If you were to start listing down the assets which you have, which are the ones that is able to use as a collateral?

Why do you even want to use your assets as collateral in the first place? Let me explain what we mean by collateral first, before we go into talking about using life insurance policy as the collateral.

Allow me to use the pawnshop analogy to explain collateral in a very layman term. When someone is in need of money, for whatever reasons they have, they go to the pawnshop, pass their valuables such as Rolex watches & jewelry, and Hermes bags, and pledge it to the pawnshop, in exchange for a short term loan from them. The pawnshop owner, after assessing the value of the items being pledged, will then determine the maximum amount which they are willing to lend. They earn by charging a daily interest on the loan issued during the term period. If the term expire and the person has yet to redeem the item, the pawnshop will then sell the item to the marketplace, and encash from it. Of course, if you manage to pay back the loan and the interest within the period, you have successfully redeemed your item. This is actually a very lucrative business, if you value the items accurate, with limited downside risk since the pawnshop has secured the item as a collateral, and besides, they usually only issue loan up to 60-70% of item’s value, and which the value is assessed in-house and more often than not, it’s even more conservative. Hence if one were to forfeit the item by not paying back the loan and interest, it’s a big loss to the person, and a big gain for the pawnshop.

On other scale, actually we have been using some of our assets as collateral, without us knowing. Maybe we are aware, but we didn’t know it works this way. If we know how it works, perhaps we can leverage on this collateral concept to expand our wealth.

When you purchase a house, unless you full pay it, majority of us will take a massive mortgage from the bank to finance the purchase. Now you are the proud owner of that brand new house isn’t? Perhaps not…you see, when bank lend you the money, you have signed a thick contract that your house is being used as a collateral as they issue you the loan. The title deed of your house is not issued to you yet until you pay off the loan fully. This is one form of using your asset, the house, as a collateral. The leverage effect wasn’t much, as majority of us stay in our house, and hence this asset isn’t income producing. Again, in this case of house as a collateral, the bank only issue loans up to 70-80% of the house value.

Next is our car. If you take a bank loan as well, they issue you the loan in exchange for the collateral you pledge, which in this case, the car! If you can’t pay your car loan, they shall seize the car and sell it to marketplace to redeem the loan. Again, this asset in the form of car, is a depreciating assets which doesn’t give you much mileage to multiply your wealth.

When you collateralize our assets to the bank or to lenders (can be anyone), you probably want to use the money for several purposes. It could be for

1. Emergency medical needs

2. Offset other bad loans

3. Personal and family reasons

4. Investment opportunities

5. Many other reasons

There are many places which you can place your assets for collateral. Banks will take in car and houses since they are of higher value, and will mean fatter profit for them and for shareholders. Pawnshops will take in those physical valuable items.

Now, how about life insurance policy? This is actually one of the most forgotten assets in your drawer which you didn’t utilize. We often purchase life insurance for protection and knew that there a cash value build up, which we could encash out one day. However, you don’t need to wait for that one day to happen. The insurer to your policy actually acts as a lender as well. The paperwork to issue the loan to you is minimal, and the loan issued is efficient since they already are managing your policy and hence know the cash value of your policy. The concept of borrowing from the insurer is almost the same as the bank and pawnshop, and even better than them as there isn’t any repayment schedule and any other fees incurred. It’s one of the most lowest cost loan available in the market, with the insurer able to issue a loan of up to 90% of your policy value.

Besides, while you take a loan from the insurer, your life insurance policy remain intact, and the cash value in the policy continue to compound for you.

In fact, banks will entertain you as well in terms of loan issuing if your policy cash value is huge enough for them to make a handsome profit from the loan. Meaning, you can do a collateral assignment of your policy to the bank and have them lend you money, if you are not interested in engaging the insurer for loan.

Hence, the next time if you need some money for whatever reasons, use your life insurance policy as collateral. It’s the most cost effective, tax efficient, highest loan to value issued method available in the marketplace.