to find a lender who is willing to work with you. If you don’t yet have life insurance, or you don’t have enough, consider the amount of coverage you need and apply for a policy . You may need to undergo a medical exam and fill out an application .

Once your policy has been approved, ask your insurance company or agent for a collateral assignment form, which you will complete and submit with your loan application papers. The form names your lender as an assignee of the policy—meaning that they have a stake in its benefits for as long as the loan exists. You will also name beneficiaries or a single beneficiary, who will receive whatever is left over from the death benefits after the loan is repaid.

Note that you will need to stay current on your life insurance premium payments while the collateral assignment is active. This will be stated in the loan agreement, and failure to do so could have serious repercussions.

Alternatives to life insurance as collateral

If you are considering a collateral assignment of life insurance, there are a few alternative funding options that might be worth exploring. Since many factors determine each option, working with a financial advisor may be the best way to find the ideal solution for your situation.

Unsecured loan

Depending on your situation, an unsecured loan may be more affordable than a secured loan with life insurance as collateral. This is more likely to be the case if you have good enough credit to qualify for a low-interest rate without having to offer any type of collateral. There are many different types of unsecured loans, including credit cards and personal loans.

Secured loan

In addition to life insurance, there are other items you can use as collateral for a secured loan . Your home, a car or a boat, for example, could be used if you have enough equity in them. Typically, secured loans are easier to qualify for than unsecured, since they are not as risky for the lender, and you are likely to find a lower interest rate than you would with an unsecured loan. The flip side, of course, is that if you default on the loan, the lender can take the asset that you used to secure it and sell it to recoup their losses.

Life insurance loan

Some permanent life insurance policies accumulate cash value over time that you can use in different ways. If you have such a policy, you may be able to partially withdraw the cash value or take a loan against your cash value. However, there are implications to using the cash value in your life insurance policy, so be sure to discuss this solution with a life insurance agent or your financial advisor before making a decision.

Home equity line of credit (HELOC)

A home equity line of credit (HELOC) is a more flexible way to access funds than a standard secured loan. While HELOCs carry the downside of risking your home as collateral, you retain more control over the amount you borrow. Instead of receiving one lump sum, you will have access to a line of credit that you can withdraw from as needed. You will only have to pay interest on the actual amount borrowed.

Frequently asked questions

What is the best life insurance company, what type of loans are collateral assignments usually associated with, what are other common forms of collateral, what are the two types of life insurance assignments.

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Can You Assign Your Insurance Benefits to Someone Else?

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Most business insurance policies contain a so-called anti-assignment clause. This clause prohibits policyholders from transferring any of their rights under the policy to someone else. This means that the insured business cannot cede its right to collect claim payments to another party. However, laws in most states permit policyholders to transfer their rights to another party under certain circumstances.

Anti-Assignment Clause

In the standard ISO policies , the anti-assignment clause is located in a separate form called the Common Policy Conditions. These conditions apply to all coverages that are included in the policy. For instance, if a policy includes business auto , general liability , and commercial property coverages, the anti-assignment clause applies to all three coverages.

The clause is entitled Transfer of Your Rights and Duties Under This Policy. It includes the following provision:

Your rights and duties under this policy may not be transferred without our written consent except in the case of death of an individual named insured.

The anti-assignment clause prohibits the  named insured from transferring any of its rights or obligations under the policy to someone else without the insurer's permission. The only exception is if the named insured is an individual (sole proprietor) and he or she dies. An assignment is permitted in this case because a sole proprietorship and the individual owner are one and the same. If the individual dies, the business cannot survive unless it is sold to someone else.

An anti-assignment clause is intended to prevent the insurer from unwittingly assuming risks it never intended to take on. Commercial insurers review business insurance applicants carefully. Before they issue policies, underwriters consider the knowledge and experience of a company's owners and managerial staff. If a business is sold to someone else, the new owners may not be as skilled or attentive as the previous ones. From the insurer's perspective, the new owners are an unknown risk.

Post-Loss Assignments Permitted

The anti-assignment clause doesn't distinguish between assignments made before a loss and those made afterward. Even so, courts in most states have allowed policyholders to assign their rights to another party after a loss has occurred. Pre-loss assignments are still prohibited. Here is an example of a post-loss assignment of insurance benefits.

Victor operates a restaurant called Vital Vittles out of a building he owns. Late one January night two water pipes in the building freeze. The pipes subsequently burst, causing considerable water damage to Victor's building. Victor is forced to close his restaurant until the repairs are completed.

Victor hires a water damage contractor called Rapid Restoration to repair the damage to his building. He tells the contractor that he needs the repairs done quickly as he is anxious to reopen his restaurant. The contractor says that the repairs can be expedited if Victor signs over his rights under the policy to Rapid Restoration. The contractor will then proceed with the repairs and negotiate a claim settlement with Vital Vittles' commercial property insurer. Victor agrees to the assignment and the contractor begins the repair work.

While Vital Vittles' commercial property policy contains an anti-assignment clause, Victor has assigned his rights to Rapid Restoration after a loss has occurred. Thus, in most states, Victor's insurer cannot reject the assignment (assuming post-loss assignments are permitted in Victor's state).

Problems With Assignments of Benefits

In recent years, assignment of benefits (AOB) agreements have been problematic in some states, particularly Florida. Unscrupulous contractors have preyed on unsuspecting homeowners and business owners who have suffered water damage . Some contractors work alone while others operate in cahoots with crooked lawyers. In either event, the contractor convinces the policyholder to assign his or her rights under the policy over to the contractor. The contractor then exaggerates the cost of the repairs and collects the inflated amount from the insurer. The policyholder is left with a large claim on his or her loss history. When the policy expires, the insurer may refuse to renew it.

In the previous example, Victor has assigned his rights under the policy to Rapid Restoration. Suppose that Rapid Restoration completes only half of the repair work on Victor's building. The actual cost is $15,000 but the contractor submits a bill to the insurer for $30,000. Alternatively, the contractor never submits a bill but sues the insurer for $30,000. In either case, the insurer may refuse to pay on the basis that the contractor has committed insurance fraud. Victor cannot intervene because he has signed his rights over to the contractor. If the contractor is unsuccessful in its lawsuit against the insurer, it may demand payment from Victor's company.

Avoiding Problems With AOBs

As a business owner, you can avoid problems associated with AOBs and unscrupulous contractors by taking the following steps:

• Report any loss or accident directly to your insurer (or your agent or broker ). Notify your insurer immediately. Don't allow a contractor to do the notification on your behalf.
• Take photos of the damage.
• Don't allow any contractor to begin work until an insurance adjuster has documented the damage
• Vet contractors thoroughly before hiring them. Make sure they are properly licensed. If your area has suffered a natural disaster, watch out for construction scams.
• Don't sign an AOB unless you have reviewed it carefully. If you don't understand it, ask your agent, insurer, or attorney for assistance.
• If your contractor won't do any work until you've signed an AOB, find another contractor.

AOBs in Health Insurance

Assignment of benefit agreements are common in health insurance. Patients are often asked to agree to such clauses before they receive treatment from a physician, hospital, or another healthcare provider. The assignment of benefits clause transfers a patient's right to collect benefits under his or her health policy to the provider. By signing the document, the patent agrees that payments will be made directly to the provider for the services rendered. The clause states that the patient is ultimately responsible for the charges if the insurer fails to pay.

Once the treatment has been performed, the provider submits the AOB along with a claim to the patient's health insurer. The insurer pays the provider for services rendered to the patient.

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What Is Collateral Assignment of Life Insurance?

Collateral assignment of life insurance designates a lender as the assignee of a policy, granting them the right to part or all of the death benefit until the loan is repaid.

Nathan Paulus

Director of Content Marketing, MoneyGeek

Nathan Paulus is the Head of Content Marketing at MoneyGeek, with nearly 10 years of experience researching and creating content related to personal finance and financial literacy. Paulus has a bachelor's degree in English from the University of St. Thomas, Houston. He enjoys helping people from all walks of life build stronger financial foundations.

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Content Editor

Casie McCoskey is a professional editor passionate about providing people with accessible information on personal finance. Before MoneyGeek, she worked in the legal field, drafting and editing briefs and motions.

Quality Verified

MoneyGeek is dedicated to providing trustworthy information to help you make informed financial decisions. Each article is edited, fact-checked and reviewed by industry professionals to ensure quality and accuracy.

Updated: June 5, 2024

• How It Works
• Overview of Application Process

Pros and Cons

• Impact on Beneficiaries
• Alternatives

Related Content

Advertising & Editorial Disclosure

Collateral assignment of life insurance is an arrangement where a policyholder uses the face value of their life insurance policy, which can be a term or permanent life insurance policy, as collateral to secure a loan. If the policyholder dies before they pay off the loan, the lender is prioritized to receive a portion of the death benefit equivalent to the outstanding loan balance. The remaining benefit then goes to the policy's beneficiaries. This agreement ensures that life insurance collateral assignment acts as a safety net for both the lender and the beneficiaries.

• Collateral assignment involves using a life insurance policy as security for a loan, where the lender has a claim on the death benefit if the borrower defaults or passes away before repaying the loan.
• The lender receives priority over the death benefit, which means they are paid first from the policy's payout before any beneficiaries if the loan remains unpaid.
• Various life insurance policies, including term, whole and universal, can be used for collateral assignment, depending on the insurance company's policies and the policy's value.
• If a life insurance policy lapses or is canceled during a collateral assignment, it can breach the loan agreement, potentially resulting in immediate repayment demands.

How Collateral Assignment of Life Insurance Works

The collateral assignment allows you to use your life insurance policy as security for a loan. The process involves legally designating your policy as collateral, which means if you pass away before fully repaying the loan, the lender can claim the death benefit to cover the remaining balance. You start by choosing either a term policy or whole life insurance and then complete a collateral assignment agreement. This agreement is legally binding and sets the terms for the lender to access the death benefit .

For your beneficiaries, the assignment of your life insurance policy as collateral could reduce the death benefit they receive. If you die with an outstanding loan balance, the lender is paid first from the policy's proceeds. Any remaining amount goes to your beneficiaries only after the loan is settled.

For example, a policyholder with a $500,000 policy uses their life insurance as collateral for a $200,000 loan. If the policyholder dies before settling the loan, the lender will receive $200,000 from the policy's death benefit. Meanwhile, the remaining $300,000 gets disbursed to the policy's beneficiaries.

Roles of the Policyholder, Lender and Insurance Provider

Role of the Policyholder

• Ensure consistent premium payments to keep the policy active and in force.
• Inform the lender of any policy changes, such as lapses or surrenders.
• Understand that active management upholds the collateral agreement's integrity.

Role of the Lender

• Accept the life insurance policy as collateral.
• Right to recover owed amounts from the policy's death benefit if the policyholder dies before loan repayment.
• Priority claim on the death benefit, with remaining funds disbursed to beneficiaries.
• Responsible for releasing the assignment after full loan repayment.

Role of the Insurance Provider

• Approve or reject the collateral assignment of the policy.
• Evaluate and ensure compliance with policy terms.
• Officially record the assignment as part of the policy.

Applying for Collateral Assignment

Applying for collateral assignment is a process moderated by your life insurance company designed to secure loans using your life insurance policy as collateral. It involves a series of steps:

Obtain a Collateral Assignment Form

Request a collateral assignment form from your life insurance provider. This form is vital for designating the lender as a collateral beneficiary for the loan amount. Ensure you obtain the correct form, as forms vary based on policy type and insurer.

Fill Out the Form Correctly

Complete the form with accurate details, including policy number, loan amount and lender information. Pay close attention to all sections to avoid errors that could delay or invalidate the assignment. Incomplete or incorrect information can lead to processing delays or rejection.

Sign the Paperwork

Ensure both the policyholder and lender sign the form, confirming the agreement. This dual signature legally binds both parties to the terms of the collateral assignment. Any discrepancy in signatures may question the form's validity.

Submit the Completed Form

Submit the signed form back to the insurance company for processing. Consider using a traceable delivery method for submission to confirm receipt. Delays in submission can impact the timeline of the loan approval process.

Await Approval or Rejection From the Insurance Company

Wait for the insurer to review and approve or reject the collateral assignment. The insurer may request additional information or clarification, which can extend the approval timeline.

Receive a Letter of Acknowledgment

You and your lender will receive a letter of acknowledgment from the insurer if your collateral assignment application is approved.

Obtaining Required Documentation

The required documentation for collateral assignment of life insurance is straightforward. Typically, you'll need to provide two main types of documents for the assignment of a life insurance policy as collateral:

• Collateral Assignment Form: This form is critical because it officially transfers a portion of your life insurance policy benefits to the lender as collateral. It demonstrates to the lender that you have taken the steps to secure your loan against your life insurance policy.
• Original Life Insurance Policy and Proof of Loan: Lenders may require your original life insurance policy to ensure it is valid and enforceable. Proof of the loan agreement or obligation, such as a mortgage note or other loan document, is also commonly required. This establishes the legitimacy of your loan and substantiates the life insurance collateral assignment.

If you need more clarification about documentation requirements, contact your lender to confirm the necessary details to avoid process delays.

Pros and Cons of Collateral Assignment

Using life insurance as collateral can offer a range of benefits and potential drawbacks. Collateral assignment of a policy allows you to secure loans and is often safer than using physical assets as collateral. However, you should also note the inherent risks, primarily that the lender retains the first right to your policy’s death benefit upon your death.

• Lower interest rates on loans.
• Allows you to use the policy and not physical assets as collateral.
• The cash value of your insurance policy continues to grow.
• The lender has the first right to the death benefit.
• Failure to repay the loan can reduce or even eliminate the death benefit.
• Any lapse or cancellation of the policy may lead to violating the loan terms.

Impact of Collateral Assignment on Beneficiaries

While the collateral assignment of life insurance has its benefits, it’s important to remember that it can impact the amount your beneficiaries receive. If you pass away with an outstanding balance on your loan:

Your Lender Will Be Paid First

In the collateral assignment arrangement, the lender is designated as the collateral beneficiary holding the primary claim to the death benefit for the outstanding loan amount. This means if you pass away before fully repaying the loan, the lender is entitled to receive payment from the death benefit first. The amount collected by the lender is limited to the remaining loan balance.

Any Remaining Death Benefit Will Be Disbursed to Your Beneficiaries

After the lender's claim is satisfied, the remaining death benefit is disbursed to your policy’s designated beneficiaries. The amount they receive depends on the loan balance at the time of your death. If the loan balance is substantial, your beneficiaries will receive significantly less than the policy's total death benefit.

This structure underscores the importance of carefully considering life insurance collateral loans and their impact on future financial planning. Policyholders using life insurance as collateral need to understand the terms set forth by loan companies that accept it.

Alternatives to Collateral Assignment

Alternatives to collateral assignment include personal loans , home equity loans or surrendering the life insurance policy for its cash value. None of these options require using life insurance as collateral, and each offers different benefits and risks compared to using life insurance as collateral.

FAQ About Collateral Assignment

These questions cover various topics related to collateral assignments, including their requirements, implications for beneficiaries and what happens in different scenarios.

A collateral assignment is a contractual arrangement in which a borrower uses their life insurance policy as collateral for a loan. This agreement grants the lender rights to the policy’s death benefit. The lender is prioritized over other beneficiaries until the loan is repaid in full.

In the context of a life insurance collateral assignment, the collateral is the policy's death benefit. This setup allows lenders to be listed as collateral beneficiaries, guaranteeing that they can recover the outstanding loan balance from the death benefit in the event of the borrower’s death before the debt is fully paid.

In a life insurance contract, a collateral assignment allocates the policy's death benefit as security for a loan. This means that if the borrower dies before repaying the loan, the lender, as the collateral assignee of the life insurance, can claim the owed amount from the death benefit. The remaining balance, if any, goes to the designated beneficiaries, ensuring the loan is covered without affecting other assets.

Collateral assignment allows a lender to claim the life insurance death benefit for an outstanding loan amount while naming a life insurance beneficiary designated who receives the death benefit. The lender's claim is prioritized over the beneficiaries' in collateral assignment.

Most types of life insurance policies , including term, whole and universal life, can be used for collateral assignment, provided the insurance company allows it and the policy has sufficient value.

Yes, the policyholder can change beneficiaries after a collateral assignment, but the lender's right to the death benefit amount remains until the loan is repaid. This ensures the lender's position as a collateral beneficiary.

Canceling your life insurance policy before repaying the debt can lead to a breach of the collateral assignment loan agreement. This action may prompt the lender to increase your interest rate or demand immediate repayment of the outstanding loan balance.

These related sections offer additional insights into concepts and alternatives connected to collateral assignments and life insurance:

Using Collateral for a Personal Loan — This link explains how to use various types of collateral for securing a personal loan, providing a broader context to the specific use of life insurance as collateral.

Term vs. Permanent Life Insurance — This resource compares term and permanent life insurance, helping to understand which policies can be used for collateral assignments.

Permanent Life Insurance — This page details permanent life insurance, a type commonly used in collateral assignments due to its cash value component.

Life Insurance Calculator — This page helps you calculate the appropriate amount of life insurance coverage needed, which is crucial when considering using a policy for collateral.

About Nathan Paulus

Nathan Paulus is the Head of Content Marketing at MoneyGeek, with nearly 10 years of experience researching and creating content related to personal finance and financial literacy.

Paulus has a bachelor's degree in English from the University of St. Thomas, Houston. He enjoys helping people from all walks of life build stronger financial foundations.

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What Is a Collateral Assignment of Life Insurance?

Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University.

A collateral assignment of life insurance is a conditional assignment appointing a lender as an assignee of a policy. Essentially, the lender has a claim to some or all of the death benefit until the loan is repaid. The death benefit is used as collateral for a loan.

The advantage to using a collateral assignee over naming the lender as a beneficiary is that you can specify that the lender is only entitled to a certain amount, namely the amount of the outstanding loan. That would allow your beneficiaries still be entitled to any remaining death benefit.

Lenders commonly require that life insurance serve as collateral for a business loan to guarantee repayment if the borrower dies or defaults. They may even require you to get a life insurance policy to be approved for a business loan.

Key Takeaways

• The borrower of a business loan using life insurance as collateral must be the policy owner, who may or may not be the insured.
• The collateral assignment helps you avoid naming a lender as a beneficiary.
• The collateral assignment may be against all or part of the policy's value.
• If any amount of the death benefit remains after the lender is paid, it is distributed to beneficiaries.
• Once the loan is fully repaid, the life insurance policy is no longer used as collateral.

How a Collateral Assignment of Life Insurance Works

Collateral assignments make sure the lender gets paid only what they are due. The borrower must be the owner of the policy, but they do not have to be the insured person. And the policy must remain current for the life of the loan, with the policy owner continuing to pay all premiums . You can use either term or whole life insurance policy as collateral, but the death benefit must meet the lender's terms.

A permanent life insurance policy with a cash value allows the lender access to the cash value to use as loan payment if the borrower defaults. Many lenders don't accept term life insurance policies as collateral because they do not accumulate cash value.

Alternately, the policy owner's access to the cash value is restricted to protect the collateral. If the loan is repaid before the borrower's death, the assignment is removed, and the lender is no longer the beneficiary of the death benefit.

Insurance companies must be notified of the collateral assignment of a policy. However, other than their obligation to meet the terms of the contract, they are not involved in the agreement.

Example of Collateral Assignment of Life Insurance

For example, say you have a business plan for a floral shop and need a $50,000 loan to get started. When you apply for the loan, the bank says you must have collateral in the form of a life insurance policy to back it up. You have a whole life insurance policy with a cash value of $65,000 and a death benefit of $300,000, which the bank accepts as collateral.

So, you then designate the bank as the policy's assignee until you repay the $50,000 loan. That way, the bank can ensure it will be repaid the funds it lent you, even if you died. In this case, because the cash value and death benefit is more than what you owe the lender, your beneficiaries would still inherit money.

Alternatives to Collateral Assignment of Life Insurance

Using a collateral assignment to secure a business loan can help you access the funds you need to start or grow your business. However, you would be at risk of losing your life insurance policy if you defaulted on the loan, meaning your beneficiaries may not receive the money you'd planned for them to inherit.

Consult with a financial advisor to discuss whether a collateral assignment or one of these alternatives may be most appropriate for your financial situation.

Life insurance loan (policy loan) : If you already have a life insurance policy with a cash value, you can likely borrow against it. Policy loans are not taxed and have less stringent requirements such as no credit or income checks. However, this option would not work if you do not already have a permanent life insurance policy because the cash value component takes time to build.

Surrendering your policy : You can also surrender your policy to access any cash value you've built up. However, your beneficiaries would no longer receive a death benefit.

Other loan types : Finally, you can apply for other loans, such as a personal loan, that do not require life insurance as collateral. You could use loans that rely on other types of collateral, such as a home equity loan that uses your home equity.

What Are the Benefits of Collateral Assignment of Life Insurance?

A collateral assignment of a life insurance policy may be required if you need a business loan. Lenders typically require life insurance as collateral for business loans because they guarantee repayment if the borrower dies. A policy with cash value can guarantee repayment if the borrower defaults.

What Kind of Life Insurance Can Be Used for Collateral?

You can typically use any type of life insurance policy as collateral for a business loan, depending on the lender's requirements. A permanent life insurance policy with a cash value allows the lender a source of funds to use if the borrower defaults. Some lenders may not accept term life insurance policies, which have no cash value. The lender will typically require the death benefit be a certain amount, depending on your loan size.

Is Collateral Assignment of Life Insurance Irrevocable?

A collateral assignment of life insurance is irrevocable. So, the policyholder may not use the cash value of a life insurance policy dedicated toward collateral for a loan until that loan has been repaid.

What is the Difference Between an Assignment and a Collateral Assignment?

With an absolute assignment , the entire ownership of the policy would be transferred to the assignee, or the lender. Then, the lender would be entitled to the full death benefit. With a collateral assignment, the lender is only entitled to the balance of the outstanding loan.

The Bottom Line

If you are applying for life insurance to secure your own business loan, remember you do not need to make the lender the beneficiary. Instead you can use a collateral assignment. Consult a financial advisor or insurance broker who can walk you through the process and explain its pros and cons as they apply to your situation.

Progressive. " Collateral Assignment of Life Insurance ."

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Kansas Legislative Research Department. " Collateral Assignment of Life Insurance Proceeds ."

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Understanding Life Insurance Assignments: Your Complete Guide

A life insurance assignment allows you to transfer the rights of your policy, either temporarily or permanently.

Learn how collateral and absolute assignments can be used for loan collateral, estate planning, and other financial purposes.

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What is a collateral assignment.

Collateral assignments are used to secure a lender’s financial interest in your policy in exchange for lending you money.

If you die, the collateral assignment allows the lender to collect your policy’s death benefit up to the amount of the outstanding loan balance.

How Do Collateral Assignments Work?

A typical scenario involves taking out a business loan .

The lender may require a life insurance policy as collateral.

The type of life insurance policy used, whether a term, whole life, or universal life doesn’t matter.

The insurance policy will pay off the balance if you die while the loan is outstanding.

One of the most common uses for collateral assignments is with SBA loans , especially if you do not have other assets to post as collateral.

The collateral assignment applies to the entire policy, including any life insurance rider benefits that may be included.

The Collateral Assignment Process: A Step-by-Step Guide

The process is similar whether you are adding the assignment to an existing policy or buying new coverage.

There are two parties to a collateral assignment.

• Assignor – Is the owner of the life insurance policy
• Assignee – Is the lender

Life insurance companies have standardized forms used for this purpose.

• The owner completes the form and sends it to the lender for review and signature.
• Once completed by the lender, the form is sent to the insurance company.
• The insurance company records the assignment and confirms to the owner and lender that it is complete.

This may all seem confusing if you haven’t used an assignment before, but the reality is that most life insurers make it pretty easy to complete.

Releasing a Collateral Assignment

When you pay off your loan, you have the right to have the collateral assignment released.

It’s a simple process :

• The policy owner completes the form and sends it to the lender.
• The lender signs off on the release. Many companies require a notary as a witness. The lender may return the form to the owner or the insurance company.
• Once completed and returned to the insurance company, the release is recorded, and all parties are notified.

Companies typically complete this process in about a week, and it’s a good idea to confirm everything with the home office to avoid potential issues.

Your agent can help with this.

What Happens to a Collateral Assignment if You Die?

How do collateral assignments work when you die?

Your beneficiary will file a death claim with the life insurer at some point.

Collateral Assignment Tip # 1

If your beneficiary is a loved one, it’s a good idea to let them know that your policy has a collateral assignment so they are not surprised when they file the claim.

Here’s an example of how a death claim with a collateral assignment works:

• Policy Face Amount = $5,000,000
• Beneficiary = Your Spouse
• Original Bank Loan = $200,000
• Outstanding Loan Balance at Death = $100,000

What happens next?

• Your beneficiary will file the death claim with the life insurance company.
• The life insurance company will review the claim and see a collateral assignment attached to your policy.
• The life insurer contacts the lender for an updated payoff figure.
• Payoff amounts are sent directly to the lender.
• Your beneficiary receives the balance of the policy death benefit .

For the above example, your lender would receive $100,000, and your beneficiary would receive the remaining $4,900,000.

Collateral Assignment Tip # 2

NEVER name your lender directly as a beneficiary. If you do, the lender will receive the entire death benefit, and your intended beneficiary will have to go through the lender to receive their share.

Collateral Assignments and Health Issues

While lenders may want a life insurance policy as collateral, obtaining life insurance can sometimes be difficult if the insured has substantial health issues .

If you have an existing life insurance policy in effect, you can use that for the assignment.

Another option that exists in some states is contingent coverage.

Contingent coverage is a one-year policy that you can renew.

The policy will exclude death from the known health issue but provide coverage for new health issues that develop or from accidental deaths .

Many lenders accept this coverage when it’s the only option available. And we’ve also seen lenders waive the collateral assignment requirement at times.

What is an Absolute Assignment?

An absolute assignment is a change of ownership of the policy.

When you want to permanently relinquish your rights to the life insurance policy, an absolute assignment is used.

Examples where absolute assignments are used include:

Life Insurance Settlements

1035 exchange, gifting life insurance to charities, irrevocable life insurance trusts (ilit), business insurance planning.

With this transaction, you are selling your life insurance policy to a third party.

If it is a term policy, you would convert a term policy to permanent insurance before it is sold. In some cases, a company will buy the term policy.

Another example may involve admitting seniors to a nursing home, where the nursing home may take over the policy you have.

A 1035 exchange is a tax-free transfer of cash value from universal life or whole life policy to another similar policy.

You can use absolute assignments to transfer your policy to your favorite charity.

You use absolute assignments to transfer your policy to an ILIT permanently.

An example would be a survivorship policy you and your spouse own that you are transferring to the trust.

Many other potential issues may arise with transfers to an ILIT that are beyond the scope of this article.

If you purchase key person life insurance on an employee, absolute assignments transfer ownership to the employee.

Many times, this happens if the employee leaves the company or retires.

You may have a policy permanently assigned to a nursing home or assisted living facility to help with long-term care expenses.

How Do Absolute Assignments Work?

Life insurance companies have forms used for Absolute Assignments.

Absolute assignment forms require:

• Current owner name, address, and tax ID information.
• New owner name, address, and tax ID information.
• Relationship to the proposed insured.
• Spousal consent in some states and situations.

The completed forms are submitted to the insurance company, recorded, and confirmations are sent to all parties.

Frequently Asked Questions About Life Insurance Assignments

You may have questions about your life insurance assignment and how it works.

The following are general guidelines, as each situation is uniquely different.

Can the collateral assignment change the beneficiary?

No, the collateral assignment does not change the beneficiary.

The life insurance assignment gives the lender the right to receive proceeds equal to their outstanding loan balance.

Can a business be a beneficiary in a collateral assignment of life insurance?

A business can be the beneficiary of a life insurance policy that is collaterally assigned.

Final Words

Life insurance assignments are common for absolute and collateral assignments.

What is most important is that you understand what is involved with this process.

That’s where we’ll help you make the best decision for your life insurance.

There is never any pressure or obligation with our life insurance service.

Please take a few minutes to submit your quote request today. Thank you.

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What Is A Collateral Assignment Of Life Insurance?

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A collateral assignment is sometimes a necessity if you’re applying for larger financing amounts such as a mortgage or business loan.

But what is a collateral assignment and how do you go about getting it on your life insurance policy? 

In this article, we’ll cover what collateral assignment is, how you can add it to your life insurance, and what alternatives there are out there. 

What Is Collateral Assignment? 

A collateral assignment is a process by which a person uses their life insurance policy as collateral for a secured loan.

In simple terms, collateral assignment is reassigning priorities for who gets paid the death benefit of your life insurance policy.

What Is a death benefit?

A death benefit or face value of a life insurance contract is the amount of money that your beneficiaries will receive from your policy when you die.

Once you apply for collateral assignment and it’s approved, your specified debtor (the loan provider) will be paid first and then your beneficiaries will receive what is left over in your life insurance policy.

This is different from using your cash value to loan money as you are taking out a loan from another financial institution and using your policy as a guarantee that you’ll cover any debt when you die. 

For example, let’s say you want to take out a secured loan from your local bank and want to use your life insurance policy as a collateral assignment.

In this situation, you’d still have to pay back any debt you have with interest during the loan period. 

However, the life insurance policy would be used if the borrower dies and there was an outstanding loan balance remaining. 

Secured Loans vs. Unsecured Loans

Secured loans are debts that are backed by assets that a lender can claim if the debt isn’t repaid. These types of loans often offer better interest rates and more generous payment terms.

Unsecured loans are debts that don’t have collateral. These types of loans are more expensive to repay and considered riskier than secured loans.

Source: Pexels

How Does Applying for Collateral Assignment Work?

The process for getting collateral assignments for life insurance is the same as when you apply for new life insurance coverage. 

All you’ll be doing is indicating to your life insurance provider that your lender will be given priority for the amount of money you have borrowed through them.

There is an:

Application process.

Underwriting process.

Offer that you’ll receive.

You’ll be required to name beneficiaries as well as indicate ownership of the life insurance policy in the collateral assignment form which will be provided by your life insurance company.

This is because you’re changing the terms of your payout and your life insurance provider will need to follow these instructions once you die.

NB Some insurance companies don’t offer collateral assignment on new loans and generally only provide this feature to an existing life insurance policy.

You should check beforehand to see what will be required to apply for a collateral assignment. If you need help finding plans that offer this, send an email to a licensed insurance agent today.

Once you’ve assigned a new collateral assignee to your life insurance policy, they will be entitled to lay a claim on your death benefit for any debt you have with them.

For example, let’s say you take out a collateral assignment life insurance policy worth $200,000 for a loan of $75,000 over 7 years at an interest rate of 18%.

If you die after five years, based on these figures, you’ll still have $41,231.02 owed on your loan.

Your $200,000 life insurance plan will be used to cover this and your beneficiaries will receive the remaining $158 768.98 from your life insurance policy.

Your lender is only allowed to take the amount outstanding on the debt owed and cannot take more. 

What about Missed Payments and Cash Value Life Insurance?

If you have a permanent life policy with a cash value account, sometimes called cash value life insurance, your lender will have access to it to cover missed payments on your loan.

For example, let’s say you miss a payment on your loan and have a collateral assignment. Your lender will be able to access your cash value account and withdraw that month’s payment to cover your debt.

Who Can You Add as a Collateral Assignee?

You can add any person or institution as a collateral assignee to your life insurance policy if you owe them money.

This can include banks, lenders, private individuals, businesses, or credit card companies. 

The most common collateral assignments are for business loans and mortgages. This is because they are loans for high amounts that are paid off over several years. 

In fact, some banks and financial lenders may require that you add them as collateral assignees when you apply for any of the financing options mentioned below.

Common Collateral Assignees Include:

💵 Bank loans

💳 Credit cards

🏡 Mortgages

💼 Business loans

What Do I Do If I’ve Paid Off My Debt?

If you’ve managed to pay off your debt - firstly, congratulations! Secondly, you’ll want to notify your life insurance company that you’ll be changing your collateral assignments on your life policy.

While there is no legal claim that a company can make to debts that aren’t owed anymore, there may be a hold up in paying out the death benefit to your beneficiaries and other collateral assignees.

Life insurance companies will have to figure out who must be paid first, according to the order stated in your collateral assignment terms.

In general, life insurance policies will settle claims within 24 hours of being notified of a policyholder’s death.

The process can be delayed if you do not release your collateral assignees from your life insurance contract. 

Tips to Make Sure Your Life Policy Is Paid Out Quickly

Here are some tips if you want your beneficiary claims to be handled as fast as possible:

1) Keep a copy of your life insurance policy and policy number in a safe place or with your lawyer, financial advisor, or estate planner.

2) Speak to your beneficiaries about your policies and give them the contact details of the relevant life insurance company.

3) Make sure your life insurance contract is updated to reflect your latest list of beneficiaries.

4) Make sure you have your beneficiaries' details listed in the contract or with your lawyer.

The Benefits of Using Collateral Assignment of Life Insurance

While adding a collateral assignment to your current life insurance policy may require an application, paperwork, and time, there are benefits:

Many lenders like it: Banks and financial institutions sometimes prefer it when applicants use their life insurance policy as collateral for a loan. This is because they know that their debt will be serviced long-term by your insurance company which makes their loan to you a lower risk.

Your private property won’t be jeopardized: The last thing you want when you go into debt is to put your personal items, such as your car, investments, or home on the line as collateral. Using collateral assignment is an alternative to this and can protect you in the event that you can’t service your debt.

It can be affordable for some people: If you’re in good health and young, you may be paying affordable rates for permanent life cover. In situations like this, it can make sense to use your life cover as collateral for debts you’ve incurred.

What Are Some Alternatives to Collateral Assignment?

Term Life Insurance: Getting a term life insurance contract to cover specific debts is one way of ensuring your estate and family are protected when you die.

There are multiple types of term life insurance plans and they are more affordable than permanent life insurance. This makes options like level term life insurance and decreasing term life insurance ideal for different types of debts you may have over your lifetime.

What Is Term Life?

Term life is a temporary life coverage option that lasts for a specific period of time. It is different from permanent life insurance which lasts until you die or you stop paying premiums.

Term life contracts are typically between 5 to 20 years, however, you can get renewable term life plans and even a forty-year term life plan .

Borrow from your life insurance: If you have a permanent life insurance policy, such as universal, whole, or indexed life cover, you can borrow money from your cash value account. 

However, keep in mind that you’ll be required to pay interest on any amount that you borrow and any amount of debt incurred will be deducted from your policy’s death benefit when you die.

What Is Cash Value?

Cash value is a feature of permanent life insurance plans that policyholders can contribute additional money toward while they have a policy in force.

This money is set aside in a cash value account which is tax-deferred and can be used in a number of ways.

In some cases, if your policy allows it, you can end your contract and get the cash surrender value of it. This amount is usually much less than the value of your total life insurance contract. 

Our Verdict on Collateral Assignment

Many banks, lenders, and financial institutions want long-term guarantees that you’ll be able to service your debt if anything happens to you.

In some situations, getting collateral assignments on your life insurance to cover these debts is a good option for people who are trying to access finance from these institutions. 

However, there is a risk that your death benefit payout may be delayed for your beneficiaries if you don’t keep your different collateral assignees up to date.

If you already have a life insurance policy, you should contact your provider to find out what the process is and what you’ll need to do to change the collateral assignees on your policy.

If you don’t have a policy yet, our advice is to look at all of your options before you decide to take a permanent life insurance contract with a collateral assignment.

There are alternatives out there that are more affordable if you’re looking to protect your family and estate from debt.

Term life is one such option that is adaptable to your life and easy to get. 

For example, a decreasing term life insurance policy might be the right choice for someone who has recently bought a home and wants to cover their mortgage while they pay it back.

Another option is final expense insurance, which is a permanent life policy for smaller amounts, usually under $50,000.

With final expense insurance, your beneficiaries can pay for anything they want, including any debts you may have had in your life.

The process for applying is simple and you won't have to go through a medical exam or intensive underwriting as you would with traditional permanent life insurance. 

If you need any assistance with finding, comparing, or learning about the different life insurance options to cover your debts, speak to one of our expert advisors today at 1-888-912-2132 or [email protected] .

Where Can I Learn More about Life Insurance?

If you’re looking to learn more about life insurance, different kinds of coverage, or costs, visit our life insurance hub to find our latest articles.

We do the research so that you don’t have to and our articles cover complicated topics like what is a cash value account, what is key person insurance, or how long life insurance takes to pay out a death benefit.  

If you need help with quotes, try out a life insurance quote finder or reach out to us via email at [email protected] to get in touch with a licensed life insurance agent for your state.

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Assignment of benefits: what you need to know.

• August 17, 2022
• Steven Schwartzapfel

Insurance can be useful, but dealing with the back-and-forth between insurance companies and contractors, medical specialists, and others can be a time-consuming and ultimately unpleasant experience. You want your medical bills to be paid without having to act as a middleman between your healthcare provider and your insurer.

However, there’s a way you can streamline this process. With an assignment of benefits, you can designate your healthcare provider or any other insurance payout recipient as the go-to party for insurance claims. While this can be convenient, there are certain risks to keep in mind as well.

Below, we’ll explore what an assignment of insurance benefits is (as well as other forms of remediation), how it works, and when you should employ it. For more information, or to learn whether you may have a claim against an insurer, contact Schwartzapfel Lawyers now at 1-516-342-2200 .

What Is an Assignment of Benefits?

An assignment of benefits (AOB) is a legal process through which an insured individual or party signs paperwork that designates another party like a contractor, company, or healthcare provider as their insurance claimant .

Suppose you’re injured in a car accident and need to file a claim with your health insurance company for medical bills and related costs. However, you also need plenty of time to recover. The thought of constantly negotiating between your insurance company, your healthcare provider, and anyone else seems draining and unwelcome.

With an assignment of benefits, you can designate your healthcare provider as your insurance claimant. Then, your healthcare provider can request insurance payouts from your healthcare insurance provider directly.

Through this system, the health insurance provider directly pays your physician or hospital rather than paying you. This means you don’t have to pay your healthcare provider. It’s a streamlined, straightforward way to make sure insurance money gets where it needs to go. It also saves you time and prevents you from having to think about insurance payments unless absolutely necessary.

What Does an Assignment of Benefits Mean?

An AOB means that you designate another party as your insurance claimant. In the above example, that’s your healthcare provider, which could be a physician, hospital, or other organization.

With the assignment of insurance coverage, that healthcare provider can then make a claim for insurance payments directly to your insurance company. The insurance company then pays your healthcare provider directly, and you’re removed as the middleman.

As a bonus, this system sometimes cuts down on your overall costs by eliminating certain service fees. Since there’s only one transaction — the transaction between your healthcare provider and your health insurer — there’s only one set of service fees to contend with. You don’t have to deal with two sets of service fees from first receiving money from your insurance provider, then sending that money to your healthcare provider.

Ultimately, the point of an assignment of benefits is to make things easier for you, your insurer, and anyone else involved in the process.

What Types of Insurance Qualify for an Assignment of Benefits?

Most types of commonly held insurance can work with an assignment of benefits. These insurance types include car insurance, healthcare insurance, homeowners insurance, property insurance, and more.

Note that not all insurance companies allow you to use an assignment of benefits. For an assignment of benefits to work, the potential insurance claimant and the insurance company in question must each sign the paperwork and agree to the arrangement. This prevents fraud (to some extent) and ensures that every party goes into the arrangement with clear expectations.

If your insurance company does not accept assignments of benefits, you’ll have to take care of insurance payments the traditional way. There are many reasons why an insurance company may not accept an assignment of benefits.

To speak with a Schwartzapfel Lawyers expert about this directly, call 1-516-342-2200 for a free consultation today. It will be our privilege to assist you with all your legal questions, needs, and recovery efforts.

Who Uses Assignments of Benefits?

Many providers, services, and contractors use assignments of benefits. It’s often in their interests to accept an assignment of benefits since they can get paid for their work more quickly and make critical decisions without having to consult the insurance policyholder first.

Imagine a circumstance in which a homeowner wants a contractor to add a new room to their property. The contractor knows that the scale of the project could increase or shrink depending on the specifics of the job, the weather, and other factors.

If the homeowner uses an assignment of benefits to give the contractor rights to make insurance claims for the project, that contractor can then:

• Bill the insurer directly for their work. This is beneficial since it ensures that the contractor’s employees get paid promptly and they can purchase the supplies they need.
• Make important decisions to ensure that the project completes on time. For example, a contract can authorize another insurance claim for extra supplies without consulting with the homeowner beforehand, saving time and potentially money in the process.

Practically any company or organization that receives payments from insurance companies may choose to take advantage of an assignment of benefits with you. Example companies and providers include:

• Ambulance services
• Drug and biological companies
• Lab diagnostic services
• Hospitals and medical centers like clinics
• Certified medical professionals such as nurse anesthetists, nurse midwives, clinical psychologists, and others
• Ambulatory surgical center services
• Permanent repair and improvement contractors like carpenters, plumbers, roofers, restoration companies, and others
• Auto repair shops and mechanic organizations

Advantages of Using an Assignment of Benefits

An assignment of benefits can be an advantageous contract to employ, especially if you believe that you’ll need to pay a contractor, healthcare provider, and/or other organization via insurance payouts regularly for the near future.

These benefits include but are not limited to:

• Save time for yourself. Again, imagine a circumstance in which you are hospitalized and have to pay your healthcare provider through your health insurance payouts. If you use an assignment of benefits, you don’t have to make the payments personally or oversee the insurance payouts. Instead, you can focus on resting and recovering.
• Possibly save yourself money in the long run. As noted above, an assignment of benefits can help you circumvent some service fees by limiting the number of transactions or money transfers required to ensure everyone is paid on time.
• Increased peace of mind. Many people don’t like having to constantly think about insurance payouts, contacting their insurance company, or negotiating between insurers and contractors/providers. With an assignment of benefits, you can let your insurance company and a contractor or provider work things out between them, though this can lead to applications later down the road.

Because of these benefits, many recovering individuals, car accident victims, homeowners, and others utilize AOB agreements from time to time.

Risks of Using an Assignment of Benefits

Worth mentioning, too, is that an assignment of benefits does carry certain risks you should be aware of before presenting this contract to your insurance company or a contractor or provider. Remember, an assignment of benefits is a legally binding contract unless it is otherwise dissolved (which is technically possible).

The risks of using an assignment of benefits include:

• You give billing control to your healthcare provider, contractor, or another party. This allows them to bill your insurance company for charges that you might not find necessary. For example, a home improvement contractor might bill a homeowner’s insurance company for an unnecessary material or improvement. The homeowner only finds out after the fact and after all the money has been paid, resulting in a higher premium for their insurance policy or more fees than they expected.
• You allow a contractor or service provider to sue your insurance company if the insurer does not want to pay for a certain service or bill. This can happen if the insurance company and contractor or service provider disagree on one or another billable item. Then, you may be dragged into litigation or arbitration you did not agree to in the first place.
• You may lose track of what your insurance company pays for various services . As such, you could be surprised if your health insurance or other insurance premiums and deductibles increase suddenly.

Given these disadvantages, it’s still wise to keep track of insurance payments even if you choose to use an assignment of benefits. For example, you might request that your insurance company keep you up to date on all billable items a contractor or service provider charges for the duration of your treatment or project.

For more on this and related topic, call Schwartzapfel Lawyers now at 1-516-342-2200 .

How To Make Sure an Assignment of Benefits Is Safe

Even though AOBs do carry potential disadvantages, there are ways to make sure that your chosen contract is safe and legally airtight. First, it’s generally a wise idea to contact knowledgeable legal representatives so they can look over your paperwork and ensure that any given assignment of benefits doesn’t contain any loopholes that could be exploited by a service provider or contractor.

The right lawyer can also make sure that an assignment of benefits is legally binding for your insurance provider. To make sure an assignment of benefits is safe, you should perform the following steps:

• Always check for reviews and references before hiring a contractor or service provider, especially if you plan to use an AOB ahead of time. For example, you should stay away if a contractor has a reputation for abusing insurance claims.
• Always get several estimates for work, repairs, or bills. Then, you can compare the estimated bills and see whether one contractor or service provider is likely to be honest about their charges.
• Get all estimates, payment schedules, and project schedules in writing so you can refer back to them later on.
• Don’t let a service provider or contractor pressure you into hiring them for any reason . If they seem overly excited about getting started, they could be trying to rush things along or get you to sign an AOB so that they can start issuing charges to your insurance company.
• Read your assignment of benefits contract fully. Make sure that there aren’t any legal loopholes that a contractor or service provider can take advantage of. An experienced lawyer can help you draft and sign a beneficial AOB contract.

Can You Sue a Party for Abusing an Assignment of Benefits?

Sometimes. If you believe your assignment of benefits is being abused by a contractor or service provider, you may be able to sue them for breaching your contract or even AOB fraud. However, successfully suing for insurance fraud of any kind is often difficult.

Also, you should remember that a contractor or service provider can sue your insurance company if the insurance carrier decides not to pay them. For example, if your insurer decides that a service provider is engaging in billing scams and no longer wishes to make payouts, this could put you in legal hot water.

If you’re not sure whether you have grounds for a lawsuit, contact Schwartzapfel Lawyers today at 1-516-342-2200 . At no charge, we’ll examine the details of your case and provide you with a consultation. Don’t wait. Call now!

Assignment of Benefits FAQs

Which states allow assignments of benefits.

Every state allows you to offer an assignment of benefits to a contractor and/or insurance company. That means, whether you live in New York, Florida, Arizona, California, or some other state, you can rest assured that AOBs are viable tools to streamline the insurance payout process.

Can You Revoke an Assignment of Benefits?

Yes. There may come a time when you need to revoke an assignment of benefits. This may be because you no longer want the provider or contractor to have control over your insurance claims, or because you want to switch providers/contractors.

To revoke an assignment of benefits agreement, you must notify the assignee (i.e., the new insurance claimant). A legally solid assignment of benefits contract should also include terms and rules for this decision. Once more, it’s usually a wise idea to have an experienced lawyer look over an assignment of benefits contract to make sure you don’t miss these by accident.

Contact Schwartzapfel Lawyers Today

An assignment of benefits is an invaluable tool when you need to streamline the insurance claims process. For example, you can designate your healthcare provider as your primary claimant with an assignment of benefits, allowing them to charge your insurance company directly for healthcare costs.

However, there are also risks associated with an assignment of benefits. If you believe a contractor or healthcare provider is charging your insurance company unfairly, you may need legal representatives. Schwartzapfel Lawyers can help.

As knowledgeable New York attorneys who are well-versed in New York insurance law, we’re ready to assist with any and all litigation needs. For a free case evaluation and consultation, contact Schwartzapfel Lawyers today at 1-516-342-2200 !

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What Is an Insurance Claim? | Experian

What is assignment of benefits, and how does it impact insurers? | Insurance Business Mag

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Consumer Insight

Sept. 13, 2023

Assignment of Benefits: Consumer Beware

You've just survived a severe storm, or a tornado and you've experienced some extensive damage to your home that requires repairs, including the roof. Your contractor is now asking for your permission to speak with your insurance company using an Assignment of Benefits. Before you sign, read the fine print. Otherwise, you may inadvertently sign over your benefits and any extra money you’re owed as part of your claim settlement.

The National Association of Insurance Commissioners (NAIC) offers information to help you better understand insurance, your risk and what to do in the event you need repairs after significant storm damage.

Be cautious about signing an Assignment of Benefits. An Assignment of Benefits, or an AOB, is an agreement signed by a policyholder that allows a third party—such as a water extraction company, a roofer or a plumber—to act on behalf of the insured and seek direct payment from the insurance company.  An AOB can be a useful tool for getting repairs done, as it allows the repair company to deal directly with your insurance company when negotiating repairs and issuing payment directly to the repair company. However, an AOB is a legal contract, so you need to understand what rights you are signing away and you need to be sure the repair company is trustworthy.

• With an Assignment of Benefits, the third party, like a roofing company or plumber, files your claim, makes the repair decision and collects insurance payments without your involvement.
• Once you have signed an AOB, the insurer only communicates with the third party and the other party can sue your insurer and you can lose your right to mediation.
• It's possible the third party may demand a higher claim payment than the insurer offers and then sue the insurer when it denies your claim.
• You are not required to sign an AOB to have repairs completed. You can file a claim directly with your insurance company, which allows you to maintain control of the rights and benefits provided by your policy in resolving the claim.

Be on alert for fraud. Home repair fraud is common after a natural disaster. Contractors often come into disaster-struck regions looking to make quick money by taking advantage of victims.

• It is a good idea to do business with local or trusted companies. Ask friends and family for references.
•  Your insurer may also have recommendations or a list of preferred contractors.
• Always get more than one bid on work projects. Your adjuster may want to review estimates before you make repairs.

Immediately after the disaster, have an accurate account of the damage for your insurance company when you file a claim.

• Before removing any debris or belongings, document all losses.
• Take photos or video and make a list of the damages and lost items.
• Save damaged items if possible so your insurer can inspect them, some insurance companies may have this as a requirement in their policy.

Most insurance companies have a time requirement for reporting a claim, so contact your agent or company as soon as possible. Your  state insurance department  can help you find contact information for your insurance company, if you cannot find it.

• Insurance company officials can help you determine what damages are covered, start your claim and even issue a check to start the recovery process.
• When reporting losses, you will need insurance information, current contact information and a  home inventory or list of damaged and lost property . If you do not have a list, the adjuster will give you some time to make one. Ask the adjuster how much time you have to submit this inventory list. The NAIC Post Disaster Claims Guide has details on what you can do if you do not have a home inventory list.

After you report damage to your insurance company, they will send a claims adjuster to assess the damage at no cost to you . An adjuster from your insurance company will walk through and around your home to inspect damaged items and temporary repairs you may have made.

• A public adjuster is different from an adjuster from your insurance company and has no ties to the insurance company.
• They estimate the damage to your home and property, review your insurance coverage, and negotiate a settlement of the insurance claim for you.
• Many states require public adjusters to be licensed. Some states prohibit public adjusters from negotiating insurance claims for you. In those states, only a licensed attorney can represent you.
• You have to pay a public adjuster.
• The NAIC Post Disaster Claims Guide has information on the different types of adjusters.

Once the adjuster has completed an assessment, they will provide documentation of the loss to your insurer to determine your claims settlement. When it comes to getting paid, you may receive more than one check. If the damage is severe or you are displaced from your home, the first check may be an emergency advance. Other payments may be for the contents of your home, other personal property, and structural damages. Please note that if there is a mortgage on your home, the payment for structural damage may be payable to you and your mortgage lender. Lenders may put that money into an escrow account and pay for repairs as the work is completed.

More information. States have rules governing how insurance companies handle claims. If you think that your insurer is not responding in a timely manner or completing a reasonable investigation of your claim, contact your  state insurance department .

About the National Association of Insurance Commissioners

As part of our state-based system of insurance regulation in the United States, the National Association of Insurance Commissioners (NAIC) provides expertise, data, and analysis for insurance commissioners to effectively regulate the industry and protect consumers. The U.S. standard-setting organization is governed by the chief insurance regulators from the 50 states, the District of Columbia and five U.S. territories. Through the NAIC, state insurance regulators establish standards and best practices, conduct peer reviews, and coordinate regulatory oversight. NAIC staff supports these efforts and represents the collective views of state regulators domestically and internationally.

Assignment of Life Insurance Policy

The person who assigns the policy, i.e. transfers the rights, is called the Assignor and the one to whom the policy has been assigned, i.e. the person to whom the policy rights have been transferred is called the Assignee.

Assignment of a Life Insurance Policy simply means transfer of rights from one person to another. The policyholder can transfer the rights of his insurance policy to another for various reasons and this process is called Assignment.

The person who assigns the policy, i.e. transfers the rights, is called the Assignor and the one to whom the policy has been assigned, i.e. the person to whom the policy rights have been transferred is called the Assignee. Once the rights have been transferred to the Assignee, the rights of the Assignor stands cancelled and the Assignee becomes the owner of the policy.

here are 2 types of Assignment:

• Absolute Assignment – This means complete Transfer of Rights from the Assignor to the Assignee, without any further conditions applicable.
• Conditional Assignment – This means that the Transfer of Rights will happen from the Assignor to the Assignee subject to certain conditions. If the conditions are fulfilled then only the Policy will get transferred from the Assignor to the Assignee.

Let’s take an example:

Rahul owns 2 Life Insurance policies of value Rs 2 lakhs and Rs 5 lakhs respectively. He would like to gift one policy of Rs 2 lakhs to his best friend Ajay. In that case, he would like to absolutely assign the policy in his name such that the death or maturity proceeds are directly paid to him. Thus, after the assignment, Ajay becomes the absolute owner of the policy. If he wishes, he may again transfer it to someone else for any other reason. This type of Assignment is called Absolute Assignment.

Now, Rahul needed to take a loan for Rs 5 lakhs. So, he thought of doing so against the other policy that he owned for Rs 5 lakhs. To take a loan from ABC bank, he needed to conditionally assign the policy to that Bank and then the bank would be able to pay out the loan money to him. If Rahul failed to repay the loan, then the bank would surrender the policy and get their money back.

Once Rahul’s loan is completely repaid, then the policy would again come back to him. In case, Rahul died before completely repaying the loan, then also the bank can surrender the policy to get their money back. This type of Assignment is called Conditional Assignment.

Sachin Telawane is a Content Manager and writes on various aspects of the Insurance industry. His enlightening insights on the insurance industry has guided the readers to make informed decisions in the course of purchasing insurance plans.

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Assignment Insurance

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What is Assignment Insurance?

Assignment Insurance is a type of insurance that may refer to a variety of policies related to the transfer of risk from one party to another. Assignment Insurance typically involves an individual or business accepting responsibility for the financial risk associated with a particular situation, asset, or activity. In some cases, it may also refer to the transfer of ownership of an insurance policy from one party to another.

Assignment Insurance in More Detail

For example, Assignment Insurance may be used when an individual or business takes on the financial risk associated with a particular asset or activity, such as the purchase of a home or a business venture. In this case, the insurer pays out the agreed upon amount of money to the recipient of the policy in the event of a loss, such as a fire or a natural disaster.

Assignment Insurance may also be used when an individual or business transfers the ownership of an insurance policy from one party to another. This may occur when a policyholder decides to sell their policy to another person, such as someone who can make better use of the policy or who can afford to pay the premiums.

Assignment Insurance is useful for individuals and businesses who need to transfer the responsibility of a particular asset or activity from one party to another. It can help to protect both parties involved in the transaction, as well as provide assurance that the financial burden associated with the asset or activity will be covered in the event of a loss.

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Assignment of insurance policies and claims

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Assignment in Insurance Policy | Meaning | Explanation | Types

Table of Contents

• 1 What is Assignment in an Insurance Policy?
• 2 Who can make an assignment?
• 3 What happens to the ownership of the policy upon Assignment?
• 4 Can assignment be changed or cancelled?
• 5 What happens if the assignment dies?
• 6 What is the procedure to make an assignment?
• 7 Is it necessary to Inform the insurer about assignment?
• 8 Can a policy be assigned to a minor person?
• 9 Who pays premium when a policy is assigned?
• 10.1 1. Conditional Assignment
• 10.2 2. Absolute Assignment

What is Assignment in an Insurance Policy?

Assignment means a complete transfer of the ownership of the policy to some other person. Usually assignment is done for the purpose of raising a loan from a bank or a financial institution .

Assignment is governed by Section 38 of the Insurance Act 1938 in India. Assignment can also be done in favour of a close relative when the policyholder wishes to give a gift to that relative. Such an assignment is done for “natural love and affection”. An example, a policyholder may assign his policy to his sister who is handicapped.

Who can make an assignment?

A policyholder who has policy on his own life can assign the policy to another person. However, a person to whom a policy has been assigned can reassign the policy to the policyholder or assign it to any other person. A nominee cannot make an assignment of the policy. Similarly, an assignee cannot make a nomination on the policy which is assigned to him.

What happens to the ownership of the policy upon Assignment?

When a policyholder assign a policy, he loses all control on the policy. It is no longer his property. It is now the assignee’s property whether the policyholder is alive or dead, the assignee alone will get the policy money from the insurance company.

If the assignee dies, then his (assignee’s) legal heirs will be entitled to the policy money.

Can assignment be changed or cancelled?

An assignment cannot be changed or cancelled. The assignee can of course, reassign the policy to the policyholder who assigned it to him. He can also assign the policy to any other person because it is now his property. We can think of a bank reassigning the policy to the policyholder when their loan is repaid.

What happens if the assignment dies?

If the assignee dies, the assignment does not get cancelled. The legal heirs of the assignee become entitled to the policy money. Assignment is a legal transfer of all the interests the policyholder has in the policy to the assignee.

What is the procedure to make an assignment?

Assignment can be made only after issue of the policy bond. The policyholder can either write out the wording on the policy bond (endorsement) or write it on a separate paper and get it stamped. (Stamp value is the same, as the stamp required for the policy — Twenty paise per one thousand sum assured). When assignment is made by an endorsement on the policy bond, there is no need for stamp because the policy is already stamped.

Is it necessary to Inform the insurer about assignment?

Yes, it is necessary to give information about assignment to the insurance company. The insurer will register the assignment in its records and from then on recognize the assignee as the owner of the policy. If someone has made more than one assignment, then the date of the notice will decide which assignment has priority. In the case of reassignment also, notice is necessary.

Can a policy be assigned to a minor person?

Assignment can be made in favour of a minor person. But it would be advisable to appoint a guardian to receive the policy money if it becomes due during the minority of the assignee.

Who pays premium when a policy is assigned?

When a policy is assigned normally, the assignee should pay the premium, because the policy is now his property. In practice, however, premium is paid by the assignor (policyholder) himself. When a bank gives a loan and takes the assignment of a policy a security, it will ask the assignor himself to pay the premium and keep it in force. In the case of an assignment as a gift, the assignor would like to pay the premium because he has gifted the policy.

Types of assignment

Assignment may take two forms:

• Conditional Assignment.
• Absolute Assignment.

1. Conditional Assignment

It would be useful where the policyholder desires the benefit of the policy to go to a near relative in the event of his earlier death. It is usually effected for consideration of natural love and affection. It generally provides for the right to revert the policyholder in the event of the assignee predeceasing the policyholder or the policyholder surviving to the date of maturity.

2. Absolute Assignment

This assignment is generally made for valuable consideration. It has the effect of passing the title in the policy absolutely to the assignee and the policyholder in no way retains any interest in the policy. The absolute assignee can deal with the policy in any manner he likes and may assign or transfer his interest to another person.

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Absolute Assignment of Life Insurance Policies

An absolute assignment transfers all ownership rights of a life insurance policy.

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•   1. What Is the Assignment of Insurance Benefits?
•   2. What Is a Life Insurance Assignment?
•   3. Does Life Insurance Count Towards the Two Million for Federal Estate Tax?

An absolute assignment of a life insurance policy involves transferring all rights and ownership decisions to another party. You could have one of several reasons for wanting to do this; for example, using the policy as collateral for a loan, or making a donation to your favorite charity at death. Making an absolute assignment is relatively simple as long as your life insurance policy allows it.

How Transfer of Ownership Works

Absolute assignment is akin to a transfer of ownership, in that you are giving all ownership rights to another party. Although you remain the insured under the contract, the new party can change the beneficiary (usually to itself), it can make decisions about investment options of a whole-life policy, and it can take any other action that does not jeopardize the policy's in-force status. You remain responsible for the premium payments, and you could be in breach of the assignment provisions if you don't pay them.

Collateral Loan Bank Assignment

Absolute assignment of life insurance is often done when a person applies for a loan. If the bank is concerned that the loan might not be repaid if you died, if might require a life policy with an absolute assignment to the bank. The bank names itself the beneficiary of the policy up to the amount of the loan balance. Any residual death benefit would go to your named beneficiary.

Financing a Charitable Gift

Another use of absolute assignment is to make a charitable gift. This approach is gaining in popularity.

Life insurance is often purchased to finance a charitable donation by the estate of a deceased individual. One drawback to this approach is that the entire gift goes through the estate and might incur probate delays and fees.

The use of an absolute assignment streamlines the process, as the charity can name itself the beneficiary of the policy. The charity can issue you a tax receipt for every premium, which you can deduct as a charitable contribution.

Absolute Assignment Legal Considerations

Insurance companies freely provide assignment forms that are straightforward and easy to fill out. Once an assignment is complete, a copy of the form should be filed with the insurance company.

The life insurance company may withhold part of its payout to any beneficiary -- including a newly designated one -- if a premium hasn't been fully paid, or because of other indebtedness. That might have legal ramifications for you and the assignee, in which the insurance company will take no part.

• Standard Life Insurance Co. of New York: Absolute Assignment Form
• Waypoint Partners: Assigning Your Life Insurance Policy
• Collateral Assignment Agreement

Philippe Lanctot started writing for business trade publications in 1990. He has contributed copy for the "Canadian Insurance Journal" and has been the co-author of text for life insurance company marketing guides. He holds a Bachelor of Science in mathematics from the University of Montreal with a minor in English.

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Nomination and Assignment under Insurance Contracts

Published by siri k reddy on 30/01/2021 30/01/2021, introduction:.

The term assignment itself means you assign something to someone else. In term life insurance, the assignment of the policy describes the action of assigning legal rights as well as policy ownership to someone else. The person who assigns the policy is known as an Assignor and the person who has been assigned the policy is known as an Assignee.

Nomination under the insurance contract refers to nominate someone on your behalf in order to collect the benefit in your absence. A person who is trustworthy can be nominated upon the death of a person. The trustworthy person could be from the dead person’s family or close friends. Then that person is the nominee of the policy.

However in most of the cases, people choose their family member as the nominee of the policy but as per the insurance act of 1938, under section 39, the nomination of a particular person is not restricted to a family only. Any person who is considered as trustworthy and any person who will not misuse the policy are considered to be an ideal nominee of that particular policy.

Types of Assignment

There are two types of assignment of policies:

• Absolute assignment: under this particular type of assignment, the assignor is bound to transfer the ownership, title, legal interests and all the rights of the policy to the assignee. This type of transfer of the policy does not include the terms and conditions on the part of the assignee. The exact purpose of the absolute assignment is to repay the debts or to show affection to loved ones.
• Collateral assignment: collateral assignment refers to that particular assignment in which the policyholder assigns the policy on terms and conditions, and the assignee is restricted to avail the benefits of all the terms and conditions. The main purpose of the collateral assignment is to repay loans and liabilities.

Types of Nomination

There are three types of nominations, such as:

• Beneficiary nominee: in this particular nomination a particular person can be made beneficiary to the immediate family members like parents, children, and spouse. The beneficiary will be entitled to receive all the benefits of the policy legally only in case of unfavourable conditions.
• Minor nominee: since it is considered that a minor cannot deal with financial conditions, the guardian of that particular minor has to give the details of their selves only when the policyholder chooses his/her child as the nominee.
• Non-family nominee: a non-family member is that person who does not have blood relation with the policyholder such as close friends, a distant relative, a neighbour, etc. under section 39 of the insurance act of 1938; any trustworthy person can be a policy nominee.

Nomination and Assignment in Life Insurance Plans

As it is already known that insurance is a legal contract between the insurance company who is also called the insurer and the policyholder. An assignee is a person to whom the rights have been transverse to. An example of an absolute assignment is as follows: Mr Bharath owns a life insurance policy of 1 crore and he wants to gift this particular policy to his wife as ‘absolute assignment’ to her name. Once this absolute assignment is made to his wife’s name, she will be the owner of the policy. She also has the right to transfer this policy to someone else.

An example of a conditional assignment is as follows: Ms Supriya owns a term insurance policy of 900,000. She wants a home loan of the same amount. Hence her banker asked her to assign the term policy in their name in order to get the loan.  If Supriya meets an untimely death the banker is entitled to enjoy their money. An assignment deed or deed of assignment [DOA] is that deed through which rights can be transferred from one person to another.

Sections and Policies

SECTION 38- ASSIGNMENT AND TRANSFER OF INSURANCE POLICIES

The provisions under section 38 of the Insurance Law Act, 2015. The provisions of this particular section are as follows:

• This policy allows itself to be transferred with or without consideration.
• An assignment has a high chance of being affected by an endorsement upon the policy or by a separate instrument to the insurer.
• The instruments should reflect the assignment and the reasons for the transfer.
• An authorized agent or the transferor should sign the assignment.
• The transferor of the assignment should not be operative against an insurer until prior notice is issued
• The authority has the right to specify the fees that is paid for the transfer
• The insurer is also expected to give a written acknowledgement of receipt of the notice. Such notice acts as evidence for the future.
•  The notices shall be delivered only at one place where the policy is being served in order to avoid confusions. This arrangement is made as the insurer is involved in managing more than one business place.
• The insurer has the right to accept or deny acting upon any transfer or endorsement only if it is not bonafide or not in the public interest.
• Before denying the endorsement, the insurer should make a note of the reasons for the same.

SECTION 39- NOMINATION BY POLICYHOLDER

The provisions of this particular section are as follows:

• The policyholder can nominate a person to whom money secured by the policy shall be paid during the death.
• When in case of a minor, the policyholder can appoint any person to receive the money in the event of policyholder’s death during the minority of the nominee.
• Nomination can be made at any time before the maturity of the policy.
• The nomination can be incorporated or endorsed to the insurer.
• The provisions of section 39 are not applicable to any life insurance policy to which section 6 of the Married Women’s Property Act, 1874 applies.
• If the nominee dies before the policyholder, the money is payable to the legal representatives or the holder of succession certificate.

SECTION 45- Policy shall not be called in question on the ground of misstatement after three years

Provisions of this section are as follow:

• Any policy of life insurance shall not be called in question after the expiry of three years from the date of issuance of the policy, the date of commencement of risk, the date of revival, the date rider coming to the policy.
• Silence is not considered to be fraud unless it depends on the circumstances of the case.
• The insurer can call for age proof at any time only if he is entitled.
• No insurer can reject a life insurance policy on the grounds of fraud if the beneficiary can prove that the fraud was true to the best of his knowledge.

Difference between Nomination and Assignment

Assignment of Policies- Impact on Existing Nomination

• According to section 39(4) of the insurance act, 938, the assignment of an insurance policy automatically cancels the nomination.
• Here are the few circumstances under which the assignment does not automatically cancel nomination :

When the policy loan is taken from the life insurer who issues the policy, the policy has to be assigned in favour of the life insurer. Under such circumstances, assignments in favour of the life insurer do not automatically cancel the nomination.

On the other hand, where the policy is assigned by a debtor to creditor acts as collateral security for the loan taken by the policyholder from the assignee.

The nomination and assignments have their own uses and benefits as a separate topic under the insurance contracts. I have gained in-depth knowledge of what exactly is nomination and assignment along with minute differences between them. The differences between them have helped me gain much more understanding of the topic. Nomination protects the interests of the insured and the insurer. Whereas the assignment strives to protect the interests of the assignee in availing all the benefits.

References:

• INSURANCE LAWS IN INDIA- VARDHAMAN MAHAVEER, pg. 32. 54.
• RAJIV JAIN: INSURANCE LAW AND PRACTICE, pg. 44
• https://m.economictimes.com/nomination-and-assignment/articleshow/3320189.cms
• https://accountlearning.com/difference-nomination-assignment/
• https://accountlearning.com/assignment-in-insurance-policy-meaning-explanation-types/
• https://life.futuregenerali.in/life-insurance-made-simple/life-insurance/change-nominee-in-term-insurance

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At TruStage, we believe insurance should be simple, straightforward and easy to understand. That’s why we created this insurance glossary with the terms you need to know, in plain English. We want to help you make smarter, more informed decisions about protecting yourself, your family and your finances.

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z #

Absolute assignment, accelerated death benefits, accidental death and dismemberment insurance, accidental death insurance, accrued interest.

Interest that has been earned but not yet paid out. Some annuities, for instance, have a feature where a portion of the payment goes to investments. Over time, these investments will build up accrued interest.

Accumulated Value

Whole life insurance usually includes a death benefit as well as an accumulated value. This is the cash value that has built up over time plus any dividend value (including interest). As you pay your premiums over the years and earn more of a return, the accumulated value of your policy may grow.

Actual Cash Value

The amount something is worth in its current condition. It’s a way to determine the value of an item when it got damaged or destroyed by considering its original cost minus depreciation from wear and tear.

Administrative Expense

An insurance company's operating costs. It covers things like salaries, underwriting, advertising, printing costs, agency expenses and premium taxes. These expenses get lumped into what you pay and are used to calculate dividends and premium rates.

Advance Directive

Amount of insurance, annual renewable term, annuity certain.

An investment that provides a series of payments for a set period of time (say, five, 10 or 30 years). If you die before the end of the period, your beneficiary will receive the remainder of the payments for the guaranteed period.

Anti Theft Device

Any mechanism or system installed in a vehicle such as alarms, steering wheel locks, or GPS tracking systems to help prevent theft or unauthorized access. Often, there’s a discount on insurance premiums for vehicles equipped with approved devices.

American Memorial Life Insurance Company (AMLIC)

Application.

Transferring benefits of a life insurance policy to another person or financial institution as collateral for a loan. If the insured dies, the lender is paid first and the balance (if any) is paid to the policy’s beneficiary.

Automatic Premium Loan (APL) Provision

Let’s say you miss a payment on your whole life policy. Rather than cancelling your policy, the insurance company withdraws money from the policy’s cash value and uses it as a loan to pay the owed premium. Your insurance stays in force thanks to the Automatic Premium Loan Provision.

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Beneficiary

The person or persons who will receive the death benefit of your life insurance policy or annuity. Beneficiaries can be anyone … spouse or partner, child, a church or charity. Not sure if you're a life insurance beneficiary? Here's how to find out.

Benefit Period

The length of time that services are covered under your plan. It has a start and an end date. Most people are familiar with the benefit period for medical insurance, but term life insurance, disability, long-term care, homeowner's, and auto insurance policies will also carry a benefit period.

Bodily Injury Coverage

A component of auto insurance designed to help you financially if you're held responsible for injuries to others in a car accident. It covers things like medical bills, rehabilitation, and even legal costs if you're sued for injuries caused to others while operating your vehicle.

The act of purchasing multiple insurance policies (like car and home insurance) from a single provider that could help you save money. In addition to potential savings, bundling can also offer convenience by helping you manage all your policies in one place, saving time and effort.

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Car Liability Insurance

A type of auto insurance that covers costs if you're found responsible for injuries or property damage to others in an accident. It helps pay for the other driver's expenses if you’re at fault in a car accident. This video can help explain it more.

Cash Surrender Value

If you cancel your whole life policy and take the cash value, the amount you may be able to walk away with is an amount known as the cash surrender value. This amount equals the cash value minus a surrender charge, any outstanding loans and interest on those loans.

Typically when you have whole life insurance, a portion of your premiums go into an investment account, or the cash value. This money grows with interest over time. You can do many things with the cash value, including taking out a loan, using it for any needs that arise or funding the policy. The longer you’ve had the policy, the higher the cash value will be. Please remember that loans do accrue interest and any outstanding loan balance reduces the death benefit at the time of claim. Learn more about cashing out a life insurance policy.

Collateral Assignment

Transferring ownership of an asset from the borrower to the lender until the loan gets fully paid. The transferred asset can be the borrower's life insurance. If the borrower is unable to pay, the lender can cash in the life insurance policy and recover what is owed.

Collision Insurance

If you’re at fault, this type of auto insurance coverage helps pay for repairs or vehicle replacement if it's damaged in an accident with another vehicle (or even an object such as a fence or a tree). It’s typically required if you lease or finance your car and can also be used when another driver is at fault but doesn't have enough liability insurance to cover your costs.

Comprehensive Insurance

This type of auto insurance helps pay for damage that occurs due to non-collision events outside of your control such as theft, vandalism, natural disasters, and accidents involving animals. Many people add it to an existing policy because it’s often considered an affordable option.

Condo Insurance

Also known as HO-6, this type of insurance covers the interior structure of condo units including personal belongings, liability protection, and additional living expenses when the unit becomes uninhabitable due to covered events such as fire or theft. It can also pay for temporary housing in certain circumstances, and it may be more affordable than you think.

Contingent Beneficiary

Contingent owner, conversion right, cost of insurance, coverage end date, coverage period.

The period of time (with a start and end date) an insurance policy covers the policyholder. Learn more about how life insurance works.

Coverage Start Date

Your coverage start date – also called the “effective date” – is the day your coverage officially kicks in. Remember, your policy won’t pay any benefits until that exact date.

Covered Perils

Any event or situation that causes property damage or loss. Fire, theft, vandalism, windstorms, and certain types of water damage are good examples that insurance can cover.

Death Benefit

The amount of money paid to the beneficiary of a life insurance policy when the insured dies. Learn more about life insurance death benefits.

Deceased Identity Theft

The crime of stealing the identity of a deceased individual. Also known as ‘ghosting,’ brings risk to their overall estate, including financial assets, credit cards, tax returns, etc.

Declarations Page

A document with important details of an insurance policy like your policy number, coverage limits, deductibles, premium amounts, dates of the policy, and more. Think of it as a quick reference to help you understand everything you need to know about your insurance coverage.

The amount of money a policyholder must pay out of pocket before their coverage kicks in to cover a claim. For example, if you have a $500 deductible on your car insurance and you're involved in an accident causing $2,500 in damages, you would pay the first $500, and then your insurance would cover the remaining $2,000.

Deferred Annuity

A type of annuity that delays, or defers, income payments until a later date of your choosing. There are two main phases: the savings phase, which is when you invest money into the account, and the income phase, which is when the plan begins paying you. Generally, the money earned on a deferred annuity is taxed only when you withdraw it.  Learn more about TruStage Annuity products.

Depreciation

The decrease in value of something over time due to age, becoming obsolete, or normal wear and tear. It’s helps figure out the value of property or belongings at the time of a claim to determine its replacement cost.

Disclosure Statement

An official statement that outlines the terms, conditions, risks and rules of a financial transaction, such as an insurance policy, loan or investment.

Direct Response

Insurance sold directly to you by an insurance company, usually by mail or online. Learn more about TruStage.

A partial refund of premiums paid on permanent life insurance. Similar to the dividends paid by a company to its shareholders, the amount paid to policyholders depends on the insurance company’s profits.

Dividend Option

Not all life insurance policies pay out dividends. But for those that do, the policyholder is given different options on how to use them. The dividend can earn interest, reduce the premium, purchase additional paid-up insurance, or be taken in cash.

The date on which your monthly payment is due. You’ll want to keep track of this to make sure your policy doesn’t lapse! What is the grace period on a life insurance policy?

Endorsement

A change to your insurance policy that adjusts your coverage. Also known as a “rider” or “floater,” endorsements are designed to tailor insurance policies to better meet your needs by helping you decide how much insurance you really need.

Estate Planning

End-of-life planning that is done in advance. An estate plan may include a will, identified beneficiary, and a power of attorney.

Evidence of Insurability (EOI)

Part of the application process for a life or health insurance policy where an applicant provides health information, such as medical history. The EOI can determine whether you’re approved for coverage and how much your premiums will be. Learn more about applying for life insurance.

An event or situation not covered by an insurance policy to avoid risks that may be too high or unpredictable. Exclusions help clarify the scope of coverage and define the limits of protection so you know exactly what you’re protected against.

An individual named by the insurer who manages the estate of the deceased and executes the terms identified in a will.

Your insurance policy’s share of the company’s operating costs. This includes things like medical exams, underwriting, printing costs, advertising, agency expenses, premium taxes and salaries. These costs figure in to your dividends and premium rates.

Extended Term

A nonforfeiture option in a whole life policy that uses cash value to purchase term insurance equal to the existing amount of life insurance. This allows you to continue receiving coverage for a limited time without paying premiums. What is term life insurance ?

Face Amount

Family benefit, final expense insurance.

Final Expense I nsurance is a funeral insurance policy meant to provide funds for the insured’s final expenses after death.  Final Expense Insurance is life insurance sold through licensed insurance producers that do not usually have specific relationships with funeral homes.  The policy funds are directed to the identified beneficiary and may be used to cover funeral expenses, debt, or other outstanding needs.

Financial Needs Analysis

Fixed Amount Option

Fixed period annuity, fixed period option, free look provision.

A certain amount of time (usually 30 days) to examine an insurance policy and return it to the company for a full refund if not satisfied.

Full Life Insurance

A phrase sometimes used to refer to permanent life insurance or whole life insurance. Learn more about TruStage Whole Life Insurance .

Funeral Preplanning Insurance

Sometimes referred to as funeral insurance, funeral preplanning insurance is an insurance policy purchased and assigned to a funeral home to cover the costs associated with preplanning a funeral.

Goods & Services Contract/Agreement

An agreement between the funeral home and customer that details the items and services selected for burial and/or funeral. A Goods & Services agreement may include (but is not limited to) the casket, cost of the funeral, flowers, transportation, preparation of the body, etc.

Grace Period

The period of time a policy stays in force even after a premium payment is due and goes unpaid. It’s usually a month so don’t wait too long to make things right. Learn more about life insurance life insurance grace periods.

Group Life Insurance

Life insurance that covers an entire group of people (as opposed to individual coverage).  Employers usually offer group life insurance to their workers as part of a larger benefit package. Typically, the coverage ends when you leave the company.  Is your employer’s provided life insurance enough?

Guaranteed Auto Protection (GAP)

An insurance option designed to help pay off your auto loan or lease if your vehicle is totaled or stolen and the insurance payout isn’t enough to cover the outstanding balance. Simply put, you won’t have to pay a remaining balance that’s above what your standard insurance covers.

Guaranteed Insurability Option (aka Guaranteed Purchase Option)

A rider that ensures you will be able to buy more insurance in the future as your need for coverage increases. Generally, you will be allowed to purchase additional life insurance at specified ages without having to provide evidence of insurability.  What are life insurance riders?

Guaranteed Renewable

The right to continue your insurance each year as long as premiums are paid. Even if you develop a serious health condition and have a lot of claims, you have the assurance that your insurance will stay put.

Home Insurance

Sometimes referred to as “homeowners insurance,” this type of policy helps pays for losses and damage to your property if something unexpected happens like a fire or burglary. Most lenders require proof of home insurance and you can learn more about it here.

Home Warranty

A service contract covering the repair or replacement of major home systems and appliances that fail due to normal wear and tear. Keep in mind, it’s not the same as home insurance, so you may want to learn more about the differences.

Immediate Annuity

Incontestable clause, insurable interest, insurance policy, interest option, irrevocable beneficiary.

A life insurance policy beneficiary who cannot be removed from a policy unless they agree to be, and who also has the power to prevent the policy holder from canceling the policy without their approval. For example, if a spouse is an irrevocable beneficiary , that person cannot be removed as a beneficiary even if the couple divorces. 

Juvenile Insurance Policy

No current definitions.

Termination of coverage due to nonpayment of premiums within a specified time period. A lapsed policy no longer pays benefits or provides coverage.

The rate at which insurance policies are cancelled because of unpaid premiums. Not surprisingly, the more expensive a policy is, the higher the lapse rate.

Last Conversion Date

The last day a policy can be converted from term life insurance to whole life insurance to avoid losing money paid on premiums.

Leased Vehicle

A car used for a specified period of time where the person leasing the car makes regular payments (typically to a car dealership) for the right to use the vehicle. Some people prefer leasing a car instead of buying it, but each has its advantages you can read about here.

Life Expectancy

The number of years someone is expected to live, based on statistical research. Insurers factor in life expectancy when determining the premium for certain policies, particularly life insurance.

Life Income with Period Certain Annuity

A type of annuity that guarantees income for a certain number of years. This allows you to specify when the benefit will start and how long it will last to meet your retirement and estate planning needs, as well as your lifespan expectations. Common time frames for a period certain annuity are 10, 15, or 20 years.

Life Insurance

Life insurance is a contract with an insurance company that helps financially protect your loved ones if you pass away. You pay your premiums, and, if you pass away while coverage is in place, the company pays a lump sum (called a death benefit) to your beneficiaries. This money can help them with things like funeral costs, rent or mortgage, day-to-day living expenses, education costs and more. Get a free life insurance quote from TruStage.

Lifetime Coverage

An insurance policy that lasts for your entire life, as long as premiums are paid. Whole life insurance is a type of permanent life insurance designed to provide lifetime coverage. 

Living Benefits

Part of a life insurance policy that lets you access funds while you’re still living, usually to cover the cost of care if you were to have a terminal or catastrophic illness.

Living Will

A legal document that specifies the type of medical care an individual does or does not want in the event they are no longer able to communicate their wishes.

Mechanical Repair Coverage

Insurance that covers the costs of unexpected vehicle repairs and replacements of parts that fail due to normal wear and tear. It’s typically offered as an optional add-on to auto insurance policies that only cover accidents. Learn what makes it different than Liability Insurance.

Medical Information Bureau (MIB)

A computer database that stores medical and some non-medical information for fraud detection purposes. This information is used by insurance companies to assess an applicant’s risk and eligibility for life and health insurance.

Medical Report

A report on the health of a life insurance applicant that is filled out by a doctor following a physical examination. Learn more about physical exams and life insurance.

Misstatement of Age

If an applicant for life insurance misstates their age, the insurer, during a length of time known as the "contestability period," may choose to cancel the policy, increase the premiums or adjust the policy amount.  Why are some life insurance claims not paid out?

Mortality Rate

The frequency of death at each attained age. Life insurance companies use mortality rates to determine life insurance rates that make sense for both the consumer and the company.

A type of loan provided by a bank or financial institution to help someone purchase a home. The person borrowing the money agrees to make regular payments over a set period of time, and we offer a calculator  to help you figure out how much you can afford.

Mortgage Life Insurance

As the name implies, mortgage life insurance is a policy that pays off the balance of your mortgage should you die. The payout goes to the mortgage lender, not your family.

Non-Forfeiture

Non-forfeiture clause, non-forfeiture provisions, non-participating life insurance policy.

A life insurance policy that does not share in the insurance company’s surplus earnings and does not pay dividends. If you want to own a participating policy with dividends, you will likely need to buy whole life insurance .

Non-Smoker Rates

Paid-up additions.

Using dividends earned by a whole life insurance policy to purchase additional coverage and grow additional cash value.

Paid-Up Insurance

A whole life policy that is paid in full, remains in force, and you no longer have to pay any premiums. It’s a great option for someone who has recently received an inheritance or has come into money.

Participating Insurance

A life insurance policy that pays dividends to the policyholder. Dividends are generated from the profits of the insurance company and are typically paid out on an annual basis over the life of the policy. If you want to own a participating policy, you will likely need to buy whole life insurance.

Payout Option (annuities)

When you invest in an annuity, you choose the term of the payments you’ll receive. Three of the most common payout options are lifetime payments (which continue for as long as you live), period certain (say, five years or 30 years) and joint-life payments (which continue for as long as either you or your spouse lives).

Payout Phase (annuities)

The period during which the money accumulated in an annuity is paid out as regular income payments. You can choose to receive these payments for a specific period of time (such as five or 30 years) or for the rest of your life.

Period Certain (annuities)

An annuity that provides guaranteed income for a set period of time (say, five years or 30 years). If you die before the end of the period your beneficiary will receive the remainder of the payments for the period. Learn more about TruStage Annuity products.

Permanent Life Insurance

A life insurance policy that lasts your entire lifetime, as long as premiums are paid. One of the most common types of permanent life insurance is one you’ve likely heard of: whole life insurance . It can build cash value over time, as well as provide a death benefit to your beneficiaries.

Personal Injury Protection (PIP)

A type of auto insurance that helps pay for medical expenses, lost wages, cleaning services, and other related costs (even funerals) for you and your passengers if you're injured in a car accident. It’s often required by some states in addition to liability insurance.

A written contract between you and the insurance company stating the terms of insurance. Learn how to read a life insurance policy,

Policy Dividend

Many whole life insurance policies provide dividends representing a portion of the insurance company’s profits that are paid to policyholders; policyholders are not typically guaranteed dividends. The dividend amount often depends on the amount of money paid into the policy. Dividends are typically not guaranteed and are subject to the financial performance of the insurance company.

Policy Loan

Let’s say you own a whole life insurance policy and need emergency cash. One option is to get a policy loan, which accesses the cash value of your life insurance. You’re not actually withdrawing the cash value, it’s simply being used as collateral on the loan. Keep in mind that loans accrue interest and if the money isn't paid back, the money is withdrawn from the policy’s death benefit. Learn more about how to cash out a life insurance policy.

Policy Proceeds

The amount of money actually paid on a life insurance policy at death, or when the policyowner receives payment at surrender or maturity.

Policyowner

Also known as the policyholder, this is the person who owns an insurance policy. It’s usually the insured person, but it may also be a relative of the insured, a partnership or a corporation.

Power of Attorney

A document that allows you to appoint someone to manage your affairs if you become unable to do so. This may include performing financial transactions with your resources, making decisions regarding your medical treatment, or both. You can name anyone you want to be power of attorney, but it should be someone you trust completely.

Preferred Rates

The healthiest people with the safest lifestyles are the least risky to the insurance company, so they are placed in the categories that qualify them for the lowest rates, called preferred rates. Considerations include health, gender, smoking habits, occupation and hobbies. Learn more about what factors affect life insurance premiums.

The amount of money you pay for an insurance policy. Depending on the policy, premiums can be paid monthly, quarterly, semi-annually or annually. Factors such as your age, health, gender and coverage amount all determine your premium amount. 

Primary Beneficiary

The first person in line to receive the insurance policy death benefit. This is often a spouse, sibling or child. With most policies, you can change your beneficiary at any time.

A legal document that describes a security, such as a stock, bond or mutual fund, to potential investors. A prospectus contains facts about the company (or fund), its finances, management, and other information that can help investors make an informed decision.

Qualified Annuity

An annuity purchased with pre-tax dollars. The money that you put into the plan is tax deductible when you contribute it, but all of the money you later receive from the annuity payouts will be taxable, since you haven't yet paid tax on it. Learn more about TruStage Annuity products .

The basis for an additional charge to the standard premium because the person insured is classified as a greater than normal risk. This usually results from impaired health or a hazardous occupation. Learn more about the factors that affect life insurance premiums.

Reduced Paid-Up

If you own a whole life policy , the reduced paid-up option would allow you to give up your existing coverage and instead receive a reduced death benefit that needs no additional payment of premiums. That reduced amount is based on the cash value at the time you stop the policy.

Reinstatement

Restoring a policy that had previously lapsed due to unpaid premiums. This is usually allowed during the 31 days following the expiration of an insurance policy's grace period . Reinstatement requires payment of all overdue premiums plus interest, and may require evidence of insurability.

Renters Insurance

A policy designed to protect people living in a rented apartment, condo, or home. It helps pay for personal property after unexpected circumstances such as a theft or fire and can even protect against liability if someone gets hurt where you’re renting. Learn more by researching prices.

Repatriation

The process of returning remains of a loved one to the legal residence of the deceased, then typically to their preferred funeral home.

Replacement

The act of terminating a policy with an insurance company and replacing it with a new policy. Policyholders sometimes replace their policy with a new one to get more or less coverage, to lower the premium payment, or to switch to a policy better suited to their needs. Replacement transactions are highly regulated to help protect consumers.

Replacement Cost Insurance

Coverage that reimburses the full cost of damaged or destroyed property with a new item that’s similar in type and quality. It’s designed to make sure your possessions are replaced at today's market prices instead of their depreciated value.

Revocable Beneficiary

A type of beneficiary designation that can be changed without the beneficiary's consent.

An optional add-on to an insurance policy that provides additional benefits for an increased cost. Examples of life insurance riders include accelerated death benefits and critical illness riders. Learn more about life insurance riders.

Settlement Options

A settlement is the way your life insurance policy proceeds are paid out. Options include a lump-sum cash payment, life income, or periodic payments for a certain amount of time. As a policyholder, you can usually choose the settlement method you prefer though your beneficiary may also get to choose.

Suicide Clause

A provision in a life insurance policy that denies payment if the insured person takes his or her own life within a set period after the policy is issued, typically two years. Is suicide covered by life insurance ?  

Supplementary Contract

An agreement between a life insurance company and a policyholder or beneficiary in which the policy’s proceeds are paid over a period of time instead of as a lump sum. For example, a beneficiary may decide that he wants to be paid $1,000 a month by the life insurance company. The insurance company could then set up a supplementary contract with the beneficiary reflecting this payout method.

Surrender Charge

The fee deducted from a life insurance policy or annuity payout when a policyholder cancels (or “surrenders”) the policy. Surrender charges typically decline over time, though some policies impose surrender fees for as long as 15 to 20 years after you buy a policy.

Term Conversion

Term life insurance, trustage life of canada.

Someone who lacks any form of insurance coverage. As a result, they won’t be able to offer financial compensation for damages, injuries, or losses unless they pay for it out of their own pocket.

Underinsured Motorist Insurance

A type of auto insurance that protects you if you're in an accident caused by a someone who doesn’t have any or doesn’t have enough coverage to pay for the damages or injuries they caused. Essentially, it helps pay the actual cost of your injuries and property damage when the person at fault can’t.

Underwriter

The person in an insurance company who reviews the application for insurance and decides if the applicant is acceptable and at what premium rate. For life insurance, the underwriter will look at a number of data points, including your lifestyle, occupation, medical record, financial history, and driving record. Learn more about what impacts the cost of life insurance.

Underwriting

The process by which an insurance company reviews your application and other information and decides whether to insure you and if so, how much you’ll pay for coverage. For life insurance, the underwriter looks at data like your age, health and medical history as well as lifestyle information like your hobbies and driving record.

Union Security Insurance Company (USIC)

Universal life insurance.

A type of life insurance that can protect you for your entire life, while offering the flexibility to change your premium or benefit amount as life takes twists and turns. Universal life insurance also allows you to build cash value over time that you can use for unexpected expenses that come up.

Variable Annuity

Variable life insurance, waiver of premium, whole life insurance, withdrawal charge, 10, 15, 20, 30-year insurance policy.

A life insurance policy that covers you for 10, 15, 20 or 30 years, known as the term. If the insured passes away during this time, the insurance company will pay his or her beneficiaries. Once the term ends, so does the policy. Learn more about term life insurance .

1035 Exchange

Think of it as a way of trading in your life insurance policy or annuity for a new one without any tax penalties. The exchange must meet the requirements of Section 1035 of the Internal Revenue Code for the transaction to be tax-free. Learn more about life insurance and taxes .

The fundamentals of term life insurance

Why choose term life insurance, who is term life insurance best for.

• How to buy term life insurance 

Term Life Insurance: Simple, Affordable Protection

Affiliate links for the products on this page are from partners that compensate us (see our advertiser disclosure with our list of partners for more details). However, our opinions are our own. See how we rate insurance products to write unbiased product reviews.

• Term life insurance offers coverage for buyers who want to protect their family for a limited time.
• 99% of term policies never pay out due to conversion, expiration, or lapsed payments.
• Not all term life insurance policies can be converted to permanent life insurance.
• Compare life insurance quotes with Policygenius .

Life insurance can financially make or break a family after an unexpected loss. Yet, many individuals don't prioritize it, especially while young and healthy. Ironically, the best time to buy life insurance is also the time when buyers are least likely to see the long-term value. "If you don't make it home and someone relies on your income to live, you need life insurance," says Mark Williams, CEO of Brokers International.

It may feel difficult to justify paying for another big monthly expense on top of housing, car payments, student loans, and retirement savings. But when it comes to protecting your family, if a devastating loss occurs, an extra $20 to $60 a month is a small price to pay. If you're buying term life insurance, the goal is to protect family members should you die unexpectedly within a pre-agreed term.

Term life insurance offers temporary coverage, usually over a 10-, 20-, or 30-year period. If you die during your term, your beneficiaries get your payout, known as the death benefit. Unlike permanent life insurance , which lasts your lifetime, term life insurance doesn't offer a cash value component . This feature allows you to earn interest on a portion of your premiums to grow your policy. 

The main appeal of this type of insurance policy is its affordability. The best term life insurance can keep costs down, especially for younger, healthy individuals. However, keep in mind that if you decide to renew your policy, your premiums will increase based on your age and health status. 

Cover specific needs

Many people only require life insurance to protect their dependents financially if they pass away. For example, say you have children who rely on your income or a spouse you share a mortgage with. Temporary coverage is ideal if you want protection for specific temporary needs until your children move out or the mortgage gets paid off. 

Flexibility

Term life insurance gives you the flexibility to select the coverage amount and the length of the term based on your family's needs and your budget. You can add a term life conversion rider to your policy (some policies already include this benefit). This add-on upgrades your term to a permanent policy if you opt to convert within a certain amount of time. 

Affordability

Term life insurance is ideal if you need substantial coverage but are working with a limited budget. According to Policygenius , the average monthly premium for a $500,000 policy is $27. Compare this to the average monthly cost of a $50,000 whole life insurance policy, which is $451. 

Term life insurance is best for anyone who requires temporary insurance and wants the most coverage at a competitive rate. Life insurance is particularly crucial for families with young children and those with an outstanding mortgage. It ensures your dependents can maintain their current lifestyle and pay off their debts. 

On the other hand, if you have long-term dependents, such as a child with a developmental disability or an elder parent with dementia, permanent life insurance may be a more suitable option.

How to buy term life insurance 

Term life insurance can be purchased through industry giants like New York Life Insurance , Guardian , and MassMutual Life Insurance . If you want a higher value policy, the option to convert at a later time, or term riders to temporarily increase the value of a whole life insurance policy, we'd recommend working with established giants. 

However, many online-only companies like Ethos and Ladder Life offer easy alternatives for people willing to accept less flexibility for a lower monthly premium. We've rated the best term life insurance companies based on coverage, price, service, and other key factors. Whatever you choose, we recommend shopping around. There are four steps to purchasing term life insurance:

Step 1: Apply

Some insurance companies allow you to obtain a term life insurance quote online. Others require you to speak to one of their insurance agents. Regardless, you'll typically have to take a health questionnaire and medical exam to qualify for a policy. If you have pre-existing health conditions that disqualify you from a traditional term life policy, consider looking into no medical exam life insurance .

You can find our guide on the best no medical exam life insurance here.

Step 2: Choose a term

According to Guardian Life Insurance , a good rule of thumb is to choose a term long enough to see your children out of the house and through college. You'll pay more monthly for a longer term, but it is better to be cautious because you don't know what the future holds. Also, getting insurance when you are young and in good health is usually easier.

Step 3: Decide a death benefit amount 

Ten times your annual salary is a rule of thumb, but you can decide what works for your family and financial situation. Work with an insurance agent or a financial advisor to determine how much coverage you need. 

Step 4: Name a beneficiary

A beneficiary is the person you select to receive the death benefit. You can pick multiple people, a trust you've set up, or a charity, according to the Insurance Information Institute . Most people select their spouse, partner, or trust created for a child.

Term life insurance FAQs

When your term ends, you no longer have coverage. If you die after your coverage ends, your beneficiaries won't receive a death benefit. To ensure continuity in coverage, you can purchase another term. Alternatively, many policies offer built-in conversions or conversion riders at an extra premium to upgrade your term into a permanent policy. 

It depends, but you'll likely see increased premiums . Some companies offer no medical exam life insurance, allowing you to obtain coverage despite your medical condition. However, these policies tend to have higher premiums for limited coverage. 

Roughly 10 to 15 times your income. However, this figure can vary based on your debts, income, mortgage, final expenses, and your children's future educational expenses. Work with an insurance agent or a financial advisor to accurately assess your term life insurance needs.

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• Frank Cerabino
• Nation & World
• Fort Lauderdale

Why more homeowners are dropping their insurance

It was 2019 when Anjali Tierra decided that  homeowners insurance  wasn't worth the price.

The retired high school teacher, 58, took out a policy in late 2018 after buying a three-bedroom home nestled in the Tehachapi Mountains of Southern California. She considered the insurance affordable at less than $100 a month, and the coverage brought her peace of mind while living in a  “very high” fire hazard  severity zone.

But the following year, when Tierra’s insurance provider sent her a renewal notice, she learned her monthly payment had jumped to $350  –  more than what she was comfortable paying with the $3,500 she gets each month from her pension. She dropped the insurance policy, assuming she would find affordable coverage somewhere else.

Her search turned up empty. She's been without homeowners insurance ever since.

"Every year, usually in the springtime, I will start to do the research again," she said. "I will just randomly choose an insurance company to see if they'll cover me. And since 2019, I've been rejected by every single insurance company, large and small."

Tierra is among a growing number of American homeowners who are “going bare,” or living without homeowners insurance. A recent study from the Insurance Information Institute found 12% of Americans no longer have home insurance, up from 5% in 2019. 

It’s the highest level of uninsured homeowners the industry-funded research group has seen, and follows a dramatic  spike in the cost of coverage .

“It is a very concerning trend as catastrophe losses continue to escalate,” said Mark Friedlander, director of corporate communications at the Insurance Information Institute. “It is not feasible for most Americans to pay out of pocket for a significant loss to their property.”  

What are the risks of not having home insurance?

Dropping insurance isn’t an option for most U.S. homeowners. 

Mortgage lenders typically require proof of homeowners insurance –  which covers  select damages to the house, its contents and other structures on a property. Homeowners who fail to secure coverage can find their lender  charging them for “force-placed insurance,”  which can be twice as expensive as other insurance policies and protects the lender rather than the homeowner.

But for the  roughly 40% of Americans  who own their home outright, homeowners insurance may be viewed as a discretionary purchase ‒ even if industry experts say forgoing insurance often isn't worth the risk.

"You're gambling on whether your property is going to sustain a loss," said Tim Zawacki, principal research analyst for insurance at S&P Global Market Intelligence. "And when you look at things like some of these hurricane forecasts that are out there, and data regarding the frequency of severe convective storms, that's a risky bet."

That hasn't stopped some homeowners from opting to  “self insure,”  or set aside money to save up for out-of-pocket losses that would have gone toward a premium. Others, like Tierra, focus on  mitigation efforts  to prepare their homes for potential disasters.

Tierra keeps the area near her home clear of any brush and trees and has installed ember-proof vents on her roof. Still, every fire season without insurance puts her on edge.

“This is my nest egg,” she said. “I do everything I can do possibly to protect my pets and to protect my emotional welfare, but it has been emotionally draining.”

The stress levels households are experiencing around the insurance crisis is “unprecedented,” according to California consumer insurance advocate Amy Bach.

“The majority of homeowners’ net worth is tied up in their homes. You can lose most of your net worth in one severe weather event if you don’t have insurance,” she said. 

Bach co-founded the consumer advocacy group United Policyholders three decades ago to counter the wealthy and powerful insurance industry. She says she knows people are getting priced out of homeowner’s insurance from her work on the ground in California.

“The premiums people are getting quoted are insane, $12,000, $18,000, $40,000. They can’t get their minds around it or their wallets,” she said.  

Why has homeowners insurance gone up so much?

Insurance companies sought to raise homeowners' premiums  by more than 11% last year , according to S&P Global Market Intelligence. 

Analysts say insurance companies are trying to keep up with years of big losses as inflation and supply chain disruptions pushed up the costs to fix damaged homes. The Insurance Information Institute reports that  insurers paid on average $1.10  for every $1 in premium they collected last year. 

Then there’s climate change, which is  intensifying  extreme weather. The National Oceanic and Atmospheric Administration reported  28 billion-dollar disaster events  last year, a new record in the inflation-adjusted data going back to 1980.

“You have all these factors combining to result in people paying a lot more for the same amount of coverage,” said Zawacki of S&P Global Market Intelligence.

He expects another double-digit rate of growth this year.

Former Federal Emergency Management Agency administrator Craig Fugate said for some mortgage-free homeowners, dropping insurance may not be a bad decision if they have large enough cash reserves. But people tend to underestimate their exposure and the cost to repair.

"It's a risky decision," he said.

Why are Americans losing home insurance?

The higher premiums are putting a strain on households already struggling to afford price increases on life’s staples,  from groceries  to health care to  automobiles , particularly lower-income households that have depleted pandemic-era savings and are  running up credit card debit  and falling behind on payments. 

At the greatest risk are low-income homeowners and homeowners of color who disproportionately go without homeowners insurance, research shows.

The Consumer Federation of America found homeowners who make less than $50,000 a year are twice as likely as the general population to go uninsured. The consumer advocacy group also found that 22% of Native American, 14% of Hispanic and 11% of Black homeowners have no homeowners insurance, leaving them more at risk than white homeowners.

Age is another significant factor. Older Hispanic and Black households are at higher risk of being uninsured. Older homeowners in general are more likely to leave their homes unprotected than younger ones.

“For many families around the country, their house is not only their home, but also their most valuable financial asset,” said Sharon Cornelissen, director of housing at the Consumer Federation of America. “One major storm or fire can turn an uninsured homeowner into an unhoused family or leave them to live in the wreckage of a damaged, unsafe home.”

That’s what happened to James Mercadal.

The 54-year-old inherited his two-bedroom house in New Orleans after his parents died in 2004. Mercadal had lived in the 7th Ward home his entire life, but was forced to temporarily move out after Hurricane Ida hit the city in 2021. 

Mercadal said the damage was extensive. The roof, drywall and various furniture needed to be fixed or replaced, the floors had been flooded, and the home was growing mold. In all, he said roughly $38,000 worth of work was needed.

But as a person who is blind and living on a fixed income, Mercadal couldn’t afford the monthly insurance – let alone the repairs. 

“I’m interested in getting the insurance (now),” he said. “But with my income being at $900 a month, I don’t think I will be able to afford it.”

Mercadal has received assistance from  the disaster relief organization SBP . Now, after a short stint in Houston after the hurricane, he’s back in his home.

In what states is it hard to get homeowners insurance?

Cornelissen of the Consumer Federation of America said this is a nationwide crisis in the making. Higher-risk areas may face higher costs first, but the rest of the country won’t be far behind. 

Yes, coastal disasters  hurricanes  and  wildfires  are affecting a growing number of people on the coasts. The U.S. Fire Administration estimates that more than 46 million homes valued at $1.3 trillion are at risk for wildfires, and the top 10 growth states in the 2020 U.S. Census were all hurricane-prone. Some insurance providers are even  beginning to pull out  of states like  California and Florida .

But landlocked states are getting hit harder too, with thunderstorms resulting in an estimated $64 billion worth of economic losses last year – nearly double the losses in 2022,  according to reinsurer Munich Reinsurance America . 

“This is not an issue restricted to coastal states such as California and Florida,” Cornelissen said.  

Still, people underestimate the likelihood that severe weather will affect them, according to Insurance Information Institute research.  

A third of homeowners reported that they have been impacted by weather in the past five years,  a 2023 survey found . Among the survey population of all homeowners, 59% believe their residence will be impacted by weather risks in the next 10 years, but 25% believe that they will never be impacted by weather risks and another 42% believe they will not be impacted in the next five years.

'I have nowhere to go'

Michelle Gradnigo is a homeowner in the fire-scarred foothill town of Paradise north of Sacramento. In 2018, the Camp Fire − the deadliest wildfire in California history − destroyed more than 90% of the homes there.

Her annual tab for homeowner’s insurance was already high – $3,531 a year – but she budgeted for it. Then in January she got her renewal in the mail. Her premium jumped 500% to $19,310. Her monthly mortgage payment doubled overnight to $8,000.

In a panic, she contacted her broker. She was told if she increased her deductible, lowered the estimated cost to rebuild and bundled her car insurance, her premium would drop by several thousand dollars. That wasn’t enough. She had to pull money out of her retirement account and take on credit card debt for a couple of months just to make the higher payments. 

More money for less coverage seemed predatory to Gradnigo. Nothing had changed in the wildfire threat level to her home, she says. Most of the trees are long gone. Her home has sprinklers inside and a fire hydrant outside. She says she turned to the state insurance commissioner and to her local representative. No one would help her. 

A health care administrator and retired lieutenant colonel in the Army, Gradnigo, 54, had hoped to move away with her 16-year-old son, but now she says she feels stuck. With runaway premiums and insurance companies dropping coverage for homeowners in high-risk areas, she has watched neighbors slash the asking price to sell their homes. 

“If I put this house on the market and it really doesn’t sell, I will know that I have nowhere to go,” Gradnigo said. “It’s despair here. No one is helping us and no one is talking about it.”

Gradnigo dropped Farmers Insurance and purchased fire insurance through the Fair Access to Insurance Requirement plan which offers a limited policy as a last resort for California property owners unable to find affordable coverage. She supplements that coverage with a policy to cover other liabilities such as water damage or theft.

Her out-of-pocket expense is now about $12,000 a year, three times what she used to pay. In addition to the higher bill, she says she no longer has the feeling of safety she once had.

“I know it’s just an insurance company. But when you’ve grown up believing your insurance agents are the people you can trust and hearing the commercials and the jingles and then they just do that to you …” she said, trailing off. 

Can I negotiate a lower insurance premium?

There are several steps homeowners can take to try to lower their homeowners insurance.

• Try bundling  home insurance  with  auto insurance  or another policy such as  pet  or  life insurance .
• Raise the policy deductible, or ask if an insurance agent can help identify discounts.
• Shop around for a policy as soon as you get a nonrenewal notice. 
• Seek out an experienced insurance broker who can access different options.
• Reduce the risk of your home being damaged or destroyed in a disaster.

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Buying long-term care coverage in your 60s? 5 tips to compare policy options

By Aly Yale

Edited By Angelica Leicht

June 28, 2024 / 9:42 AM EDT / CBS News

Long-term care is costly and can easily eat into your budget as you age. In fact, according to 2023 data, even a shared room in a nursing home facility would cost you nearly $9,000 per month . And a traditional Medicare policy is, unfortunately, no help with these costs. A long-term care insurance policy is, though.

And while buying this type of coverage early is the best way to protect yourself, you may still want to purchase long-term care insurance well into your 60s . If this is the case, you'll need to compare policies and insurers carefully, as options (and premiums) can vary widely as you age. 

Start comparing your top long-term care policies online now .

Here's how you can compare long-term care insurance policies successfully:

Understand your health risks

The first thing you'll want to think about is your health — or any conditions that could impact your options or premiums.

"Many people 60 and over have a higher likelihood of being declined coverage due to complicated health conditions," says Brian Gordon, a long-term care advisor and president at Gordon Associates. "The first step at any age is to be prescreened from a health standpoint."

An insurance broker can help you with prescreening. "It helps us set realistic underwriting expectations," Gordon says.

Whatever you do, make sure you're honest with your agent about your health and medical history.

"Many people start developing all sorts of health issues in their 60s and you should always be very open with the agent about all medical issues," says Mark Baron, owner of Baron Long Term Care Insurance. "If you can avoid getting declined by having your health issues out in the open, you will have more options later. It will also help the agent steer you to the correct plan that's suitable for you."

Find out what your best long-term care coverage options are now .

Read the fine print

Premiums are one thing to look at, but you should also consider the fine print of each policy you're eyeing. First, understand the coverage details.

"Does the policy include in-home care, assisted living, or nursing home care?" asks Shinobu Hindert, a certified financial planner and author of Investing Is Your Superpower . "It's important to understand what you're buying so make sure you're clear on the benefit triggers."

You should also look at the benefit amounts, how long the benefits last and added features, like inflation protection, which ensures your policy "keeps pace with rising care costs," Hindert says. 

Look at the elimination period

Long-term care insurance policies usually come with elimination periods — essentially waiting periods until your benefits can kick in. It's important to think about these when weighing policies, as you may need to cover any gaps out of pocket.

"Longer elimination periods usually result in lower premiums," Hindert says. "But you should be prepared to cover care costs out-of-pocket during this period."

You also might consider a short-term care policy to cover the gap. Talk to an insurance agent to see if this is the right move for you.

Research the insurer

Look into each insurance company you consider, too. Since you may not use your benefits for a few years (or even decades) down the line, you need to know the insurers will still be around and solvent enough to cover your claims.

"Do your due diligence on the financial stability of the insurer by looking at ratings from agencies such as A.M. Best, Moody's, or Standard & Poor's to ensure they can pay out future claims," Hindert says. 

You can also look up customer reviews, and check their rating with the Better Business Bureau.

"I prefer highly rated carriers that have multiple insurance product lines and therefore has a well-rounded business that could weather the occasional spike in long-term care claims," says Joseph Gaj, director of insurance at Wealth Enhancement Group.

Asking for a professional's help is always smart when it comes to health and retirement planning. An insurance agent can help point you toward the right products for your budget and goals, and they can also assist with comparing premiums , insurance companies , and coverage options .

"It's imperative that the agent looks at more than one plan to compare, unless you have health issues that drives the decision towards one particular plan that may be the only one that would consider you," Baron says. "Some plans are priced much better for younger people and other plans are priced better for older folks." 

You can also look at alternatives to long-term care policies if you can't qualify — things like annuities, certain retirement accounts, or a health savings account. A financial pro can guide you toward the best solution for your specific scenario. 

More from CBS News

Why seniors should buy long-term care insurance and Medicare supplemental insurance, according to experts

5 hidden expenses to watch for when buying a home, according to experts

How many CD accounts should I have? What experts say

Is a $100,000 long-term CD worth opening now?

United States Department of Agriculture

Risk Management Agency

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USDA Expands Insurance Options for Specialty and Organic Growers

News release.

WASHINGTON, June 27, 2024 – The U.S. Department of Agriculture (USDA) is expanding crop insurance options for specialty and organic growers beginning with the 2025 crop year. USDA’s Risk Management Agency (RMA) is expanding coverage options by allowing enterprise units by organic farming practice, adding enterprise unit eligibility for several crops, and making additional policy updates. This is the first of several announcements this summer, which will include the expansion of the shellfish policy in the Northeast and new coverage for grape growers in the West and beyond. These expansions and other improvements build on other recent RMA efforts to better serve specialty crop producers and reach a broader group of producers.  

“The Risk Management Agency is excited to expand coverage options for specialty and organic growers including the availability of enterprise and optional units for many producers,” said RMA Administrator Marcia Bunger. “Expanding our coverage options gives producers more opportunities to manage their risks. We will continue to build on our work through future announcements later this summer.”  

The following changes will be made beginning with the 2025 crop year :   

• Expand Enterprise Units (EU) to almonds, apples, avocado (California), citrus (Arizona, California, and Texas), figs, macadamia nuts, pears, prunes , and walnuts.
• Allow non-contiguous parcels of land that qualify for Optional Units (OU) to also qualify for EU.
• Allow EUs by organic farming practice for alfalfa seed, almonds, apples, avocado (California), cabbage, canola, citrus (Arizona, California and Texas), coarse grains, cotton, ELS cotton, dry beans, dry peas, figs, fresh market tomatoes, forage production, grass seed, macadamia nuts, millet, mint, mustard, pears, potatoes (northern, central, and southern), processing tomatoes, prunes, safflower, small grains, sunflower seed , and walnuts. 
• Expand OUs by organic practice to all remaining crops where OUs are available, and the organic practice is insurable.
• Walnut Quality Adjustment: Allow sunburned damaged walnuts to be eligible for indemnity payments through quality adjustment.  
• Almond Leaf Year: Expand insurance coverage to younger trees by including trees in their fifth leaf year after being set out.
• Processing Bean End of Insurance Period: Extend insurance coverage in Delaware, Maryland , and New Jersey by an additional 16 days.
• Canola: Expand insurance for canola into South Dakota and Michigan.

These revisions come through the Expanding Options for Specialty and Organic Growers Final Rule published today by the Federal Crop Insurance Corporation (FCIC). This Final Rule will update the Common Crop Insurance Policy Basic Provisions, Area Risk Protection Insurance Basic Provisions , and includes changes to individual Crop Provisions. The enterprise unit availability will continue to be rolled out throughout the year with each crop’s contract change date and RMA will continue to evaluate expanding EUs to additional crops.    

Additional changes in the June 30 Final Rule include:

• New Breaking Acreage:
• R educe administrative burdens on growers and the delivery system by removing written agreement requirements on new breaking acreage.  
• Reduce coverage penalties on perennial specialty crop producers and producers of intensively managed crops, such as alfalfa, when they move to row crop production. This allows for a seamless transition without losing crop insurance coverage.
• Assignment of Indemnity: Provide flexibility for an indemnity payment to be issued via automated clearing house (ACH) or other electronic means when these methods do not allow for multiple payees.
• Good Farming Practices (GFP): Streamline and shorten the FCIC GFP reconsideration process by closing the administrative file following FCIC’s initial GFP determination.
• Double Cropping and Annual Forage: Clarify a producer must prove insurance history for the annual forage crop and meet the current double cropping requirements to receive a full prevented planting payment.

RMA continues to explore ways to improve risk management tools for specialty crop producers and will be announcing additional program enhancements later this summer. Some of those improvements include:  

• Expanding the Shellfish Program to an additional 18 counties in seven states. Additional modifications include allowing insurance on seeds initially purchased smaller than 4 mm, allowing producers to use existing records for coverage in adjacent program counties, and allowing alternative yield procedures.  
• Piloting the Fire Insurance Protection – Smoke Index (FIP-SI) crop insurance program for grapes in California for the 2025 crop year. The pilot program is an index-based endorsement to the Actual Production History (APH) Grape policy that provides additional protection against smoke damage and covers the liability between the APH policy’s coverage level and 95%.
• Expanding the Enhanced Coverage Option (ECO) to walnuts and citrus crops and increasing premium support to be consistent with the Supplemental Coverage Option.
• Expanding the Grapevine insurance program to an additional 29 counties in California. Grapevine insurance offers protection against vine losses in the event of several named perils.
• Releasing new Organic Practice Guidelines to producers for the 2025 crop year. These guidelines are to help producers report planted or perennial acreage insured under a certified organic or transitional practice.

More Information

This announcement further advances USDA’s recently announced Specialty Crops Competitiveness Initiative, a Department-wide effort to increase the competitiveness of specialty crops products in foreign markets, enhance domestic marketing, and improve production and processing practices. 

Crop insurance is sold and delivered solely through private crop insurance agents. A list of crop insurance agents is available at all USDA Service Centers and online at the RMA Agent Locator . Learn more about crop insurance and the modern farm safety net at rma.usda.gov or by contacting your RMA Regional Office . 

USDA touches the lives of all Americans each day in so many positive ways. Under the Biden-Harris administration, USDA is transforming America’s food system with a greater focus on more resilient local and regional food production, fairer markets for all producers, ensuring access to safe, healthy and nutritious food in all communities, building new markets and streams of income for farmers and producers using climate smart food and forestry practices, making historic investments in infrastructure and clean energy capabilities in rural America, and committing to equity across the Department by removing systemic barriers and building a workforce more representative of America. To learn more, visit usda.gov .  

USDA is an equal opportunity provider, employer and lender.

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Turning 26 and Struggling to Find Health Insurance? Tell Us About It.

The New York Times and KFF Health News are looking into a dreaded “adulting” milestone: finding your own medical insurance at 26.

By Elisabeth Rosenthal

A hard-won provision of the Affordable Care Act allows young adults to stay on their family’s insurance until age 26. But after that, those without employer-based insurance face an array of complicated choices, including whether to shop on the insurance plan exchanges, apply for Medicaid or roll the dice and go uninsured.

Are you a young adult confused about navigating the exchanges used to pick plans? Have you bought a plan on an A.C.A. exchange and found that it didn’t cover care? Have you married or taken a job just to get insurance? Did you decide to go without coverage?

Whatever your story, my team of reporters and I want to hear it. I’m a longtime health journalist who has worked at both The New York Times and KFF Health News, an independent news organization covering health policy.

We’ll read every response to this questionnaire, and we’ll reach out to you if we’d like to learn more about your story. We won’t publish any part of your response without following up with you first, verifying your information and hearing back from you. And I won’t use your contact information for any reason other than to get in touch with you.

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