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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 ."

Fidelity Life. " What Is a Collateral Assignment of a Life Insurance Policy? "

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

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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.

What is collateral insurance and how does it work?

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What Is Collateral Assignment of Life Insurance?

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Updated: December 14, 2023

How It Works
Overview of Application Process
Pros and Cons
Impact on Beneficiaries
Alternatives

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, this arrangement means the death benefit they receive could be reduced. 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 was assigned 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.

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 crucial for designating the lender as a 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.

Signed by Both Policyholder and Lender

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 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 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:

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 requisite 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 collateral assignment.

Pros and Cons of Collateral Assignment

Utilizing a life insurance policy for collateral assignment can offer a range of benefits and potential drawbacks. This method 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.

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 primary beneficiary 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 full death benefit.

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. Each option offers different benefits and risks compared to using life insurance as collateral.

These questions covers various topics related to collateral assignments, including the requirements, implications for beneficiaries and what happens under various scenarios.

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 types of 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 lets you calculate the appropriate amount of life insurance coverage needed, which is crucial when considering using a policy for collateral.

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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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Life Insurance

What Is Collateral Assignment (of a Life Insurance Policy)?

Meredith Mangan is a senior editor for The Balance, focusing on insurance product reviews. She brings to the job 15 years of experience in finance, media, and financial markets. Prior to her editing career, Meredith was a licensed financial advisor and a licensed insurance agent in accident and health, variable, and life contracts. Meredith also spent five years as the managing editor for Money Crashers.

Definition and Examples of Collateral Assignment

How collateral assignment works, alternatives to collateral assignment.

Kilito Chan / Getty Images

If you assign your life insurance contract as collateral for a loan, you give the lender the right to collect from the policy’s cash value or death benefit in two circumstances. One is if you stop making payments; the other is if you die before the loan is repaid. Securing a loan with life insurance reduces the lender’s risk, which improves your chances of qualifying for the loan.

Before moving forward with a collateral assignment, learn how the process works, how it impacts your policy, and possible alternatives.

Collateral assignment is the practice of using a life insurance policy as collateral for a loan . Collateral is any asset that your lender can take if you default on the loan.

For example, you might apply for a $25,000 loan to start a business. But your lender is unwilling to approve the loan without sufficient collateral. If you have a permanent life insurance policy with a cash value of $40,000 and a death benefit of $300,000, you could use that life insurance policy to collateralize the loan. Via collateral assignment of your policy, you authorize the insurance company to give the lender the amount you owe if you’re unable to keep up with payments (or if you die before repaying the loan).

Lenders have two ways to collect under a collateral assignment arrangement:

If you die, the lender gets a portion of the death benefit—up to your remaining loan balance.
With permanent insurance policies, the lender can surrender your life insurance policy in order to access the cash value if you stop making payments.

Lenders are only entitled to the amount you owe, and are not generally named as beneficiaries on the policy. If your cash value or the death benefit exceeds your outstanding loan balance, the remaining money belongs to you or your beneficiaries.

Whenever lenders approve a loan, they can’t be certain that you’ll repay. Your credit history is an indicator, but sometimes lenders want additional security. Plus, surprises happen, and even those with the strongest credit profiles can die unexpectedly.

Assigning a life insurance policy as collateral gives lenders yet another way to secure their interests and can make approval easier for borrowers.

Types of Life Insurance Collateral

Life insurance falls into two broad categories: permanent insurance and term insurance . You can use both types of insurance for a collateral assignment, but lenders may prefer that you use permanent insurance.

Permanent insurance : Permanent insurance, such as universal and whole life insurance, is lifelong insurance coverage that contains a cash value. If you default on the loan, lenders can surrender your policy and use that cash value to pay down the balance. If you die, the lender has a right to the death benefit, up to the amount you still owe.
Term insurance : Term insurance provides a death benefit, but coverage is limited to a certain number of years (20 or 30, for example). Since there’s no cash value in these policies, they only protect your lender if you die before the debt is repaid. The duration of a term policy used as collateral needs to be at least as long as your loan term.

A Note on Annuities

You may also be able to use an annuity as collateral for a bank loan. The process is similar to using a life insurance policy, but there is one key difference to be aware of. Any amount assigned as collateral in an annuity is treated as a distribution for tax purposes. In other words, the amount assigned will be taxed as income up to the amount of any gain in the contract, and may be subject to an additional 10% tax if you’re under 59 ½.

A collateral assignment is similar to a lien on your home . Somebody else has a financial interest in your property, but you keep ownership of it.

The Process

To use life insurance as collateral, the lender must be willing to accept a collateral assignment. When that’s the case, the policy owner, or “assignor,” submits a form to the insurance company to establish the arrangement. That form includes information about the lender, or “assignee,” and details about the lender’s and borrower’s rights.

Policy owners generally have control over policies. They may cancel or surrender coverage, change beneficiaries, or assign the contract as collateral. But if the policy has an irrevocable beneficiary, that beneficiary will need to approve any collateral assignment.

State laws typically require you to notify the insurer that you intend to pledge your insurance policy as collateral, and you must do so in writing. In practice, most insurers have specific forms that detail the terms of your assignment.

Some lenders might require you to get a new policy to secure a loan, but others allow you to add a collateral assignment to an existing policy. After submitting your form, it can take 24 to 48 hours for the assignment to go into effect.

Lenders Get Paid First

If you die and the policy pays a death benefit , the lender receives the amount you owe first. Your beneficiaries get any remaining funds once the lender is paid. In other words, your lender takes priority over your beneficiaries when you use this strategy. Be sure to consider the impact on your beneficiaries before you complete a collateral assignment.

After you repay your loan, your lender does not have any right to your life insurance policy, and you can request that the lender release the assignment. Your life insurance company should have a form for that. However, if a lender pays premiums to keep your policy in force, the lender may add those premium payments (plus interest) to your total debt—and collect that extra money.

There may be several other ways for you to get approved for a loan—with or without life insurance:

Surrender a policy : If you have a cash value life insurance policy that you no longer need, you could potentially surrender the policy and use the cash value. Doing so might prevent the need to borrow, or you might borrow substantially less. However, surrendering a policy ends your coverage, meaning your beneficiaries will not get a death benefit. Also, you’ll likely owe taxes on any gains.
Borrow from your policy : You may be able to borrow against the cash value in your permanent life insurance policy to get the funds you need. This approach could eliminate the need to work with a traditional lender, and creditworthiness would not be an issue. But borrowing can be risky, as any unpaid loan balance reduces the amount your beneficiaries receive. Plus, over time, deductions for the cost of insurance and compounding loan interest may negate your cash value and the policy could lapse, so it’s critical to monitor.
Consider other solutions : You may have other options unrelated to a life insurance policy. For example, you could use the equity in your home as collateral for a loan, but you could lose your home in foreclosure if you can’t make the payments. A co-signer could also help you qualify, although the co-signer takes a significant risk by guaranteeing your loan.

Key Takeaways

Life insurance can help you get approved for a loan when you use a collateral assignment.
If you die, your lender receives the amount you owe, and your beneficiaries get any remaining death benefit.
With permanent insurance, your lender can cash out your policy to pay down your loan balance.
An annuity can be used as collateral for a loan but may not be a good idea because of tax consequences.
Other strategies can help you get approved without putting your life insurance coverage at risk.

NYSBA. " Life Insurance and Annuity Contracts Within and Without Tax Qualified Retirement Plans and Life Insurance Trusts ." Accessed April 12, 2021.

IRS. " Publication 575 (2020), Pension and Annuity Income ." Accessed April 12, 2021.

Practical Law. " Security Interests: Life Insurance Policies ." Accessed April 12, 2021.

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Home > Finance > What Is Collateral Assignment Of Life Insurance

What Is Collateral Assignment Of Life Insurance

Published: November 22, 2023

Discover the benefits of collateral assignment of life insurance and how it can impact your finance. Gain valuable insights into this powerful financial strategy.

(Many of the links in this article redirect to a specific reviewed product. Your purchase of these products through affiliate links helps to generate commission for LiveWell, at no extra cost. Learn more )

Introduction, definition of collateral assignment of life insurance, how collateral assignment works, reasons for using collateral assignment of life insurance, benefits and drawbacks of collateral assignment of life insurance, comparison with other forms of collateral, examples of collateral assignment of life insurance, important considerations before using collateral assignment.

When it comes to securing a loan, financial institutions often require borrowers to provide collateral as a form of security. Collateral helps mitigate the lender’s risk by providing an asset that can be seized and sold in the event of default. While real estate and vehicles are common forms of collateral, there is another valuable asset that can be used – life insurance.

In the world of finance, the collateral assignment of life insurance has gained popularity as a means of securing loans. This unique strategy allows borrowers to use the cash value or death benefit of their life insurance policy as collateral. By assigning the policy to the lender, the borrower can provide an additional layer of security while retaining ownership and control of the policy.

In this article, we will delve into the concept of collateral assignment of life insurance, understanding how it works, the reasons for using it, the benefits and drawbacks, as well as important considerations to keep in mind.

Additionally, we will compare collateral assignment with other forms of collateral and provide real-life examples to illustrate its practical application in various scenarios.

Before we proceed, it’s important to note that the details of collateral assignment can vary depending on the jurisdiction and terms of the insurance policy. It’s crucial for borrowers and policyholders to consult with their financial advisors and insurance providers to ensure they fully understand the implications and requirements of utilizing collateral assignment of life insurance.

Collateral assignment of life insurance refers to the process of using a life insurance policy as collateral for a loan or other financial obligation. When a borrower assigns their life insurance policy as collateral, they transfer a portion or all of their rights and benefits from the policy to the lender. This arrangement provides the lender with a form of security in case the borrower defaults on the loan.

Under a collateral assignment, the policyholder retains ownership of the policy and continues to pay the premiums. The assignee, typically the lender, receives the right to the policy’s cash value or death benefit as a means of recovering the outstanding debt in the event of default.

To create a collateral assignment, a written agreement known as a collateral assignment agreement is usually required. This agreement outlines the specifics of the assignment, including the amount of coverage assigned, the rights of the assignee, and the conditions for release of the collateral upon repayment of the loan.

It’s important to note that the collateral assignment of life insurance does not cancel or terminate the policy. The policy remains in force, and the beneficiary designation typically remains unchanged. In the event of the policyholder’s death, the death benefit is paid out as specified in the original policy contract.

It’s also worth mentioning that there are two types of collateral assignments for life insurance: outright assignment and conditional assignment. An outright assignment transfers all the policy rights and benefits to the assignee for the duration of the loan, while a conditional assignment only grants the assignee access to the policy’s value or death benefit if certain conditions, such as default on the loan, occur.

Now that we have a clear understanding of collateral assignment of life insurance, let’s explore how this process works in practice.

The process of collateral assignment of life insurance involves several steps and considerations. Here’s how it generally works:

Evaluation of Loan Eligibility: The borrower applies for a loan and undergoes the usual evaluation process. The lender assesses the borrower’s creditworthiness, income, and other factors to determine loan eligibility.
Identification of Collateral Options: If the lender requires collateral to secure the loan, the borrower explores different options. Life insurance policies with cash value or death benefits can be considered as potential collateral.
Insurance Policy Examination: The borrower reviews their life insurance policy to determine the available cash value and death benefit. This information helps both the borrower and the lender assess the suitability of collateral assignment.
Collateral Assignment Agreement: Once both parties agree to move forward with collateral assignment, a collateral assignment agreement is drafted. This agreement outlines the details of the assignment, including the amount of coverage assigned, the rights and obligations of the parties involved, and the conditions for release of the collateral.
Notification to the Insurance Company: The borrower notifies their insurance company about the collateral assignment. The insurance company updates their records to reflect the assignee’s rights to the policy’s cash value or death benefit, as stipulated in the collateral assignment agreement.
Ongoing Premium Payments: The borrower continues to pay the premiums on the life insurance policy to keep it active. Failure to do so could lead to policy termination and potentially affect the collateral assignment.
Loan Repayment: The borrower is responsible for repaying the loan according to the terms and conditions set by the lender. If the borrower defaults on the loan, the lender has the right to access the assigned cash value or death benefit to recover the outstanding debt.
Release of Collateral: Once the loan is fully repaid, the lender releases the collateral back to the borrower. At this point, the borrower regains full control and ownership of the life insurance policy.

It’s important to note that the process may vary slightly depending on the specific requirements of the lender and the insurance company. Additionally, the terms of the collateral assignment agreement will play a crucial role in determining the rights and obligations of both parties involved.

Now that we understand how collateral assignment works, let’s explore the reasons why individuals opt for this strategy.

Collateral assignment of life insurance can be a valuable tool for borrowers and lenders alike. Here are some reasons why individuals choose to use this strategy:

Access to Financing: Collateral assignment allows individuals who may not have traditional forms of collateral, such as real estate or valuable assets, to access financing. By utilizing the cash value or death benefit of their life insurance policy, borrowers can secure loans for various purposes, such as business expansion, education expenses, or medical bills.
Lower Interest Rates: Lenders may offer lower interest rates for loans secured by collateral. The added security provided by the life insurance policy reduces the lender’s risk exposure, resulting in more favorable terms for the borrower.
Easier Loan Approval: Collateral assignment can make loan approval easier for borrowers with less-than-perfect credit or limited income. The presence of collateral can mitigate some of the perceived risks for lenders, increasing the chances of loan approval.
Retention of Policy Ownership and Control: Unlike other forms of collateral, such as selling an asset outright, collateral assignment of life insurance allows borrowers to retain ownership and control over their policy. They can continue to name beneficiaries, make changes to the policy, and access the policy’s cash value as needed, as long as the loan obligations are being met.
Preservation of Policy Benefits: Assigning collateral does not cancel the life insurance policy. The original policy benefits, such as death benefit payouts, remain intact for the beneficiaries. This ensures that loved ones are financially protected in case of the policyholder’s untimely passing.
Flexibility and Versatility: Collateral assignment can be used with various types of life insurance policies, including both permanent (whole life, universal life) and term life insurance. This provides borrowers with the flexibility to choose a policy that aligns with their financial goals and needs.

It’s important for borrowers to carefully evaluate their financial situation and assess whether collateral assignment is the right option for their needs. Taking into account the benefits and drawbacks of collateral assignment, as well as comparing it with alternative forms of collateral, can help borrowers make informed decisions.

Next, let’s explore the advantages and disadvantages of collateral assignment of life insurance.

Collateral assignment of life insurance offers several benefits and drawbacks for borrowers and lenders. Understanding these advantages and disadvantages can help individuals make informed decisions about utilizing this strategy. Let’s explore them:

Improved Loan Terms: By offering collateral in the form of a life insurance policy, borrowers can often secure loans with better interest rates and terms compared to unsecured loans.
Access to Higher Loan Amounts: Collateral assignment can help borrowers access higher loan amounts based on the value of their life insurance policy. This can be particularly beneficial for larger expenses or investments.
Retain Policy Ownership: Collateral assignment allows borrowers to retain ownership and control of their life insurance policy. They can continue to make changes to the policy and access its benefits, such as cash value, while meeting loan obligations.
Preservation of Policy Benefits: The life insurance policy’s original benefits, such as death benefit payouts, remain intact for the beneficiaries. This ensures that loved ones are financially protected, even if the policy is assigned as collateral.
Flexibility and Versatility: Collateral assignment can be used with different types of life insurance policies, providing borrowers with flexibility in choosing a policy that suits their needs and financial goals.
Reduced Cash Value and Benefit: Assigning collateral may restrict access to the policy’s cash value and limit the death benefit available to the policyholder during the loan term.
Policy Termination Risk: If the borrower fails to meet the loan obligations or defaults, the policy may be terminated, leading to loss of coverage and potential financial consequences.
Potential Loan Default Consequences: In the event of loan default, the lender can access the assigned cash value or death benefit, potentially impacting the financial protection for the borrower’s beneficiaries.
Complexity and Administrative Requirements: Collateral assignment involves paperwork and administrative tasks, including drafting and executing a collateral assignment agreement, notifying the insurance company, and ensuring ongoing premium payments.
Limitations on Policy Modifications: Depending on the terms of the collateral assignment agreement, borrowers may have restrictions on making changes to the policy, such as reducing coverage or surrendering the policy.

It’s essential for borrowers to carefully consider these benefits and drawbacks in the context of their specific financial situation and goals. Consulting with financial advisors and insurance professionals can provide valuable guidance to make an informed decision.

Next, let’s compare collateral assignment of life insurance with other forms of collateral to better understand its advantages and limitations.

Collateral assignment of life insurance offers distinct advantages and considerations compared to other forms of collateral. Let’s compare it to some common forms of collateral:

Real Estate:

Real estate is a traditional form of collateral widely used in lending. While real estate offers the potential for long-term appreciation, it can be financially burdensome due to property taxes, maintenance costs, and market fluctuations. Moreover, using real estate as collateral may involve complex legal processes and lengthy evaluation periods. In contrast, collateral assignment of life insurance provides a quicker and more straightforward solution, especially for those without real estate assets.

Vehicles are another common form of collateral. While they are easily identifiable and possess monetary value, vehicles depreciate over time. Additionally, vehicles require ongoing maintenance and are subject to wear and tear. Unlike vehicles, a life insurance policy’s value is not dependent on physical assets, making it an attractive option for those who do not own valuable vehicles or wish to preserve their vehicle’s daily utility.

Securities:

Securities, such as stocks or bonds, can be used as collateral. However, they are subject to market volatility, and their value can fluctuate considerably. Additionally, using securities as collateral may require transferring ownership or creating a margin account, which can involve additional fees and restrictions. Collateral assignment of life insurance offers stability, as the policy’s cash value remains relatively secure, regardless of market conditions.

Savings Accounts:

Savings accounts or certificates of deposit (CDs) can be used as collateral, providing a low-risk option for lenders. However, tying up savings in collateral may limit accessibility to those funds and reduce financial flexibility. Collateral assignment of life insurance can offer an alternative solution, allowing borrowers to access funds while keeping their savings intact.

It’s important to note that the suitability of collateral assignment versus other forms of collateral may depend on an individual’s unique circumstances and preferences. Assessing the advantages, drawbacks, and requirements of different collateral options is crucial in determining the best choice for a particular situation.

Next, let’s explore some practical examples of collateral assignment of life insurance to illustrate its application in real-life scenarios.

Collateral assignment of life insurance can be used in various real-life situations to secure loans and meet financial obligations. Here are a few examples:

1. Small Business Loan: A small business owner requires capital to expand their operations. Instead of offering personal assets or seeking a business loan without collateral, they choose to assign the cash value of their life insurance policy as collateral. This allows them to access favorable loan terms and maintain ownership of their life insurance policy while growing their business.

2. Education Financing: A parent wants to fund their child’s college education but does not have sufficient savings or assets to provide as collateral. By assigning the death benefit of their life insurance policy as collateral, the parent can secure a loan to cover tuition and other educational expenses. This approach allows them to borrow at lower interest rates and preserve their other assets for future needs.

3. Medical Expenses: A borrower faces unexpected medical expenses that are not fully covered by insurance. They assign the cash value of their life insurance policy as collateral to secure a loan and cover the medical bills. This enables them to get the necessary treatment without depleting their savings or incurring high-interest debt.

4. Estate Planning: An individual wants to ensure their loved ones are adequately provided for in case of their untimely passing. They assign the death benefit of their life insurance policy as collateral to secure a loan and establish an estate plan. This allows them to create a tax-efficient strategy while providing immediate financial support to their beneficiaries.

5. Debt Consolidation: A borrower has multiple outstanding debts with high-interest rates. They decide to assign the cash value of their life insurance policy as collateral to secure a consolidation loan. This allows them to combine their debts into a single loan with more favorable terms, such as lower interest rates and manageable monthly payments.

These examples demonstrate the versatility and practicality of collateral assignment of life insurance in various financial scenarios. It provides a viable option for individuals and businesses to access funds, manage expenses, and meet financial goals while leveraging the financial protection provided by their life insurance policies.

Before pursuing collateral assignment, it’s crucial to thoroughly understand the terms and conditions of the loan and collateral assignment agreement. Seeking guidance from financial advisors and insurance professionals can help borrowers make informed decisions and ensure the best outcome for their specific circumstances.

In the next section, we will explore important considerations that individuals should keep in mind before using collateral assignment of life insurance.

Before deciding to use collateral assignment of life insurance, it is essential to consider the following factors:

Loan Terms and Repayment:

Thoroughly review the terms and conditions of the loan, including the interest rate, repayment period, and any associated fees. Determine if the loan terms align with your financial capabilities and goals. It’s crucial to have a clear understanding of the repayment schedule and ensure it is manageable within your budget.

Impact on Policy Benefits:

Understand how assigning collateral will affect your life insurance policy. Evaluate the potential impact on the policy’s cash value, death benefit, and other policy features. Determine if the reduction in benefits is acceptable in relation to the loan amount and the financial protection provided to your beneficiaries.

Insurance Policy Review:

Review your life insurance policy in detail to understand its provisions, restrictions, and rights. Familiarize yourself with the policy’s cash value accumulation, surrender charges, and any other contractual obligations. Ensure that the policy is eligible for collateral assignment and that you comply with all requirements set by the insurance company.

Risk of Policy Termination:

Be aware that failing to meet loan obligations can result in policy termination, potentially leaving you without coverage and potential financial consequences. Consider your ability to meet the loan payments and have a contingency plan in case of unforeseen circumstances to mitigate this risk.

Professional Guidance:

Seek advice from financial advisors and insurance professionals who can provide insight into the pros and cons of collateral assignment of life insurance. They can help you evaluate your specific needs, assess the impact on your financial situation, and explore alternative options that may better suit your circumstances.

Legal and Tax Implications:

Understand the legal and tax implications associated with collateral assignment based on your jurisdiction. Consult with legal and tax professionals to ensure compliance with applicable laws and regulations. Be aware of any potential tax consequences, such as potential taxable events or changes in the insurance policy’s tax status.

By carefully considering these factors, you can make an informed decision about whether collateral assignment of life insurance is the right strategy for your financial needs. It’s important to conduct thorough research, weigh the benefits and drawbacks, and consult with professionals to ensure you are making the best choice for your individual circumstances.

In the concluding section, we will summarize the key points and emphasize the significance of due diligence when utilizing collateral assignment of life insurance.

Collateral assignment of life insurance can be a valuable tool for borrowers and lenders seeking to secure loans and meet financial obligations. By leveraging the cash value or death benefit of a life insurance policy, individuals can access financing with favorable terms and retain ownership and control over their policy.

However, utilizing collateral assignment requires careful consideration and due diligence. It is essential to assess the benefits and drawbacks, compare it with alternative forms of collateral, and evaluate its impact on policy benefits and repayment obligations. Seeking guidance from financial advisors and insurance professionals is crucial to ensure informed decision-making and a thorough understanding of the process and implications.

Understanding the terms and conditions of the loan, the collateral assignment agreement, and the policy itself is paramount. Regular reviews of the insurance policy and ongoing premium payments are necessary to maintain coverage and prevent policy termination. Additionally, individuals should stay aware of legal, tax, and compliance requirements associated with collateral assignment based on their jurisdiction.

By responsibly utilizing collateral assignment, individuals can access financing for various purposes while protecting their loved ones through the preservation of policy benefits. This strategy offers flexibility and versatility, allowing borrowers to meet their financial goals without sacrificing ownership and control of their life insurance policies.

Ultimately, the decision to use collateral assignment of life insurance should align with individual financial goals and risk tolerance. With careful planning, proper guidance, and a thorough understanding of the process, collateral assignment can be a valuable tool in managing finances and achieving financial objectives.

It’s important to always consult with professionals and conduct thorough research before proceeding with collateral assignment of life insurance to ensure the best outcome for your specific circumstances.

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What Is A Collateral Assignment Of Life Insurance?

A couple signing up for Collateral Assignment

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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.

A woman signing up for Collateral Assignment.

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.

Assignment of Interest In LLC: Everything You Need to Know

Assignment of interest in LLCs happens when a member communicates to other members his/her intention to transfer part or all of his ownership rights in the LLC to another entity. 3 min read updated on February 01, 2023

Updated October 28, 2020:

Assignment of interest in LLCs happens when a member communicates to other members his/her intention to transfer part or all of his ownership rights in the LLC to another entity. The assignment is usually done as a means for members to provide collateral for personal loans, settle debts, or leave the LLC. The member (assignor) and the person assigned (assignee) sign a document called the Membership Assignment of Interest.

Why a Member May Want to Assign Interest

A member may choose to assign interest for a number of reasons.

The assignment of interest may happen as collateral to a loan to one of the members.
Some members can assign interest to settle debts. The assignment will be effective until the debt is cleared.
An assignment of interest can also' be done to a member's legal heirs , going into effect upon the death of a member.

The Rights and Limitations of the Assignee

The laws governing LLC membership interest assignments vary considerably from one state to another.

Most states prohibit the assignee from participating in the LLC's operations or decisions unless the Articles of Organization have this provision.
An assignee is protected from liability from the assignor until the assignee becomes a member in most states. However, the law in a few states, including California and Florida, states that the assignee does get the assignor's liability.
Should the assignee become a member after the assignment, he is only entitled to the rights and restrictions the assignor had.
The assignment usually gives the assignee the right to receive the assignor's share of the profits — but not necessarily the other rights.

The Rights and Limitations of the Assignor

In many states, all LLC members have the right to assign membership interest.
In most states, assigning interest does not necessarily lead to forfeiting of voting and management rights and can be temporary. Texas law, on the other hand, states that the assignor ceases to be a member of the LLC after the assignment.

The Rights and Limitations of Other Members

All members of the LLC have to be notified of any type of assignment.
Some states require the assignment of interest to be approved by all members.
The new person who has been assigned interest does not necessarily become a member even if the assigner has decided to leave the LLC. The other members can decide whether to admit the assignee as a member or not. Should a member assign interest without the input of other members, the interest is normally limited to financial benefits.
In a two-member LLC, one member can easily transfer the interest to the other.

The Membership Interest Assignment Document

The LLC's operating agreement should explain the rights of members on issues of transfer of interest, and the agreement should be followed during the assignment process. The Membership Interest Assignment acts as a record of the agreement, and the LLC normally keeps a copy of the document. The law in most states does not provide a formal template of the Membership Interest Assignment document but lists what should be included in the document. The document should have the following details:

Percentage of interest that will go to the assignee
Whether the assignee will have voting rights
The signatures of the assignor and the assignee

Assignment of Interest Versus Selling Ownership Stake

The assignment of interest is typically different from selling the ownership stake . Selling a member's ownership stake in the LLC requires unanimous approval by the other members. A departing member may also assign his membership to another member.

If a member is being paid to transfer interest, this is treated for tax purposes as a sale, and the selling member's gains might be liable to capital gains tax. Even if a departing member is not paid for his interest, if the departure results in the assignee getting the departing members' share of liability, the departure is seen as an exchange or sale.

Assignment of Interest Versus Abandoning an LLC

If a member wants to withdraw interest in an LLC, he/she can choose to simply legally abandon the LLC in most states. The abandoning member should give some kind of notice to the other members explaining that he is abandoning membership. Abandoning membership does not usually require the approval of other members.

Abandoning an LLC does not absolve the member of liability he/she may have incurred when still a member.

If you need help with the assignment of interest in LLCs, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.

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Content Approved by UpCounsel

LLC Membership Interest Transfer Agreement
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Assignment of Interest
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Assignment of Rights and Obligations Under a Contract
Assignment Agreement Definition
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How to handle the accounting for collateral assignment split-dollar life insurance plans.

By Marc Giampaola , Director, Assurance Services & Michael Parillo , Senior Manager, Managed Services & Consulting

Split-dollar life insurance is an arrangement between two parties to share the costs and benefits of a permanent insurance policy. Often these arrangements are between an employer (the “company”) and an employee (the “executive”), involving a whole life or indexed universal life (“IUL”) policy. Companies generally use the policies as a Supplemental Executive Retirement Plan (“SERP”), which are considered non-qualified benefit plans.

The two most common types of split-dollar life insurance arrangements are endorsement and collateral assignment, which are defined based on which party controls the policy. Within these agreements, there are multiple documents executed, most commonly:

Life insurance policy – Issued by the insurance company to the policy owner on the life of the insured.
Split-dollar agreement – Agreement between employer and employee providing details of the agreement.
Promissory note – A loan issued by the company to the employee for the cost of the policy.

Endorsement split-dollar life insurance is an employer-owned policy that endorses some or all of the death benefits to the employee’s beneficiary. The employer owns and controls the policy and, therefore, makes all policy decisions (i.e., surrender). A separate agreement is entered into between the employer and employee to define the split of costs and benefits between the two parties.

Collateral assignment split-dollar life insurance policies are owned by the employee with some benefits assigned to the employer. The employee owns and controls the policy while the employer makes the premium payments. Premiums are loans to the employee. Some level of interest on the amount borrowed must be paid. The employer is ultimately reimbursed for the premiums paid and related interest from the death benefit or the cash surrender proceeds.

There are different types of collateral assignment arrangements based on the structuring of the note within the agreement. They are as follows:

Non-recourse arrangements rely solely on the underlying insurance policy for all repayment of principal and interest to the employer. The employee, or the employee’s estate, is not responsible for funding any shortfall by the policy to return the premium and related interest; however, any shortfall could be taxable to the employee as forgiveness of debt income.
Limited recourse arrangements rely primarily on the underlying insurance policy for all repayment of principal and interest owed to the employer. However, if there is a shortfall, the employee or the employee’s estate may be called upon to make up the deficiency. These arrangements generally have terms requiring the employer to seek payment from the life insurance company first; the employee is secondarily liable.
Full-recourse arrangements are similar to limited-recourse arrangements, with the difference that the employer can seek repayment of the principal and interest from the employee directly if there is a shortfall, without first pursuing any recovery from the life insurer. The employee has substantially the same net liability for any shortfall but would have the burden of satisfying the shortfall and then pursuing recovery from the policy.
Providing cash to the insurance company and establishing a premium deposit account;
Establishing a deposit account at a bank or credit union under the employee’s name; or
Purchasing a single premium immediate annuity (SPIA).

The method of funding has no impact on the accounting, as there is a single loan made to the employee.

Most commonly, companies utilize collateral assignment split-dollar life insurance set up under non-recourse or limited-recourse arrangements. As such, the focus of the accounting section will be on these types of arrangements.

RELEVANT GUIDANCE

ASC 310: Receivables (“ASC 310”)
ASC 325: Investments – other (“ASC 325”)
Loans and investments, November 2020 Edition (“PwC Loans Guide”)

ACCOUNTING FOR SPLIT-DOLLAR ARRANGEMENTS

The accounting for split-dollar arrangements is generally the same regardless of the structure of the agreement. Additionally, whether the promissory note is non-recourse or limited-recourse has no effect on the journal entries recorded over the life of the arrangement.

Recording the Loan at Issuance

In executing the transaction, the employer provides funding for the premium payments of the life insurance policy in exchange for a promissory note from the employee. The transaction meets the definition of a loan as defined by ASC 310-10, which states:

A contractual right to receive money on demand or on fixed or determinable dates that is recognized as an asset in the creditor’s statement of financial position. Examples include but are not limited to accounts receivable (with terms exceeding one year) and notes receivable.

Upon issuance of the loan, the employer provides cash through one of the funding methods described above and establishes a loan receivable from the executive. As an example, assume the defined loan amount is $3.0 million. The value of the loan is measured at issuance equal to the cash outlay by the Company. ASC 310-10-30-2 states:

As indicated in paragraph 835-30-25-4, when a note is received solely for cash and no other right or privilege is exchanged, it is presumed to have a present value at issuance measured by the cash proceeds exchanged.

In these arrangements, the company does not provide any other right or privilege. The promissory note is received in exchange for the cash needed to fund the premiums of the policy. As such, the value of the loan is equal to the cash paid.

The journal entry to record the example transaction is:

Recording the Interest Accrual

Once the loan is established, it begins earning interest based on the note rate, typically the long-term Applicable Federal Rate for the month and year the agreement becomes effective. Interest compounds annually. In the example transaction, assume an annual interest rate of 2.50%. Each month the company earns interest on the outstanding loan balance, and a journal entry is recorded to accrue interest on the loan. Interest is paid from the death benefit and, therefore, increases the receivable from the executive in each accounting period. The entry below represents the monthly accrual of interest:

(calculated as $3,000,000 loan * 2.5% interest / 12 months)

Recording the Settlement of the Loan

The loan is settled upon death or surrender of the policy. The company is entitled to the value of the original loan and accrued interest from inception. The cash owed to the company is paid from the death benefit or surrender value, with the remainder being paid to the employee (surrender) or the employee’s estate (death). Based on the example, assuming settlement and surrender of the insurance policy 24 months post entering into the policy (i.e., $150,000 interest earned), the entries to record the receipt of cash and settlement of the receivables are as follows:

Other Considerations for Subsequent Measurement

Collectability.

At each period-end, the company needs to analyze the value of the outstanding loan for changes in the valuation. Generally, these loans are considered not held for sale and, therefore, are reported at outstanding principal adjusted for any charge-offs, allowance for loan losses, deferred fees, and unamortized premiums or discounts based on ASC 310-10-35-47, which states:

Loans and trade receivables that management has the intent and ability to hold for the foreseeable future or until maturity or payoff shall be reported in the balance sheet at outstanding principal adjusted for any chargeoffs, the allowance for loan losses (or the allowance for doubtful accounts), any deferred fees or costs on originated loans, and any unamortized premiums or discounts on purchased loans.

Additionally, the company should analyze at each period-end any probable collection issues and the need for an allowance that would reduce the asset balance.

Value of the Loan

With an insurance policy securing the loan, further consideration is needed to determine the value of the loan. For endorsement arrangements, the employer owns the policy and, therefore, owns the surrender decision. The company values the loan at the lesser of the premiums paid or cash surrender value of the policy as of the period end date. This amount can generally be obtained from the statement provided by the insurance company.

For collateral assignment arrangements, the employee owns the policy, so the company does not control the surrender decision. However, the company does maintain the right to collect on the loan under the collateral assignment. Therefore, the company may need to consider the cash surrender value of the policy when determining the value of the loan. ASC 325-30-35-1 states:

An asset representing an investment in a life insurance contract shall be measured subsequently at the amount that could be realized under the insurance contract as of the date of the statement of financial position…

Depending on the type of note used in the agreement–non-recourse or limited-recourse– when determining the carrying value of the loan at each period-end.

Limited-Recourse

For limited-recourse, the loan is secured by the cash surrender value of the insurance policy, but the company also has the option to seek repayment from the employee if the cash surrender value is less than the outstanding loan amount. Since the loan is secured by both the policy and by the employee, the cash surrender value is not the only consideration when determining the value of the outstanding loan. As such, the value of the outstanding loan does not need to be adjusted if the cash surrender value is less than the outstanding loan, and there is no further consideration needed at period-end for these types of arrangements.

Non-recourse

For non-recourse notes, the loan is secured solely by the cash surrender value of the policy and, therefore, potential for a loss related to the loan exists if the cash surrender value is less than the loaned amount. The cash surrender value is the realizable amount of a life insurance contract at any given date. The accounting guidance does not allow a life insurance asset to exceed cash surrender value less an allowance for credit losses. The company is entitled to the premiums paid plus interest earned under these arrangements. The carrying value of the portion of the loan for which premiums were paid would need to consider the cash surrender value. This portion of the loan would be valued by the company as the lesser of the cash surrender value and the cumulative premiums paid by the reporting entity.

This is based on the premise that surrender is not within the control of the company and it is uncertain whether the company will be reimbursed for cumulative premiums paid upon death or surrender. Any premiums paid in excess of this amount should be recorded as an expense.

As an example, if the outstanding loan related to a non-recourse policy was $3,000,000 and the cash surrender value of the policy was $2,500,000, the company would need to reduce the carrying value of the loan to the cash surrender value and recognize a loss related to the loan. The entry below represents how the company would record the adjustment:

While the general accounting for these arrangements is similar, specific details and terms within all documents included in the agreement need to be evaluated when determining the appropriate accounting, and companies should consult their accountant with any questions. Additionally, there are potential individual income tax implications for the executive related to these arrangements that should be considered.

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Forms & Links

Land trust forms, important information regarding procedures for opening a new account.

To help the government fight the funding of terrorism and money laundering activities, federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account.

What this means for our customers: when you open an account, we will ask you for your legal name, address, date of birth, and other information that will allow us to identify you. We will also ask for a copy of your driver’s license or other identifying information.

We are taking this action to further protect your property from fraud and identity theft.

We will be able to notarize land trust forms signed in our presence in one of our 6 land trust offices: Chicago, Lisle, Oak Park, Orland Park, Rolling Meadows, and Skokie.

Additionally, we can offer mobile notary services to you for an additional separate fee.

Below are forms in PDF format regarding land trusts that do not necessarily require the assistance of an attorney. These forms are now interactive and can be saved with the information that you entered.

If you have any questions about our forms, please call Debra White at 312-223-4131 . For other land trust questions, please contact your attorney or our Customer Service Unit toll-free at 888-878-7856 .

These forms are provided for your convenience. As with any legal document, you may wish to consult with an attorney to be certain that your objectives are being met.

Acceptance of Transfer of Beneficial Interest and Ratification (W-9)

When the primary beneficiary dies, changes beneficial interest in the trust from the deceased to the contingent beneficiary(s).

Amendment of the Contingent Beneficial Interest

Changes contingent beneficiary(s). The contingent beneficiary is the person(s) designated to inherit the beneficial interest upon the death of the primary beneficiary.

Amendment of the Power of Direction (W-9)

Used to change the party(s) who has power of direction.

Assignment of the Beneficial Interest (W-9)

Used by current beneficiary to make changes to the beneficial interest by assigning all or part of the beneficial interest in the trust to another party(s).

Corporate Resolutions

Required when the beneficiary is a corporation.

Deed in Trust - Quit Claim

Transfers property into the land trust. Typically used when property has already been purchased.

Deed in Trust - Warranty

Transfers property into the land trust. Typically used when purchasing the property directly into the trust.

Direction to Convey

Used to request issuance of a deed when property is being transferred out of the trust.

Facsimile Assignment of Beneficial Interest

Must be provided to trustee prior to trustee acknowledging the Assignment of Beneficial Interest or Collateral Assignment of Beneficial Interest. Cook County is the only county that requires the Facsimile Assignment of Beneficial Interest to be recorded for all outright and collateral assignments. Transactions with consideration of $100 or more require recording in all counties.

Grantor/Grantee Statement

The grantor-grantee statement is used in connection with the recording of a deed or facsimile in Cook County. This form is only used when the recording is exempt from the payment of transfer taxes. The grantor/beneficiary should execute this document as both Grantor and as Grantee. Chicago Title Land Trust Company does not sign as either.

Letter of Direction

Authorization by the party(s) having power of direction to execute documents. This form is not used to request a deed (Direction to Convey).

Limited Liability Company Certificate

Required when the beneficiary is an LLC.

Notary Addendum

Used to notarize documents where there is no notary block.

Partnership Certificate

Required when the beneficiary is a partnership.

Release of Collateral Assignment/Irrevocable Right to Approve/Agreement to Notify

Removes requirements for additional signatures or notifications.

Tax Bill Change Form

Used to notify us to change how county tax bills should be addressed.

Tenancy by the Entirety Affidavit

Required when the beneficial interest is held as tenants by the entirety.

Trust Agreement (W-9)

Used to create the trust and it terms with the trustee.

Patriot Act information disclosure. Prior to opening an account and any addition of a beneficiary/power of direction holder, Chicago Title Land Trust Company is required to obtain proper identification of each customer.

Additional Information

Suggested beneficial interest designations.

Sample phrasing for establishing the beneficial interest and the contingent beneficial interest in the trust.

The following links are provided for your use to learn about Land Trust and other Title Information. These links open in a new browser window to an external website. The information contained on these websites is not published or managed by Chicago Title Land Trust Company.

Chicago Title Insurance Company is part of the Fidelity National Financial family of companies with its own unique and proud history built on the fundamental principles of outstanding customer service, untarnished reputation for integrity and a rock solid, enduring identity synonymous with expertise.

Chicago Title Insurance Company's 37 metropolitan area offices comprise the largest region in the Chicago Title Family and are conveniently located throughout the Chicago metropolitan area.

A pioneer in the real estate industry since 1847, Chicago Title is dedicated to leading the evolution of the industry. Click here for more information regarding Chicago Title's Downstate Illinois operations.

Indiana Land Trust Company is Indiana’s leading land trustee. For over 50 years, Indiana Land Trust Company has helped clients throughout the State of Indiana benefit from the establishment of land trusts for their real estate holdings.

NTI Web provides state-by-state title insurance information including recording fees, mortgage and transfer taxes; document execution requirements; laws and customs; forms (state specific, endorsements, policies), etc.

*The statements made on this web page and any page that follows within the Chicago Title website are not intended, and shall not be construed to expressly or impliedly issue or deliver any form of written guaranty, affirmation, indemnification, or certification of any fact, insurance coverage or conclusion of law.

Collateral Assignment Of Lease

Jump to section, what is a collateral assignment of lease.

A collateral assignment of lease is a legal contract that transfers the rights to rental payments from the asset's owner to a lender to secure funding. In this contract, the lease’s rentals are like a loan from the funder to the lessor and the lease acts as security. Collateral assignment of lease agreements are often used in commercial real estate. In addition to the actual contract, the agreement is often accompanied by a promissory note and a security agreement. Throughout the duration of a collateral assignment of lease agreement, the lessor retains ownership of the leased asset.

Common Sections in Collateral Assignment Of Leases

Below is a list of common sections included in Collateral Assignment Of Leases. These sections are linked to the below sample agreement for you to explore.

Collateral Assignment Of Lease Sample

Reference : Security Exchange Commission - Edgar Database, EX-10.4 5 dex104.htm COLLATERAL ASSIGNMENT OF LEASES AND RENTS FOR THE LA CIENEGA-LA PROPERTY , Viewed November 9, 2021, View Source on SEC .

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Meet some of our Collateral Assignment Of Lease Lawyers

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I am an Immigration attorney specializing in business, corporate, and family immigration. I have served the immigrant (EB1A/B/C, NIWs, and PERM) and non immigrant (H, L, O, TN, E) needs for individuals, families, start-up companies, and some of the largest financial and commercial companies. I have experience with adjustment of status and consular processing. Please let me know how I can serve your immigration needs.

Sage Law Firm S.

Dean represents client in all manners of tax controversy and provides comprehensive business consulting to corporations, LLCs, and non-profits. He has worked with multi-national companies, but most enjoys assisting small businesses with all legal matters from formation to dissolution. Dean routinely represents individuals and businesses before the IRS and various state taxation agencies. From audits to appeals, he works closely with his clients to reach favorable outcomes and beneficial resolutions. Though he assists many clients in his home state of California, Dean values working with a diverse clientele throughout the country.

Meagan Kirchner has nearly a decade of experience in Immigration law. She has significant experience working on H-2B immigration matters. Her practice also focuses on business immigration, particularly representing corporate clients pursuing H, E3, TN, O, and L nonimmigrant classifications, as well as lawful permanent residence (EB-1A, NIW, EB-1C). Meagan has represented clients in a variety of industries including agriculture, hospitality, healthcare, IT, engineering, and finance. Meagan has a Bachelor of Science degree in Business from George Mason University and a Juris Doctor degree from the George Mason University School of Law. She is licensed to practice law in Virginia and is also a member of the American Immigration Lawyers Association (AILA).

In 1991, Barbara Markessinis graduated cum laude from Albany Law School in Albany, New York. Shortly thereafter, Barbara was admitted to practice in New York State and in the United States District Court for the Northern District of New York. In 1997, Barbara was admitted to practice in Massachusetts and in April of 2009 she was admitted to the United States District Court for the District of Massachusetts. After graduating from law school, Barbara worked in private practice in the Albany, New York area and for Sneeringer, Monahan, Provost & Redgrave Title Agency, Inc. before joining the New York State Division for Youth and the New York State Attorney General's Real Property Bureau as a Senior Attorney. During her tenure with the Division for Youth, Attorney Markessinis found herself in Manhattan Family Court in front of Judge Judy! A career highlight for sure! After admission to the Massachusetts Bar, Barbara returned to private practice in the Berkshires and eventually started her own firm in June of 2006. Attorney Markessinis offers legal services in elder law, estate planning and administration/probate, family law, limited assistance representation (LAR), real estate and landlord tenant disputes. In 2016, after a family member found themselves in need of long term care, Attorney Markessinis’ launched her elder law practice. Through this experience, Attorney Markessinis discovered that the process of selecting a long term care facility and/or caregiver, applying for MassHealth and preserving an applicant’s assets are serious issues faced by many people every day. This area of the law is Barbara’s passion and she offers her legal services to families who find themselves in need of an elder law attorney. Attorney Markessinis is part of the Volunteer Legal Clinic in the Berkshire Probate & Family Court and has provided limited free legal services to patients and families at Moments House cancer support center in Pittsfield. She currently serves as a Hearing Committee Member for the MA Board of Bar Overseers and is a member of the Berkshire County and Massachusetts Bar Associations, Berkshire County Estate Planning Council (BCEPC). Attorney Markessinis is also the host of WUPE Talks Law. She also serves on the Town of Hancock Zoning Board of Appeals and Planning Board.

40 years practicing most areas of commercial real estate and commercial real estate financing: heavy emphasis on reviewing, drafting and negotiating commercial shopping center leases, agreements of purchase and sale, title and survey, letters of intent, closing documents, lease amendments, lease terminations, etc

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Collateral Assignment of an Entity Interest: Economic v. Governance Rights

Posted on September 26, 2012 by Bernstein-Burkley

Bernstein-Burkley, P.C.

In these difficult economic times, debtors have become more creative in proposing additional or substitute sources of collateral to secure a debt or obtain a forbearance or loan modification. As real estate values have plummeted, alternatives have become more attractive, including an assignment of the debtor’s interest in an operating entity with good cash flow.

However, the recent decision of the Pennsylvania Superior Court in Zokaites v. Pittsburgh Irish Pubs, LLC , 962 A.2d 1220 (Pa. Super. 2008), appeal denied 972 A.2d 523 (Pa. 2009), provides food for thought in terms of structuring and drafting a collateral assignment of an interest in a limited liability company or partnership. In Zokaites , a creditor was attempting to enforce its judgment lien by executing upon the debtor’s interest in two limited liability companies (“LLC”) that owned and operated several Pittsburgh area restaurants. The creditor sought a court order to compel the debtor to transfer its ownership interest in the LLCs so those interests could be sold at sheriff’s sale. After much procedural wrangling in both state and bankruptcy court, the case ended up in the Superior Court, which looked to Pennsylvania’s Limited Liability Company Law, 15 Pa.C.S. §8901 et seq . (“LLC Law”), for guidance.

The Superior Court focused on a provision in the LLC Law that prohibits a transferee of an LLC interest from becoming a member or participating in the company’s management without the approval of all other LLC members. The same provision, however, allows a transferee to receive the LLC member’s distributions or other return of capital contributions. Because of this protection of an LLC’s “close-knit structure,” the Superior Court decided that a judgment creditor can secure a debtor’s economic rights to distributions and return of contributions from the LLC, but cannot obtain the debtor’s governance rights to vote and participate in managing the LLC. The Superior Court equated this remedy of obtaining the economic rights in an LLC interest to the “charging order” that is permitted against a partnership interest under Pennsylvania’s Uniform Partnership and Limited Partnership Acts (“Partnership Acts”).

In light of the decision in Zokaites , lenders considering accepting a collateral assignment of an entity interest should keep a few things in mind for due diligence and drafting purposes. First, where a debtor has interests in multiple related entities, have the debtor provide an organizational chart. It is often easier to understand a complex organizational structure from a chart or “tree” than from a description. The chart should show the relationship among the entities and include the names of each entity and the percentage interest the debtor owns. For example, in a recent transaction where several guarantors were proposing to pledge their interests in a variety of LLCs and partnerships that in turn were the general and limited partners of other entities, an organizational chart prepared by the debtor was a crucial tool in pinpointing who owned what and in targeting the collateral.

Second, once you understand what entity interest(s) the debtor owns, it is essential to carefully review a copy of the organizational agreement and any amendments (the LLC Operating Agreement or the Partnership Agreement) for each entity. Key provisions include transfer or assignment rights or restrictions and default and dissolution provisions. If the organizational agreement expressly permits assignment, then the limitations under the LLC Law and the Partnership Acts do not apply 1 . Most likely, however, the LLC or partnership interest will not be assignable without the other members’ or partners’ consent. It is also important to understand whether an assignment will trigger an unwanted result such as a dissolution or default.

Third, once you know what is owned and can be pledged, draft the assignment to specifically identify the entity interest being pledged. Taking into account the ruling in Zokaites , where not all of the LLC members or partners are involved, a pledge of economic rights only is more likely to be enforceable than a collateral assignment that appears to transfer governance and other rights as well. In most instances, the cash flow from the right to receive distributions, profits, and return of capital is the true collateral anyway.

In describing complex or multiple entity interests or owners, consider attaching as exhibits the organizational chart and a table identifying each debtor, the entity, and the percentage interest owned. Include in the body of the assignment representations and warranties by the debtor confirming all of the information on the chart and table as true, complete and correct and that the debtor’s interest has not already been pledged or assigned.

Fourth, since the creditor will not have governance rights, the pledge agreement should also contain covenants to protect the creditor’s right to receive distributions. Such covenants would include prohibiting the debtor from voting to amend the Operating or Partnership Agreement or to dissolve the entity. Another useful provision would be the debtor’s authorization for the LLC or partnership and its officers to recognize and give effect to the collateral assignment by paying distributions directly to the creditor or lender upon demand. Finally, when the assignment is being made by a married individual, if possible have the spouse join in to waive any marital or spousal interest.

Assignment of a debtor’s interest in an LLC or partnership can be a valuable and useful form of collateral. But the creditor should follow the money and remain mindful of the Zokaites decision by taking a pledge of the economic rights and leaving the governance rights alone, unless all of the entity owners consent.

1. Similar to the LLC Law, the Partnership Acts contain provisions that, unless otherwise agreed, the assignee of a partner’s interest does not become a partner or share in partnership liability and cannot exercise a partner’s management, inspection of records, or accounting rights, but has the right to profits. 15 Pa.C.S. §8344(a) and 15 Pa.C.S. §8562(a)(2)and (c).

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Collateral Interests in Insurance: Confusing Territory
News & Insights

Secured lenders often look to the borrower's or guarantor's rights under insurance policies to improve their collateral position. Obtaining a collateral interest in a business interruption insurance policy may protect a lender who is dependent upon the ongoing cash flow of its borrower for debt service. Obtaining an assignment of an interest in a life insurance policy of the borrower's owner or a principal guarantor protects the lender against economic effect of the sudden loss of a member of the borrower's team essential to its success.

Despite its importance to many commercial loan transactions, the law governing lien interests in insurance is non-uniform. Since 1945, matters relating to insurance have been left to each state. 1 More importantly, all but two states have excluded liens in insurance policies from Article 9 of the Uniform Commercial Code ("UCC"). 2 Because of this exclusion, concepts of creation, perfection 3 and priority of liens taken by lenders in insurance policies are wholly dependent upon the forum and the terms of the particular insurance policy involved. Nonetheless, in the context of a bankruptcy proceeding, these concepts are essential to determining the extent of a lender's secured claim under section 506 of the United States Bankruptcy Code 4 ("Code") and to determining when a lien is perfected under Code section 547(e)(1)(B) for avoidable preference purposes.

How, then, does a lender create and perfect its interest in policies of insurance? Because of the exclusion of insurance from the ambit of the UCC, it is clear that execution and delivery by the debtor of a security agreement covering general intangibles and filing a financing statement will not create an enforceable lien. 5 An important first step is to examine the policy to make sure that all of the elements required by the insurer for the creation of a valid lien are complied with.

Case law provides guidance (albeit conflicting) regarding how liens in insurance policies are created. Regarding life insurance, some courts hold that possession of the policy is required to create a lien interest, 6 while other courts hold that a policy cannot be pledged by possession. 7 In those jurisdictions where possession is not required or with respect to commercial insurance policies, execution and delivery of a collateral assignment of rights under the policy and notice to the insurer will likely be sufficient to create an interest in the policy. Commercial insurers often do not require a specific form of collateral assignment. With respect to life insurance policies, however, completion and delivery of collateral assignment forms provided by the insurer is often a prerequisite to a valid lien. A lender should pay particular attention to forms prepared by the insurance company to ensure that the lender is receiving the protections it seeks.

Regarding the sufficiency of notice, does notice to the debtor's insurance broker (but not the insurer directly) and receipt of a certificate of insurance showing the lender as an additional insured create an enforceable lien? Maybe—depending upon the effect of a certificate of insurance in the subject jurisdiction (which varies) and upon a court finding the broker is deemed to be an agent of the insurer with authority to bind it. Some courts have found a valid lien is created upon the execution of a collateral assignment of rights in the policy, even without notice to the insurer. 8 The one thing that is apparent is that the law is conflicting and muddled.

Nor are the rules with respect to priority of collateral interests any clearer. While a majority of courts follow the UCC's "first in time, first in right" precept, holding that senior priority of interests in a policy goes to the lender who first provides notice to the insurer, other courts rule that priority goes to first assignee regardless of notice to the insurer. These courts find that the notice requirement is for the benefit of the insurance company and not for third parties. 9

In any case, regarding commercial policies, to fully protect itself, the lender should not rely upon a certificate of insurance but instead should obtain from the insurer an endorsement to the policy providing that the lender is a loss payee and an additional insured under the policy. The endorsement should require the insurer to provide the lender with advance notice of cancellation and an opportunity to pay premiums due. The endorsement also should provide that the lender retains the right to receive a loss payment even if the lender has commenced a foreclosure or similar action to preclude a claim that the underlying debt is extinguished. In summary, the steps a lender should take to create and perfect a valid lien in insurance policies include:

Reviewing the policy to determine the insurer's requirements for the creation of a valid lien.
Having the debtor execute and deliver an appropriate assignment of life insurance as collateral (usually using the insurer's form), or a collateral assignment of rights in the debtor's commercial policy.
Taking possession of the original life insurance policy in those states which require possession.
Delivering notice of the collateral assignment to the insurer and receiving confirmation of receipt of the assignment.
For commercial policies, obtaining an endorsement from the insurer naming the lender as an additional insured and loss payee.
Ensuring that the endorsement requires the insurer to send advance notice of cancellation to the lender and permits the lender to pay premiums due, and provides that the lender is entitled to a loss payment even if foreclosure or similar proceedings are commenced.

Collateral interests in insurance policies often significantly enhance a lender's secured position, and having a valid interest in an insurance policy may be important in determining the extent of a lender's secured position, and therefore it's rights, in a bankruptcy proceeding. However, because liens in insurance are governed by state law and excluded from the UCC, there is no established, single set of ground rules for a lender to follow to create and perfect liens in the debtor's life or commercial insurance policies. Lenders must recognize this fact and carefully take the necessary steps to protect themselves.

If you have any questions on the topics discussed in this e-alert, please contact your Reinhart attorney or any member of Reinhart's Business Reorganization team .

1 See The McCarran-Ferguson Act of 1945 (15 U.S.C. § § 1011-1015). 2 See Cal. Com. Code § 9109 (including all types of insurance); La. Rev. Stat § 10:9-109(d)(8) (including life insurance). 3 "Perfection" is a concept arising under the UCC and is probably not appropriate when referring to liens in insurance policies. See Andrew Verstein, Bad Policy For Good Policies: Article 9's Insurance Exclusion, 17 Conn. Ins. L. J. 287, 309 (2011) (hereinafter "Verstein"). But see 11 U.S.C. § 547(e)(1)(B), which discusses perfection of interests in property for the purposes of preferences. 4 11 U.S.C §§ 101-1532. 5 See Wheeling & Lake Erie Ry. Co. v. Keach, 521 B.R. 703 (B.A.P. 1st Cir. 2014). 6 See In re Maplewood Poultry Co., 2 B.R. 550 (Bankr. D. Me. 1980) (applying New Jersey law). 7 See Metro. Life Ins. Co. v. Haack, 50 F. Supp. 55 (W.D. La. 1943) (applying Missouri law). 8 See Ketchikan Shipyard, Inc. v. Anchorage Nautical Tours, Inc. (In re Anchorage Nautical Tours, Inc.), 102 B.R. 741 (B.A.P. 9th Cir. 1989). 9 See generally, Verstein at 310-11.

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LLC Membership Interests as Collateral

It is not uncommon for lenders to take a security interest in a business owner’s ownership interest in the corporation, LLC, limited partnership or other entity as collateral for a loan to the business. For the most part, the transactions are documented through a standard pledge or assignment (the “assignment agreement”) of the stock or other evidence of ownership. While such an approach may be acceptable when the interests of a corporation are pledged, when the collateral is an interest in an LLC, savvy lenders will make sure that they use an enhanced form of assignment agreement and perhaps obtain the consents (and necessary waivers) from the other LLC members.

An enhanced form of assignment agreement is called for because an LLC has one distinct advantage over other entity forms. Under Maryland law, a judgment against an LLC member can only be enforced by imposing a charging order against the member’s interest. This is a court order requiring the LLC to pay the creditor the debtor member’s share of LLC distributions. In this respect, a charging order is akin to a wage garnishment, except it is against the member’s distributions rather than against wages. The lender who simply obtains an assignment of a membership interest in an LLC gets no right to attach the member’s LLC interest or be admitted as a voting member . The lender cannot, therefore, participate in company management, force a sale of company assets or distribution of profits, or inspect company books.

In contrast, shares of a corporation’s stock are freely transferable absent contrary provisions in a shareholder agreement. Consequently, a lender with a security interest can typically exercise all of the associated rights of a stockholder. Upon obtaining the shares, the lender acquires the right to inspect corporate books and records and to vote on the election and removal of directors. If the shares represent a controlling interest, the lender could actually replace all the directors and officers and take over control of the corporation. Depending on the circumstances, the lender may also have the right to seek involuntary dissolution or place the corporation in receivership.

To optimize the collateral value of an LLC membership interest, lenders will want to be sure that they, as assignees, can be admitted, automatically, as full voting members of the company once they obtain ownership of the membership interest (a complex process in and of itself). Lenders will also want to scrutinize the LLC operating agreement to see if it contains provisions that either permit the company to acquire a member’s interest for a discounted value in the event of the member’s personal bankruptcy or that limit profit distributions either by making them discretionary rather than mandatory, or by restricting distributions to insolvent members. Finally, the operating agreement should be reviewed so that the lender understands any restrictions that may be placed upon the rights of an assignee who assumes a member’s interest. If such provisions are included in the operating agreement, they should be addressed in the assignment agreement as part of the negotiations over the assignment of the LLC membership interest so as to preserve the creditor’s rights and the value of charging orders.

Savvy lenders know that the LLC is the optimal form of entity for insulating company assets from owners’ personal creditors. Hence, they are the lenders that will carefully review the LLC organizational documents and only take LLC interests as collateral using an enhanced form of assignment agreement.

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Knowledge Point

What is a collateral assignment?

Rather than obtain funding of leases at lease origination , lessors often assign the lease payments and the leased assets to finance the leases after lease inception . By back-leveraging , a lease funder makes a nonrecourse loan to the lease originator after inception of the lease that is secured by the collateral assignment of the leased asset to the funder and the lease payments as the means to service the debt . As a collateral assignment, the lessor incurs a direct obligation to the lease funder for the loan while remaining the owner of the leased asset. Since a collateral assignment usually requires lessee consent, lessors obtain the right to back- leverage leases at lease origination.

Back-Leveraging = Collateral Assignment after Lease Inception

Although the lessor retains ownership of the leased asset, a collaterally- assigned lease must be managed with the consent and approval of the assignees . Moreover, a collateral assignment generally allows funders to share in and exercise rights of the lessor under the lease in their own name, which makes it necessary for the lessor to negotiate shared rights with the funders. Shared rights , which are the rights of the lessor – as assignor – and the assignee that each exercises in its own name, typically include the right to receive notices and other documents from the lessee, to inspect the property interest , to enforce lessee compliance with certain covenants , to call upon the lessee for the payment of indemnities, and to seek recovery under the lessee’s liability insurance coverage. Once the funding is repaid in full, the funder relinquishes the collateral assignment and the lessor again has full control over the asset.

In addition to shared rights and the terms of lessee consent, lease assignment provisions normally stipulate the level of assistance a lessee is to provide to a lessor, such as indemnification and insurance. Moreover, the lease agreement will typically also contain a provision expressly providing to lessees the right to quiet enjoyment , which is the right of tenants and landlords to the continued undisturbed use and enjoyment of real property to be honored by the assignee should the real estate be collaterally-assigned.

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Mariners' Matt Brash done for season after Tommy John surgery

ESPN News Services

Mariners right-hander Matt Brash , one of the top relievers in the American League last season, underwent Tommy John surgery earlier this week and will miss the entire 2024 season, Seattle general manager Justin Hollander said Friday.

Brash had not pitched in the majors this season after experiencing elbow discomfort during spring training. He initially attempted to rehab the injury without surgery but last month experienced a setback just before going out on a rehab assignment.

Hollander said that after meeting with Dr. Keith Meister in Arlington, Texas, the decision was made to have the surgery Wednesday.

"To have his season go away like this stinks for him. Stinks for us," Hollander said. "Probably one of the most popular players in the organization among his teammates, among staff members."

Later Friday, Mariners right-hander Bryan Woo left his start against the Oakland Athletics with one out in the fifth inning for precautionary reasons after experiencing tightness in his arm. He is expected to make his next turn in the rotation for Seattle.

Hollander said Brash had a partial tear in the posterior area of the ulnar collateral ligament in his pitching elbow, an area of the ligament that's difficult to rehabilitate without surgery. Brash was able to pitch without issue despite the tear until he started to experience pain while throwing last month.

Hollander said the hope is that Brash could be back pitching for the Mariners sometime in late spring or early summer of next season. Meister also placed a brace in Brash's elbow in the hope of speeding up the UCL recovery. The brace is separate from the internal brace surgery the likes of Spencer Strider have undergone to repair elbow issues.

Brash led all of baseball with 78 appearances last season and posted a 9-4 record with a 3.06 ERA. He struck out 107 batters in 70⅔ innings, often using a wipeout slider that has made him one of the more difficult relievers to face.

He began his career with Seattle in 2022 as a starter before transitioning to the bullpen. He appeared in 117 games over the previous two seasons and is the latest name to join the growing list of players sidelined by elbow issues this year, including Strider, Cleveland 's Shane Bieber , the New York Yankees ' Jonathan Loaisiga , Miami 's Eury Perez and Oakland 's Trevor Gott .

"I would put him up as one of the top relievers in the league," Seattle manager Scott Servais said. "It's probably the most unique breaking ball. It's the breaking ball everybody talks about in the league; Matt Brash's slider. It's just a wipeout pitch. When you don't have a weapon like that, you have to manipulate through a bullpen a little differently. He's a great security blanket to have when you map out a plan each night."

The Mariners have been without two of their top relievers since spring training. Brash was sidelined with his elbow issues, and Gregory Santos has been out because of a lat strain. Hollander said Santos had a small setback in his recovery and after a brief break has resumed throwing out to about 90 feet. But the setback means it will likely be July before Santos pitches for the Mariners.

Woo was making his first start of the year Friday night after being slowed by a sore elbow during spring training. He allowed one hit through the first four innings only to leave the game after getting Tyler Soderstrom to foul out behind third base to open the fifth.

Servais said after Seattle's 8-1 victory over Oakland that he expects Woo to make his next start.

"He was just a little tight. He wasn't loose, and there is no point in pushing it right now," Servais said. "I think he's going to be fine."

While the news on pitchers was rough, the Mariners could be close to getting two position players back. Outfielder Dominic Canzone (shoulder) is expected to start a rehab assignment with Triple-A Tacoma on Saturday, while shortstop J.P. Crawford (oblique) is likely to start a rehab assignment either this weekend or early next week.

The Associated Press contributed to this report.

IMAGES

Collateral Assignment Form
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Assignment Of Entire Interest In Estate
Free Printable Collateral Assignment Of Lease Form (GENERIC)

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Private Non-Equity Collateral Split-dollar
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COMMENTS

A Collateral Assignment of Life Insurance
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.
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 ...
What Is Collateral Assignment of Life Insurance?
Collateral assignment of life insurance is an arrangement where you agree to give a lender the first claim to the payout from your life insurance policy. This allows your life insurance to serve as the collateral that many loans — especially small business loans or Small Business Administration (SBA) loans — require before they can lend you money you need.
What Is Collateral Assignment of Life Insurance?
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 the loan is paid off, the lender is prioritized to receive ...
What Is Collateral Assignment?
Collateral assignment of your life insurance policy can help you get approved for a loan. Learn how it works, how it impacts your policy, and alternatives to consider. ... the amount your beneficiaries receive. Plus, over time, deductions for the cost of insurance and compounding loan interest may negate your cash value and the policy could ...
Life Insurance Collateral Assignment [Pros and Cons]
A collateral assignment of life insurance is a conditional assignment that appoints a lender as an assignee of the policy. Similar to using other types of collateral for a loan - such as a property or a vehicle - if the loan is not repaid, the lender has a claim to some or all of the life insurance policy's death benefit, and in some ...
What Is Collateral Assignment Of Life Insurance
Collateral Assignment Agreement: Once both parties agree to move forward with collateral assignment, a collateral assignment agreement is drafted. This agreement outlines the details of the assignment, including the amount of coverage assigned, the rights and obligations of the parties involved, and the conditions for release of the collateral ...
Collateral Assignment of Life Insurance
3. Fill out a collateral assignment form. Once you sign your life insurance contract and pay your first premiums, complete a collateral assignment form with your insurer. You'll fill out your lender's contact details so your insurer can designate them as a collateral assignee while your loan is outstanding. 4.
What Is A Collateral Assignment Of Life Insurance?
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.
Assignment of Interest In LLC: Everything You Need to Know
The assignment of interest may happen as collateral to a loan to one of the members. Some members can assign interest to settle debts. The assignment will be effective until the debt is cleared. An assignment of interest can also' be done to a member's legal heirs, going into effect upon the death of a member.
What Is an Interest Rate Cap?
Collateral assignment: If a cap is purchased as a lender requirement for a loan, the borrower usually needs to assign their interest in the cap to the lender for the duration of the loan. This assignment is accomplished via a "Collateral Assignment of Rate Cap" (or similarly named) document, which is signed or acknowledged by the lender ...
How to Handle the Accounting for Collateral Assignment Split-dollar
Collateral assignment split-dollar life insurance policies are owned by the employee with some benefits assigned to the employer. The employee owns and controls the policy while the employer makes the premium payments. ... Interest is paid from the death benefit and, therefore, increases the receivable from the executive in each accounting ...
Collateral Assignment: All You Need to Know
A collateral assignment involves granting a security interest in the asset or property to a lender. It is a lawful arrangement where the borrower promises an asset or property to the lender to guarantee the debt repayment or meet a financial obligation. Moreover, in a collateral assignment, the borrower maintains asset ownership, the lender ...
Collateral Assignment of Life Insurance
Collateral assignment of life insurance is a common requirement for business loans, and lenders may require you to get a life insurance policy to be used for collateral assignment. 4 min to read. Answers; ... Your lender may then have the right to raise your loan's interest rate or demand full repayment of your outstanding loan balance.
Chicago Title
Must be provided to trustee prior to trustee acknowledging the Assignment of Beneficial Interest or Collateral Assignment of Beneficial Interest. Cook County is the only county that requires the Facsimile Assignment of Beneficial Interest to be recorded for all outright and collateral assignments. Transactions with consideration of $100 or more ...
Collateral Assignment Of Lease: Definition & Sample
A collateral assignment of lease is a legal contract that transfers the rights to rental payments from the asset's owner to a lender to secure funding. In this contract, the lease's rentals are like a loan from the funder to the lessor and the lease acts as security. Collateral assignment of lease agreements are often used in commercial real ...
Collateral Assignment Of An Entity Interest
Assignment of a debtor's interest in an LLC or partnership can be a valuable and useful form of collateral. But the creditor should follow the money and remain mindful of the Zokaites decision by taking a pledge of the economic rights and leaving the governance rights alone, unless all of the entity owners consent. 1.
Collateral Interests in Insurance: Confusing Territory
Obtaining a collateral interest in a business interruption insurance policy may protect a lender who is dependent upon the ongoing cash flow of its borrower for debt service. Obtaining an assignment of an interest in a life insurance policy of the borrower's owner or a principal guarantor protects the lender against economic effect of the ...
LLC Membership Interests as Collateral
LLC Membership Interests as Collateral. It is not uncommon for lenders to take a security interest in a business owner's ownership interest in the corporation, LLC, limited partnership or other entity as collateral for a loan to the business. For the most part, the transactions are documented through a standard pledge or assignment (the ...
What is a collateral assignment?
Collateral assignment is the transfer of the rights to the rental payments from and a security interest ( lien) in a leased asset by the asset's owner and lessor to lenders - the lease funders - to secure the funding upon payment of the consideration by the funder to the lessor, typically structured on a nonrecourse basis.
Chicago Title
Collateral Assignment of Beneficial Interest: This is the agreement that secures the lenders interest in the beneficial interest of the trust and puts a lien on the beneficial interest in the trust. It is the land trust equivalent of the mortgage. However, since it is not recorded, it does not show up as a lien on record title.
PDF Collateral Assignment TEMPLATE
This Assignment shall be governed by and construed in accordance with the laws of the District of Columbia, except to the extent that the laws of the jurisdiction in which the particular collateral is located are required to be applied pursuant to applicable choice of laws principles or rules. 8.
PDF Expert Q&A on Current Issues with LLC/LP Interests as Collateral
interest, for example governance rights and economic rights. These same issues also apply to LP interests. If parties are not familiar with these state law issues, they should consult local counsel. Interests in LLCs and LPs are often important collateral for a secured party and this collateral raises additional issues
Contracting Concepts: Assignment of Claims
FAR 32.803(b) states that a contract may prohibit an assignment of claims if the agency determines not allowing it to be in the government's interest. But DFARS 232.803(b) states that only contracts for personal services may prohibit the assignment of claims. Thus, you will generally include an assignment of claims clause in most contracts.
Iowa Code § 554.9408
Section 554.9407 - Restrictions on creation or enforcement of security interest in leasehold interest or in lessor's residual interest; Section 554.9408 - [Effective 7/1/2024] Restrictions on assignment of promissory notes, health care insurance receivables, and certain general intangibles ineffective
Mariners' Matt Brash done for season after Tommy John surgery
Outfielder Dominic Canzone (shoulder) is expected to start a rehab assignment with Triple-A Tacoma on Saturday, while shortstop J.P. Crawford (oblique) is likely to start a rehab assignment either ...

What Is a Collateral Assignment of Life Insurance?

Key Takeaways

How a Collateral Assignment of Life Insurance Works

Example of Collateral Assignment of Life Insurance

Alternatives to Collateral Assignment of Life Insurance

What Are the Benefits of Collateral Assignment of Life Insurance?

What Kind of Life Insurance Can Be Used for Collateral?

Is Collateral Assignment of Life Insurance Irrevocable?

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

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Collateral assignment of life insurance

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Insurance Disclosure

What is collateral assignment of life insurance?

Why use life insurance as collateral?

Pros and cons of using life insurance as collateral

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

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

Alternatives to life insurance as collateral

Unsecured loan

Secured loan

Life insurance loan

Home equity line of credit (HELOC)

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Related Articles

What Is Collateral Assignment of Life Insurance?

Related Content

How Collateral Assignment of Life Insurance Works

Applying for Collateral Assignment

Obtain a Collateral Assignment Form

Fill Out the Form Correctly

Signed by Both Policyholder and Lender

Submit Completed Form

Await Approval or Rejection From Insurance Company

Receive a Letter of Acknowledgment

Obtaining Required Documentation

Pros and Cons of Collateral Assignment

Impact of Collateral Assignment on Beneficiaries

Your Lender Will Be Paid First

Any Remaining Death Benefit Will Be Disbursed to Your Beneficiaries

Alternatives to Collateral Assignment

What Is Collateral Assignment (of a Life Insurance Policy)?

Definition and Examples of Collateral Assignment

Types of Life Insurance Collateral

A Note on Annuities

The Process

Lenders Get Paid First

Key Takeaways

What Is Collateral Assignment Of Life Insurance

Table of Contents

Real Estate:

Securities:

Savings Accounts:

Loan Terms and Repayment:

Impact on Policy Benefits:

Insurance Policy Review:

Risk of Policy Termination:

Professional Guidance:

Legal and Tax Implications:

How Is A Collateral Assignment Used In A Life Insurance Contract?

How Is Collateral Assignment Used In A Life Insurance Contract?

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