Life Assurance Policy as Collateral

A life assurance policy can be used as collateral security against a mortgage loan. This is known as an assignment, or a transfer of ownership of the policy. An assignment of a life assurance policy is realised in one of two ways: by legal mortgage or equitable mortgage.

Legal mortgage: The assignment is carried out by deed and the borrower's control of the policy is suspended until the loan is repaid. During the term of assignment, the borrower forfeits any rights of the policy eg any proceeds, including surrender. The lender has a legal right to sell the policy if the borrower does not fulfil the conditions of the loan.

The policy will be reassigned to the borrower when the loan is repaid. The borrower repays the loan to the lender and any surplus capital remains with the borrower or his estate if deceased. It is usual for the borrower to continue paying the premiums. In some instances the lender may pay any unpaid premiums and add this amount to the loan.

Equitable mortgage: The lender holds the policy document as proof of interest in the policy proceeds and informs the life assurance office of this interest. The lender has no legal interest in the policy and no power to dispose of it. Any proceeds payable during the period of assignment are payable to the lender. Any surplus is passed to the borrower or to his estate. When the loan is repaid the policy is reassigned to the borrower.

For mortgage purposes policy assignments are only applicable to life assurance policies. Other policies eg pensions cannot be assigned. In addition, if a life policy has been placed under a trust it cannot then be assigned to a lender.

In the case of a policy being assigned to the lender the borrower is referred to as the assignor.