What can a policy owner do if a bank loan application requires collateral?

When a policy owner needs to provide collateral for a bank loan, assigning policy ownership to the bank is a practical solution. By assigning the ownership, the bank has a legal claim to the policy in the event that the loan is not repaid. This process essentially gives the bank rights to the benefits of the policy, ensuring that if the borrower defaults, the bank can collect the death benefit or perhaps even surrender the policy to recover the loan amount.

In contrast, withdrawing cash from the policy might reduce the death benefit available and may not provide sufficient collateral for the loan. Terminating the policy would eliminate the life insurance coverage altogether, which defeats the purpose of having insurance in place. Increasing the insurance coverage is also unlikely to serve as collateral since the bank’s primary concern is having secured access to the funds, which is already established with an existing policy rather than increasing coverage. Assigning the ownership directly ties the bank's interest to the existing policy, making it the most logical and effective route for securing the loan.