What banks allow a term life policy to be used as collateral??

[Nurse D]

Are there any financial institutions that allow them to be assignees on term life policies?


I have a 20 year term, convertible, life policy that I am considering assigning to a bank/financial institution in order to access a portion of the face value of the policy.


The policy is one year old AND is still within the 2 year contestability period.


To my knowledge, Indiana does NOT have any rules against this type of transaction and my policy doesn’t prohibit it as long as the policy is paid and current, no matter if it’s within the 2 year contestability period or not.


I have heard that some banks/financial institutions will use them as collateral by becoming an assignee on the policy for the amount the insured has requested. I haven’t read where the insured makes any payments but it just an accelerated payment and when the policyholder passes, the bank gets their portion and the remaining amount, if any, goes to the beneficiaries.


Can anyone advise if this is still done and what institutions or investment companies still do this?


I am NOT interested in doing a life settlement and am not willing to sell my policy for pennies on the dollar and if there’s broker fees, it would be worse. The life settlement process, itself, feels predatory which is why I would rather do this type of transaction with a reputable financial institution.


The “policy auctions” they have are very strange. When I asked what information of mine is furnished to these “investors” to ensure the best offer, it was invasive, IMO. The life expectancy report is all they care about.


I am considered terminally ill and on disability so I don’t qualify for traditional loans.

 

[fed up]

I don't think it is going to happen since it is a term policy which has no cash value

 

[PrivClientSG]

Welcome, and I am sorry to hear of your illness. That said, first, I wouldn't be as concerned about whether your state (Indiana) has any rules against this type of transaction, as I would be about finding a bank that would agree to this loan. The collateral assignment form from any insurance company will protect the financial institution. The ABA may still have their own, standardized, collateral assignment form. If you do find a bank to do this, they may have a problem with the policy being within the two year contestability period. That is up to the bank, not the state. Yes, a state may have an issue with certain types of loans, lending activities, etc., but in this case I think it's a moot point.

Second, and more to your question, I have had clients assign the death benefit of term policies to a bank due to a loan the bank will make. However, each one I've been involved in has been in the "commercial" or "business" marketplace. In addition, in each one, the loan called for loan payments to be made. Thus, this did not take on the form of an accelerated payment of the death benefit which would be paid when the insured/borrower passes away. It was a borrower, for business purposes, needing a business/commercial loan, saying I want to borrow money, for this specific purpose (which was the reason for borrowing, and the entire deal was underwritten based upon this), and the bank saying OK, but if you pass away, this entire situation and deal can fall apart -- so we want to be protected. As much as this was loan protection for the bank, it was also key-person coverage as well.

I am not aware of a bank who would loan an individual/insured money, based upon assigning the death benefit of a term policy. Not in the form and fashion you've described. I've had life insurance professionals tell me there are banks that would do this, and when I've asked for the name of just one -- somehow, they are unable to give the name of just one.

Every bank I know that is involved in life insurance lending does so based upon cash value. The previous example I gave is simply the bank wanting to be protected in a loan transaction they are engaging in (again, for a business/commercial loan).

That said, just to clarify -- there is a terminology distinction between life settlement and viatical settlement, whereas in the former, the insured is usually healthy, and the policy is not needed, wanted, etc. The latter is where the insured is terminally ill and needs/wants to access a portion of the death benefit by "selling" the policy. I would not categorize either as "pennies on the dollar" unless you are dealing with unscrupulous, shady, opportunistic, shady people. When dealing with professionals -- the right, quality, integrity based professionals -- the process is not predatory, however, in this discussion it is moot as you are not interested in "selling" your policy.

I won't speak to the policy auctions as I don't recommend them, I advise against them, etc. -- and find them to be operating under or off the radar so to speak. Talk about the potential of a predatory process. I've also found there is a great deal of vagueness and ambiguity throughout the entire process and discussion -- all of it -- not just about what information is supplied to these investors.

I wish you all the best.

 

[Tahoe Ray]

I am considered terminally ill and on disability so I don’t qualify for traditional loans.

Sorry to hear about your illness.

Have you checked your policy itself? Most modern term policies have ADB (accelerated death benefit) riders for terminal illness built into the base policy.

It largely depends on your prognosis but is certainly worth a look.

 

[scagnt83]

Sorry to hear about your illness.

Have you checked your policy itself? Most modern term policies have ADB (accelerated death benefit) riders for terminal illness built into the base policy.

It largely depends on your prognosis but is certainly worth a look.

This.

9 out of 10 policies sold in the past 15 years will allow the insured to access the death benefit while still living if they have a terminal illness with a prognosis of 12mo or less. Some even do 24months I believe.

 

[fed up]

This.

9 out of 10 policies sold in the past 15 years will allow the insured to access the death benefit while still living if they have a terminal illness with a prognosis of 12mo or less. Some even do 24months I believe.

Doesn't the DB become taxable when the policy is accessed prior to death? Seems I heard a story from an agent who had a client that needed money to cover an experimental medical procedure and advised client to access his policy since he was within 6 months of death without the medical intervention. He paid for and survived the operation with policy benefits but still died a year later and the estate was hit for the income tax on the early benefit.

 

[PrivClientSG]

Doesn't the DB become taxable when the policy is accessed prior to death? Seems I heard a story from an agent who had a client that needed money to cover an experimental medical procedure and advised client to access his policy since he was within 6 months of death without the medical intervention. He paid for and survived the operation with policy benefits but still died a year later and the estate was hit for the income tax on the early benefit.

Typically, no, it doesn't, but it can and will depend on the specifics. In the situation you described, there must have been something else going on. Now, interestingly enough, you said the estate was hit for the income taxes -- are you sure it was on the early/access/accelerating of the DB? Why the life insurance was left to the estate is another question (not a very good move in this, or in most situations), but perhaps the DB was left with a settlement option which generated an income tax liability. Also, someone who had no idea what they were talking about could have told the executor/executrix/representative something which was incorrect.

That said, obviously, many life insurance companies have policies which offer an option or options of "accelerating" a portion of, and accessing the death benefit -- if you are terminally, perhaps, chronically ill, etc., and you meet the various conditions. In these cases, if you are diagnosed with a terminal/chronic illness and access or accelerate the death benefit -- again, typically, it’s not taxable. In a tax context, it's simply being viewed as you being "the beneficiary" to a life insurance payout. However, it all depends on the details and specifics of the situation. I've not had one yet where it was taxable.

 

[Allen Trent]

Doesn't the DB become taxable when the policy is accessed prior to death? Seems I heard a story from an agent who had a client that needed money to cover an experimental medical procedure and advised client to access his policy since he was within 6 months of death without the medical intervention. He paid for and survived the operation with policy benefits but still died a year later and the estate was hit for the income tax on the early benefit.

Never seen an accelerated death benefit for terminal illness be a taxable event.

Is is possible you are thinking instead of an accelerated death benefit for chronic illness/LTC. Those are also normally tax free, but if a client filed an acceleration claim that exceeded the monthly IRS per diem for care, they would be taxed on the amount over the allowed monthly per diem by IRS that year. I believe 2023 is around $12,700 per month for chronic/LTC. So, is it possible in the example you mention that a client took an acceleration of say $100k, but then only needed 6 months of care, thus causing around $35-40k in taxable benefit?

Again , have not seen that with terminal illness acceleration.

 

[WinoBlues]

Sorry to hear about your illness.

Have you checked your policy itself? Most modern term policies have ADB (accelerated death benefit) riders for terminal illness built into the base policy.

It largely depends on your prognosis but is certainly worth a look.

@Nurse D what Ray said. I have helped at least a half dozen clients access a portion of their death benefit amount through the ABR.

In general you or your agent contact the claims department of the company, they send you a form for your doc to fill out and sign a HIppa for you to sign and all is returned to the company. In a week or two it is reviewed and a decision is made. Note: I do not know how being in the contestable period will affect this.

Also check if your policy has disability waiver or premium and now would be a good time to verify that your beneficiary(s) are worded correctly.

Your agent should help you with all of this.

 

[WinoBlues]

Never seen an accelerated death benefit for terminal illness be a taxable event.

Same