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

When a policy owner is applying for a bank loan and the bank requires collateral, one effective option is to assign the policy ownership to the bank. By assigning the policy, the bank gains a security interest in the policy. This means that if the policy owner defaults on the loan, the bank has the right to claim the policy benefits to satisfy the outstanding debt.

Assigning policy ownership is a common practice, particularly for life insurance policies that accumulate cash value. It allows the bank to have a legal claim over the policy, providing the necessary collateral that protects the bank’s investment while still allowing the policy owner to retain some rights to the policy, depending on the terms of the assignment.

Increasing the policy coverage amount, transferring the policy to a family member, or withdrawing all cash value do not appropriately address the collateral requirement from the bank. Increasing coverage may not provide the bank with security if the owner defaults, transferring the policy may lead to complications with the bank's collateral requirements, and withdrawing all cash value would potentially jeopardize the insurance coverage rather than securing the loan. Hence, assigning the policy to the bank is the most suitable and effective approach in this scenario.